In August Democratic presidential candidate John Edwards vowed he would use his own money to help out Katrina victims who had been foreclosed upon by mortgage lenders in whom his own money had been invested. On Friday, the Wall Street Journal reported Edwards was living up to his promise. In addition to ordering one-time employer/Edwards money manager Fortress Investments to ensure that none of Edwards’ $16 million kitty was invested in subprime lenders, he set up a charity to aid families who had been directly affected by the two lenders owned by Fortress.
The Louisiana Home Rescue Fund will be seeded with $100,000 — much of which will come from Mr. Edwards’s own pocket, the campaign said, without specifying an amount.
The program will be administered by the nonprofit ACORN Housing Corp., and will provide loans and grants to 34 families in the New Orleans area whose homes were seized or are in danger of foreclosure following the August 2005 hurricane.
How the World Works picked on Edwards in August, so it’s only fair to point out that he is living up to his word. But helping out families one by one won’t get us all the way to the finish line. For that, let’s turn to an excellent and unabashed defense of righteous government regulation delivered by Massachusetts Rep. Barney Frank, as an opinion piece in the Boston Globe. (Thanks to Mark Thoma for the link.)
At every step in the process, from loan origination through the use of exotic unsuitable mortgages to the sale of securities backed by those mortgages, the largely unregulated uninsured firms have created problems, while the regulated and FDIC-insured banks and savings institutions have not. To the extent that the system did work, it is because of prudential regulation and oversight. Where it was absent, the result was tragedy for hundreds of thousands of families who have lost, or soon will lose, their homes and for those who invested in shaky and untested, even though highly rated, securities, and have been forced to take large losses and, in many cases, shut their doors…
Well-functioning financial markets depend on transparency and confidence that institutions are playing by clearly defined rules. Both were in short supply in the months leading up to the August meltdown and remain so today. Large pools of unregulated capital, often highly leveraged, especially in hedge and private equity funds remain opaque and have been joined by massive sovereign investment funds to transform the financial landscape in ways that are out of reach of regulators here at home and in other wealthy countries. We lack the information that we need to ensure safety and soundness as well as the confidence that comes from the requirements mandating governance and reporting standards that apply to publicly traded companies.
To an important extent these new pools of capital are structured in a fashion that allows them to avoid the scrutiny that is required of firms and financial institutions in the regulated sectors. We should not be surprised. It is a fact of life that investors and firms will seek to innovate their way around whatever regulatory strictures apply, whether they deal with health and safety, labor protections, or reporting obligations. This tendency has been exacerbated by a 30-year attack on the very notion of a regulatory role for governments and loud professions that the market not only knows best, but knows everything.
Our job is to understand the changes in the financial marketplace and consider what we must do to ensure that our regulatory system is able to keep up with those changes. Innovation is as important in financial markets as it is in product markets, but it would be foolish to act as if regulatory structures, designed for a different world, do not have to be as nimble and innovative as those they regulate.
Barney Frank is the chair of the House Financial Services Committee, a position he took over after the midterm elections of 2006. Is it too soon to wonder what would happen if a candidate like Edwards occupied the White House while politicians like Frank controlled Congress?