SEC & MMS: A Tale of Two Failures

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William Black

William K. Black was a federal regulator during the Savings and Loan crisis and appears in Michael Moore's 'Capitalism: A Love Story'

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July 8th, 2010 12:16 PM

SEC & MMS: A Tale of Two Failures

By William Black

Written with Eliot Spitzer

How many disasters will it take to overhaul the regulatory agencies?

The SEC and the Minerals Management Service’s (MMS) share a number of characteristics we can’t help but notice in the wake of the worst environmental disaster in U.S. history, which followed the second-worst financial disaster in same. We have endured two cataclysms in which a regulatory agency upon which our nation’s economy and environment depended failed to meet even the minimum requirements for doing its job. The ecological disaster was aided and abetted by the systematized incompetence and cronyism of the MMS, just as the financial meltdown was stoked by the laxity and inadequacy of the SEC. Both regulatory agencies were designed to fail. At the time of the critical regulatory lapses, they were run by leaders chosen because of their anti-regulatory stance. Both agencies have been failures for at least a decade.

In both instances, the regulators accepted industry assertions about the reliability of their safety mechanisms while failing to acknowledge — much less investigate — the darker, more complex reality. In each crisis, we had the same story of a belief in the reporting done by corporations, and in each case, we had a failure to recognize the enormous potential for fraud and the lack of incentives these corporate entities have in ascertaining and measuring potential risks to the public. The regulators continued to believe the lies fed them by CEOs even when the lies had become absurd. Both times, the agencies charged with regulating ignored the advice of their own experts, neglected to enforce rules, and engaged in an alarmingly cozy relationship with the industry they were supposed to be monitoring.

So far, the Obama administration has failed to fully grapple with the weaknesses and corruption of the regulatory agencies meant to guard the public from harm. Across the entire spectrum of regulatory agencies, there exists a dangerous atrophy of infrastructure which may lead to disasters we cannot yet imagine. Maybe now, as the oil slicks spread across the Gulf, killing wildlife and wrecking lives, our false sense of security is dissolving. We hope so, because if we don’t learn from these horrific experiences, we can expect more of them. Where will the next disaster occur? At the Food and Drug Administration? At the National Transportation Safety Board? At the Nuclear Regulatory Commission?

The Government Accountability Office (GAO) is supposed to identify “high risk” governmental activities and require that the agencies address any weaknesses. Unfortunately, the GAO has traditionally excluded key regulatory activities from this high risk designation. It has only treated a regulatory activity as “high risk” if the taxpayers were likely to be the direct victims of the fraud or abuse. So far, the GAO has failed to designate either the SEC or MMS’ regulatory activities as “high risk” even after recurrent scandals at both agencies that have led to multi-trillion dollar losses and epic catastrophes. That must change. The Obama administration should not only direct regulatory agencies to thoroughly audit themselves, but it must also instruct the GAO to systematically review the agencies’ effectiveness and integrity, identify critical weaknesses, and require their timely correction.

Let’s not wait for another catastrophe.

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