The perils of inept regulators

The 2008 mortgage-market meltdown stemmed in part from some egregious — perhaps even criminal — misconduct by major financial firms. The collapse of Lehman Brothers played a particularly crucial role in triggering widespread economic consequences that linger to this day.

So it sounds reasonable to insist that federal regulators keep a closer eye on what the big banking firms are doing.

But as CBS’ “60 Minutes” reminded viewers on April 22, what went so terribly wrong as Lehman Brothers cooked its overextended mortgage books in 2008 happened right under federal regulators’ noses.

As Steve Kroft reported: “It was not widely known at the time, but during the last six months of Lehman’s existence, teams of officials from the SEC and the Federal Reserve took up residence inside the firm to monitor its precarious financial situation. They were inside the building when [Lehman official] Matthew Lee wrote his letter to Lehman executives alleging unlawful accounting practices, and they were there when the practices took place.”

That presence could severely compromise any attempts to prosecute Lehman officials.

Anton Valukas, a former U.S. attorney appointed by a bankruptcy court to investigate the Lehman case, told Mr. Kroft of the ineffective regulators: “They may not have had the expertise necessary to understand the material they were receiving. They were getting the material. Whether they understood it is another question.”

But there’s no question about this:

Unless regulators have “the expertise to understand the material they are receiving,” additional regulation won’t ease the risks of future malfeasance on Wall Street — or anywhere else.