Reform reading: AEI urges closer look at derivatives, whistleblower, consumer agency rules

Introduction

The American Enterprise Institute think tank, an ally of influential Republicans, provides a glimpse of what the House Financial Services Committee is likely to target when Spencer Bachus takes the chairman’s seat next month. The AEI’s so-called shadow financial regulatory committee recommends that Congress:

• Set guidelines for the process that the new Consumer Financial Protection Bureau must use to create new regulations.

• Allow “reasonable delays” and slow down the Commodity Futures Trading Commission and the Securities and Exchange Commission as they write regulations policing the multi-trillion-dollar derivatives market with requirements for margin, collateral and reporting trades. “The tight statutory deadline creates the potential for a foreseeable train wreck on Sept. 15, disrupting derivatives markets,” the AEI says.

• Require whistleblowers of corporate fraud and misconduct to first “make reasonable use” of internal company procedures before reporting the allegations to the SEC. The agency has proposed offering a bounty of up to 30 percent of sanctions over $1 million to the first whistleblower who reports a problem to the SEC, which the AEI says is an incentive for employees to ignore corporate procedures.

HAMP to prevent only 700,000 foreclosures

The Obama administration’s program to prevent home foreclosures is falling far short of the 3 to 4 million foreclosures it aimed to stop, and will halt only an estimated 700,000 foreclosures, according to a watchdog report released today. The Congressional Oversight Panel said in its monthly report that the Treasury Department has failed to collect and analyze data to understand the shortcomings of the Home Affordable Modification Program (HAMP).

The report also spotlighted some of the problems reported in August by the Center for Public Integrity, which described how Fannie Mae executives bungled their stewardship of the HAMP program. Fannie and Freddie Mac were given responsibility to oversee loan servicers in the HAMP program but Freddie Mac has hesitated to enforce some measures, the report says, arguing that it could hurt relationships with servicers who are among Freddie’s largest sources of mortgage loans.

“Treasury bears the ultimate responsibility for preventing such conflicts of interest, and it should ensure that loan servicers are penalized when they fail to complete loan modifications appropriately,” the report added.

Why so few prosecutions?

Two years after the financial meltdown, it’s hard to understand why there have been so few criminal prosecutions of senior executives on Wall Street. One key reason: Prosecutors in a criminal case must prove that an executive intended to defraud investors or mislead accountants.

A federal appeals court ruling last week demonstrates the difficulty that prosecutors face, according to the New York Times’ Dealbook. The Ninth Circuit overturned the securities fraud conviction of the chief financial officer at Network Associates Inc., ruling that the “government’s failure to offer any evidence supporting even an inference of willful and knowing deception undermines its case.”

At issue was the CFO’s use of an accounting method to overstate revenue from the company’s sales of computer security products. But the appeals court rejected prosecutors’ argument that a CFO’s accounting knowledge and desire to meet corporate revenue targets is enough to establish criminal intent to defraud.

Or, as Chief Judge Alex Kozinski wrote in his concurring opinion:

This is not the way criminal law is supposed to work. Civil law often covers conduct that falls in a gray area of arguable legality. But criminal law should clearly separate conduct that is criminal from conduct that is legal. This is not only because of the dire consequences of a conviction – including disenfranchisement, incarceration and even deportation – but also because criminal law represents the community’s sense of the type of behavior that merits the moral condemnation of society. When prosecutors have to stretch the law or the evidence to secure a conviction, as they did here, it can hardly be said that such moral judgment is warranted.