Playing the blame game…

This financial crisis is painful, but everyone seems to be enjoying the blamefest. Choose your culprit: Wall Street, the White House, Congress, candidates, lobbyists, Fannie, Freddie, FASB, mortgage bankers, borrowers. Or all of the above.

Then there are the regulators. On that score, some politicians are saying there was “no regulation” of the financial markets. Well, hardly. If you piled up all the relevant laws and regulations, you’d have enough paper to build yourself a nice papier-mâ_ch⟠McMansion (which, if the economy gets really bad, could be a useful project). So it’s not about the quantity of regulation, but the quality, and also the sad performance of regulatory agencies, especially the SEC.

Lest you have any doubts, check out this report issued last week by the SEC’s Office of the Inspector General (OIG). (Disturbingly, the OIG had its own scandal in 2006 but has since cleaned up its act.) Back in April, following the Bear Stearns blow-up, the Senate Finance Committee asked OIG to review the SEC’s so-called Broker-Dealer Risk Assessment Program, which covers 146 firms. Under this program, the SEC is supposed to “assess the risks to registered broker-dealers that may stem from affiliated entities…and keep apprised of significant events that could adversely affect broker-dealers, customers and the financial markets.”

The OIG report runs 46 pages, but here are some highlights: The SEC never finalized or updated its temporary regulations for the program, issued in 1992, although the OIG flagged this as a problem back in 2002. It regularly reads only the reports filed by 6 of the larger firms and its scrutiny of the other 140 firms is “sporadic and random.” It made an “undocumented policy decision” – literally, no one even bothered to write it down – not to review filings from firms that had another primary regulator, including a foreign regulator. It still hasn’t managed to figure out whether two leftover Bear Stearns-related broker-dealers, one of which has “a significant number of customer accounts,” should currently be filing the darn reports. And, quaintly, 126 of the 146 firms still file on paper, not electronically.

p.s. This fun Barron’s piece by our friend Barry Ritholtz lists some other ways the government screwed up.