THE BLOG
03/28/2008 07:13 am ET | Updated May 25, 2011

It's Time to Reregulate Business

Over the last 4-5 years we have seen an astonishing amount of problems in the business community. And it's not just a minor incident here and there; it's everywhere. From the complete breakdown in the financial sector to toy recalls to meat recalls every industry that has "self-regulated" has shown that it can't.

The president of the Chino meatpacking plant that triggered the largest beef recall in U.S. history admitted Wednesday that crippled cows, which are more likely to carry disease, probably entered the food supply at his company.

"Obviously my system broke down," said Steve Mendell, president of Westland/Hallmark Meat Co., once a major supplier to the school lunch program.

Mendell initially told a House oversight subcommittee that "downer" cows at his plant "were not slaughtered, ground or sold."

But after lawmakers screened a graphic undercover video that showed ailing cows being jabbed with electric prods, beaten and rolled with forklifts toward slaughter, Mendell acknowledged that the four-minute clip did indeed show that at least two cows were processed into food.

Dressed soberly in black, Mendell, of Newport Beach, was flushed but composed, apologetic and insistent that the meat at his plant was safe for consumption. He told lawmakers that he had received death threats, that his family and employees had suffered, and that his company "is ruined" and would not reopen.

"My whole life is up in smoke," he said.

After watching a video of his plant taken by an undercover investigator from the Humane Society of the United States, Mendell briefly bowed his head and shut his eyes.

"Would you consume meat from a cow slaughtered that way?" asked Rep. Janice Schakowsky (D-Ill.).

"No," Mendell said.

This was the same plant that caused the largest meat recall in US history.

But this is far from the only problem.

The FAA launched a review March 18 of all airlines' maintenance practices to see if they followed safety orders.

"So far we're seeing a high degree of compliance," FAA spokeswoman Alison Duquette said. Results of a preliminary inquiry, which ends today, will be known next week. A broader review will run through June 30.

Meanwhile, the FAA itself has been called into question. The House of Representatives transportation committee plans a hearing next week into what it called "critical lapses" in FAA oversight of plane maintenance.

The FAA has acknowledged that its inspectors did not adequately check on Southwest to make sure its planes had been properly inspected. Two FAA whistle-blowers have alleged to the House committee that FAA managers allowed Southwest to violate the rules.

On March 12, Southwest grounded 38 jets after discovering that the aircraft had not been properly inspected for cracks, prompting 126 flight cancellations. It also suspended three employees after an internal investigation.

And the Federal Government was warned several times about problems in the financial community:

Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of "best practices" and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.

And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.

John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

"He never gave us a good reason, but he didn't want to do it," Mr. Gnaizda said last week. "He just wasn't interested."

A newly surfaced memo from banking giant JPMorgan Chase provides a rare glimpse into the mentality that fueled the mortgage crisis.

The memo's title says it all: "Zippy Cheats & Tricks."

It is a primer on how to get risky mortgage loans approved by Zippy, Chase's in-house automated loan underwriting system. The secret to approval? Inflate the borrowers' income or otherwise falsify their loan application.

.....

Even if the memo was penned by a single employee, it illustrates an attitude prevalent in certain corners of the mortgage industry during the boom years. In the face of sustained and significant home price increases, much of the industry veered away from traditional notions of safe and sound lending. Loan volume became as important as loan quality, particularly for the rank and file typically paid on commission.

During the boom, it was common for lenders and brokers to get paid more for risky subprime loans than for 30-year fixed-rate loans because the higher-interest loans fetched a higher price on Wall Street.

.....

The document recommends three "handy steps" to loan approval:

Do not break out a borrower's compensation by income, commissions, bonus and tips, as is typically done in a loan application. Instead, lump all compensation as the applicant's base income.

If your borrower is getting some or all of a down payment from someone else, don't disclose anything about it. "Remove any mention of gift funds," the document states, even though most mortgage applications specifically require borrowers to disclose such gifts.

If all else fails, the document states, simply inflate the applicant's income. "Inch it up $500 to see if you can get the findings you want," the document says. "Do the same for assets."

There are signs this is changing, however:

The Senate yesterday approved the most far-reaching changes to the nation's product safety system in a generation, responding to recalls of millions of lead-laced toys that rattled consumers last year.

Lawmakers still have to resolve key differences between the Senate bill and a similar measure that passed the House in December. While the Senate version is considered by consumer advocates to be tougher, both contain provisions that would require retailers and manufacturers to be more vigilant about product safety.

The biggest change is likely to be a better-staffed Consumer Product Safety Commission, with more enforcement power. Both bills would boost funding for the agency, which had a budget of $63 million in fiscal 2007 and just less than 400 employees, fewer than half the number it had in 1980. The Senate bill, which passed by a vote of 79 to 13, would increase the budget to $106 million by 2011. The House's version would increase it to $100 million.

Both bills would provide funds to upgrade the CPSC's antiquated testing facilities. Both bills also would raise the maximum amount of money the CPSC can fine companies that fail to report product hazards immediately. Fines are now capped at $1.8 million. The House bill would raise the cap to $10 million; the Senate to $20 million.

Here's the basic problem. Capitalism is based on greed. Some greed is good. It drives people to make better products which benefits us all. Too much greed leads to major problems. The trick is to find the appropriate amount of greed to let out of the bottle. Right now we have way too much greed out there. And that is causing major problems.

Something I've been seeing from the Republican talking heads is the line that the Democrats want to reregulate business and that would be anti-competitive. Here's my response: the system as it currently stands is endangering our way of life and our very lives. Between

-- toys that might kill our children,

-- a food safety system that isn't working AT ALL

-- airlines that might be flying unsafe airplanes and

-- an entire financial system that is shall we say screwed up (Bear Stearns anybody?)

it's clear something isn't working. As a result, something has to change.