03/31/2009 07:37 pm ET Updated May 25, 2011

Where Was Rep. Ed Royce?

Where was (and where is) Rep. Ed Royce (R-CA) though the financial crisis? A member of the House Financial Services Committee, Rep. Royce presumably sat in the CENTCOM of the entire financial services hub, including the securities, insurance, banking, and housing industries. His subcommittee assignments covered the full scope of issues being untangled today:

* Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises
* Oversight and Investigations Subcommittee
* Subcommittee on Financial Institutions and Consumer Credit

I am particularly interested in Rep. Royce's record on the Oversight and Investigations Subcommittee which is charged with maintaining the integrity of the entire system. Why Ed Royce? Subcommittee assignments alone make him an interesting prism through whom to see the interaction between Congress and the banking industry. As one of the financial air traffic controllers on duty, Royce was presumably charged with ensuring the structural viability of the entire system or at least sounding early warning bells regarding possible mishaps. This is not to say our legislators and regulators were responsible for piloting the individual firms to safety (they were not, at least while America was a free market state). But they should be held responsible for failing to shed light on the tarmac.

I have other reasons for inquiring about Rep. Royce as well. First, the Bush Administration's preference for deferring prosecutions of financial institutions has already started to be documented. Next, with the debate regarding systemic reform of the financial services industry resurfacing in Congress, this seems like an opportune time to unpack the record of House investigations during the period leading up to the crisis. Third, the Banking Committee did perform several important oversight functions; a more thorough analysis must be done of their work than here so as to learn how to prevent future lapses. Lastly, Ed Royce is my congressman so it is fitting to write both as a concerned citizen as well as dissatisfied constituent.


Throughout the late Bush years, even as the economic situation was worsening, the name of the game for Royce was deregulation of the financial services industry. By way of example, in 2008, Royce introduced the Credit Union, Bank and Thrift Regulatory Relief Act, designed to serve financially "underserved areas" and to provide thrift institutions with "greater lending flexibility". In the words of Royce:

The introduction of this bill is a major step toward achieving our ultimate objective: providing significant regulatory relief for our financial institutions. This bill gives both credit unions and banks greater flexibility in their day to day operations, thereby allowing them to better serve their customers.

High and low, from Henry Paulson, Ben Bernanke, Alan Greenspan to the hundreds of families in foreclosure in Ed Royce's district alone, there is now near universal consensus that "regulatory relief" was a bad idea. That greater lending "flexibility" meant loan officers could mislead home buyers into thinking they could afford a particular home, get the sub-prime mortgage application approved and re-packaged off to a larger bank, and ultimately contribute to the inflation of the Southern California housing bubble. These loans were in turn re-"engineered" into mortgage-backed securities (MBS) and resold as poorly collateralized to institutional investors. When these families could not afford to pay their mortgage payments, they simply refinanced their loans against apparently rising house prices, even taking out equity for capital improvements on their homes or new boats for their driveways. Financial engineering--the term alone stirs up images of machinations and crooks sitting around a table talking over ways to swindle unsuspecting folks. But in the boiler room that is Orange County real estate financial engineering meant families could afford to borrow more. Banks could afford to lend as much as they wanted. And nobody cared so long as median OC home prices kept rising at 10% or higher every year. As in a Ponzi scheme, as soon as the early creditors started to demand their investments and to cash out, the entire system collapsed.

Conventional knowledge posits that the systemic collapse was unprecedented. But the global financial crisis was not a surprise phenomenon. Royce's colleague on the House Banking Committee, Rep. Carolyn Maloney (D-N.Y.) was a staunch advocate of increased transparency in the banking sector both before the crisis unfurled and now. In early 2008, I had the opportunity to meet Rep. Maloney at a fundraiser in New York for another congressional candidate. She spoke forcefully of the need to increase transparency in addition to oversight, of the need to impose common sense regulations to prevent classic financial runaway schemes like the Ponzi. It was clear to most people in the room that deregulation in the financial services and insurance industries was fueling white collar crime. And that it was white collar criminals who in the words of Harry Markopolos, were "steal[ing] our pensions, bankrupt[ing] our companies, and destroy[ing] thousands of jobs, ruining countless lives."


Now of course, banking regulation is hot again and Rep. Royce is hip to the game. Since Pres. Obama's inauguration, Rep. Royce has engineered a 180-degree turnaround on regulation. On January 23, 2009, days after the inauguration, Royce co-authored a letter to Timothy Geithner urging the creation of a federal-level office within the Treasury Department to fill a seeming "void on insurance oversight" within the federal government. The irony of course is that Royce had advocated for years for deregulation, aiding the creation of the "void" on insurance oversight. Second, suddenly urging the creation of an oversight body within Treasury seems like a disingenuous act of passing the buck. One wonders why sitting on the Capital Markets, Insurance, Oversight, Investigations subcommittees, Royce does not launch investigations himself.

Better yet, why can't our oversight committees foresee problems, or take actions in anticipation of failure, instead of band-aiding us after-the-fact? In this light, Royce's February 4 call for a complete overhaul of the SEC after the blow up of the $50 billion Madoff Scheme, after numerous warning signs and after whistleblowers' courageous confessions seems suspect.


A common trait among all politicians is smugness, the self-congratulatory way that successes are touted, and failures brushed over or pushed onto others. The House and Senate banking committees and subcommittees are busy poring over the failures of the SEC, the systemic failures of American banks and insurance giants. Individual senators and representatives even muse on failures of capitalism or of self-regulation (as in the case of NASD, whose former chairman was Madoff). But we have yet to see acknowledgment of personal failures. We have yet to see individual members of the influential banking committees apply the same scrutiny they now apply to firms or issues like executive compensation to themselves or the failures of their oversight committees. Or perhaps to turn the mirror inwards would reveal failures far greater than the faults we see in others. Perhaps it is true that the sins we accuse others of most loudly are the ones we suffer from most greatly in ourselves.

Rep. Royce's calls to reform the SEC or the oversight functions of the Treasury Department should start with a healthy dose of self-reflection and self-criticism. That change can start now. Rather than summarily dismissing the Democrats' health care bill, perhaps Ed Royce can begin some investigations or hearings into abuses by the American health insurance giants. Maybe this time a proactive congressional investigation can catch the thieves before they fleece everybody completely and take off with the loot. Ultimately, instead of dodging responsibility further, it is we who must demand that our "overseers" begin the actual task of reigning in banking, insurance and capital fraud.

In the spirit of self-criticism and self-responsibility, demand accountability.