Where Were the Regulators?

For a union pension fund that has been an outspoken shareholder activist, these are bittersweet times.

Richard Ferlauto, general counsel for the pension plan for the American Federation of State, County and Municipal Employees, has long agitated for more corporate accountability and greater regulatory overnight.

Now amid the wreckage of the credit crunch, he can say: Told you.

"Fundamentally, this was a failure, not only of regulation, but of the structure of corporate governance in this country, which kept shareholders from holding boards accountable for their actions," he said in an interview. "So boards mismanage risk, overpay their C.E.O, and are driven by short-term and short-sighted performance goals, rather than managing their companies for long-term survival."

The AFSCME official has pushed for independent boards, greater financial transparency, shareholder rights to vote on independent directors, and a real regulator. In 2006, the union represented by lawyers from Grant & Eisenhofer, won a landmark ruling from the federal appeals court in Manhattan, granting shareholders access on the proxy ballot to nominate independent directors for none other than American International Group.

Sounds like something that Christopher Cox, the chairman of the Securities and Exchange Commission, whose mission is to protect investors, would support, right?

Nope. Through a rule change, he took away that shareholder right for the 2007 proxy season. Indeed, Ferlauto's lawyers were literally on their way to the courthouse last March to file a lawsuit demanding access to the ballot at the annual meeting of Bear Stearns when the firm was rescued from collapse in a government-backed takeover.

"This is why I think Cox has been disastrous to the markets," Ferlauto says.

For Ferlauto, the problems with the agency are many. "The S.E.C. was completely derelict in its duties," he says. Early in the Bush administration, the agency lifted leverage limits for financial institutions. Then, the agency was complicit in eviscerating its own enforcement budget.

Wall Street never learns its lesson. "The free marketers thought that Wall Street could regulate itself. And it has just proven time and time again that it doesn't work. You need to discipline the market through regulation, and if you don't, it becomes overheated for what sets of reasons ---- greed, hubris, or just amnesia. Whatever it is. This time, the government recognized that to prevent all of this from unwinding in a very short period of time with a dramatic hurt to a lot of people is that you have got to come in an backstop the economy from falling apart. So this will slow down the economy trying to right itself and hopefully, if it's managed appropriately, we will have a somewhat softer landing."

Ferlauto puts equal blame on Republicans and Democrats for the deregulatory push: It was Robert Rubin, Clinton's Treasury secretary, a former Goldman Sachs co-chairman, who pressed for the demise of the Glass-Steagall Act, the Depression-era law that separated retail and investment banking.

Ferlauto says of Rubin: "His role in the Clinton administration led directly to breaching the wall between retail and investment banking. I think it's a disaster. The new model is that every investment bank needs a depository base. That's a back-door bailout, where you are using the F.D.I.C. to back out retail again. You know regular depositors' money that we now use to support the leverage of these deals that these Wall Street bankers thought were going to make them millions."

Now, the federal government has come in with a front-door bailout. And Ferlauto and his union, meanwhile, are continuing to press the board.

"We have been pushing them to identify their risk exposure in the credit swaps and other default obligations that they were backing up. And the board seemed to be oblivious to the threat that they carried on their balance sheet --- the response that we got was that this was limited to one business unit, it's isolated. This was numbers and accounting issue. It's not real. It's a paper problem and not a real asset problem."

Karen Donovan