Regulators helped cause the financial crisis

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When Scott M. Polakoff was named Deputy Director of the Office of Thrift Supervision in 2005, his boss praised him, saying the career bureaucrat "will be a valuable asset to OTS and the OTS mission." Now, he is at the center of an investigation into whether the bank regulator allowed companies under its supervision to falsify their financial records.

According to the Washington Post, Polakoff has been placed on leave by Treasury Secretary Timothy Geithner while "The Treasury's inspector general is investigating a number of instances in which OTS employees allowed banks to exaggerate their financial health in required filings by including money they did not receive until after the reporting period."

A senior OTS official has already been forced to resign for allowing IndyMac to overstate its financial health weeks before the California mortgage lender was seized by the government, the Post said.

If the allegations against Polakoff are true, they are disturbing. He has not been charged with criminal wrongdoing. Unfortunately, they are not the first allegations of questionable conduct by financial regulators.

For instance, a report by the House Republicans recently argued that Countrywide Financial, a symbol of the dark side of the housing bubble, "routinely violated internal company policies to provide below-market rates on home loans to the politically connected and powerful."

Officials at the Securities and Exchange Commission failed to act on warnings about swindler Bernard Madoff for years. The SEC also let accused con artist Allen Stanford off with minor fines after finding securities violations at his securities firm.

All of these situations present a disturbing picture that regulators either were too incompetent to detect the fraud under their noses or may have been active participants in it.

There needs to be an investigation into what regulators knew about the financial collapse and when they knew it. Congress held similar hearings at the time of the Depression which uncovered among other things that bankers were shorting their own stocks.

Investors will only regain confidence in financial markets when they can be assured they are honest.
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