The Financial Market Crisis: How Did We Get Here … And What’s Next?

Is a wave of new regulations and greater enforcement of current ones forthcoming?

The unprecedented collapse of the American financial market has prompted incredulity, hysteria, and outrage. And out of these emotions, have arisen the inevitable – investigations and lawsuits.

What Happened?

A perfect example is the subprime mortgage market collapse which many predict will cause 2.2 million US homeowners to lose their homes to foreclosures.

As of December 2008, more than 30 class-action lawsuits have been filled by investors against the subprime mortgage lenders, Wall Street firms, and investors who purchased shares of hedge funds, bond funds and other securities containing subprime mortgage exposure.  In addition, many individual lawsuits have also been filed, alleging such actions as fraudulent practices; failure to disclose information regarding loan packages sold to third parties; breach of contracts involving securitization; and improper due diligence on mortgage loans prior to repackaging as other securities. This, of course, is just the tip of the iceberg of the lawsuits expected to be filed within the next few years.

The Federal Bureau of Investigation began a wide-ranging investigation of the mortgage industry and reported that it had opened criminal inquiries into 14 companies. They are investigating such charges as possible accounting fraud, insider trading and other violations in connection with loans made to borrowers with weak or subprime credit.

In addition, the Bureau is cooperating with the SEC, which is conducting about three dozen civil investigations into how subprime loans were made and packaged and how securities backed by them were valued.

What Now?

The questions of just who knew what and when could easily have been answered with strong retention policies and electronic record retention plans. However, many industry observers note that few of the records retention regulations enacted over the past 15 years were strongly enforced, and consequently, most companies have done little to comply with them.
Analysts say that the fallout from the Wall Street meltdown and the bailout of the industry will lead to stronger enforcement of existing regulations including the Sarbanes-Oxley Act (SOX), the Electronic Signatures in Global and National Commerce Act, the SEC’s Rule 17A-4 and the Gramm-Leach-Bliley Act. New regulations within the financial markets may also be enacted.

Financial representatives believe that this increase of regulations should result in systemic change within the industry. Heavier regulatory enforcement and more widespread usage or even mandating the tools to maintain those regulations are predicted.

However, according to a recent Gartner study, only 10% to 15% of U.S. corporations have electronic records retention systems in place. And of those, many believe that those systems are either outdated or simply not being used correctly.

Moreso, the prevailing corporate attitude today is that of confusion: of the regulations; how to implement a solution; and of the severity of consequences of non-compliance. And the recent trend of merging records management with the legal field has created corporate chaos as well as a disconnect with a company’s IT, records, and legal departments. From a corporate perspective, this is a major factor in an organization’s lack of implementing a retention policy or even addressing basic records management issues.

However, given today’s regulatory climate, it doesn’t appear that the time tested tradition of merely ignoring this issue makes good business sense. The old saying may require that ‘no good deed goes unpunished’, and there may be a day when those responsible for the current crisis are disciplined. But many in the corporate world are anxious to see what kinds of regulatory ramifications a host of ‘bad deeds’ may bring about for us all.