FRM: What happens from here?
What happens next after the Financial Resources Mortgage Inc. sentencings, hearings and reports?I think this question can be answered along two tracks: first, how does the state address the concerns of those who were truly harmed here, or the lenders of FRM; and second, will the state learn from this debacle and move beyond blame-game politics?I have worked with Sen. Lou D’Allesandro, D-Manchester, on legislation to establish a state-appointed panel that would use state fine money, or a financial restitution account, to help those lenders who lost funds in FRM. This legislation is pending in the Senate. The funds would be sourced from a portion of fine money state agencies like the Securities Bureau and the Bank and Insurance departments collect annually from firms and individuals that violate financial regulatory laws. Such monies are not used in state government budget calculations.In the past ten years, the Securities Bureau has collected the most fine money of any New Hampshire state agency. During the past decade, the bureau has collected fines and achieved investor restitution of over $50 million from entities such as Tyco, Pennichuck, MFS, Morgan Stanley, Merrill Lynch, ING and, most recently in 2010, when the bureau gained some $21 million from UBS for state student loans on behalf of the New Hampshire Higher Education Loan Corp., a landmark regulatory enforcement case.Maybe all three state agencies should be given a target number to aim for in terms of fines, and maybe it’s time to establish benchmarks of agency performance in this area – fraudulent behavior has and will continue to be part of the human psyche, and as the state grows in size and wealth, it would be good for us to understand more rigorously how our citizens are at risk in terms of financial fraud.Within a five-year time period, these state agencies collectively could amass enough funds to pay back all or some of the FRM lenders – the total lost by all being estimated about $30 million. Going forward, such a restitution account may be used to help other victims of financial fraud.This leads me to the second point – what we as a state as well as other states and the federal government should learn from something like FRM and financial fraud in general. It is time to clean up our regulatory act.When the economic tide is rising and the markets react accordingly, that is when we need regulation the most. But historically, it has been during such periods we have been the least able to stem what becomes a prevailing anti-regulatory mind-set.I have heard the arguments: Your agency is too aggressive; we in New Hampshire are “business friendly” (which too often is code for, “We don’t engage in active regulation here or want you to do so”). But when the economic tide goes out, like it has during the past few years, that is when the weaknesses of our regulatory system are revealed. The laws and rules we have relied upon to protect us are shown to be ephemeral. Then everyone is hurt.Today, individual investors feel the financial markets are rigged, and to a certain extent they are correct. But the result of such an overly negative and cynical perspective is that many people don’t invest when they should be doing so, and as a result lose out because of their withdrawal from the markets – and we as a society may have many millions more of our citizens facing their non-working years with insufficient savings.If we don’t create a system that is fair for all, then the financial markets as well as the United States’ ability to compete for capital could be compromised – with the result being we end up lagging the developed world in economic growth.Some in the state’s mortgage industry today are saying we should not regulate the commercial mortgage market. They argue it is largely institutional in nature and the problems there are relatively minor compared with those in the residential area. But won’t another Scott Farah find a way to exploit loopholes? And what if we appoint people to positions of authority who, for example, act when they learn residential mortgages are being mischaracterized as commercial ones?What I am saying is it is also in the financial industry’s best interest to have regulators who cast a bit of a jaundiced eye in their direction, because the result of too little regulation could also be too much regulation – if things get bad enough and people become truly outraged.Checks and balances, if used correctly, really benefit all.New Hampshire state government is small, which is a good thing, but if it doesn’t encourage active regulation, which I believe has largely been the case, then the state may not grow as fast economically. If we don’t truly learn from an event like FRM, then the kind of investment capital we need to create jobs here may start seeking other jurisdictions that actually look at regulation from a different vantage point.The time has come for New Hampshire to change how it regulates itself. This same concept applies to our federal government. Capital and jobs over time seek to be deployed in areas where there is safety and a sense of balance. We live in a competitive economy at all levels, andNew Hampshire competes not only regionally and nationally, but internationally as well. We need a state economy and government that reflects that reality. Now.Mark Connolly, former director of the state Bureau of Securities Regulation, is principal of New Castle Investment Advisors LLC.