Prepare to Come About

For you sailors, you know that's the call that tells everyone on board to watch out for their heads because the sail is about swing over the deck. Unfortunately for our economy, and particularly for members of Boards of Directors and regulatory boards, the call never came as the nation's mortgage industry turned into a massive fraud.

Originally, mortgage servicors were investors in mortgage purchasers; in the scramble to invent investment bundles, those servicors turned into sales agents for golden fleecings. The regulation that was needed had been negated over the past eight years. Its absence was a major contributory element to the disaster we have in our economy now.

Boards of Directors have been used to an avuncular role, paid good salaries for helping the company management produce profits. Whistle blowing at freewheeling policies was almost antithetical to what they were asked to do.

Dallas Mayor Tom Leppert is now caught in an embarrassing position. He served on the WaMu board while it went down, caught up in unsound lending insanity.

After a conference call with fellow board members of Washington Mutual on Oct. 15, 2007, Dallas Mayor Tom Leppert boarded a night flight to Seattle to attend a full meeting of directors the next day in the company's hometown.

On Oct. 17, with the mayor back in Dallas, Washington Mutual shocked investors by backpedaling on an optimistic business forecast it had issued just two weeks earlier.

Things were getting worse, not better, the nation's largest savings and loan said. The housing market was deteriorating more rapidly than expected. Larger losses from risky mortgage loans could be expected in the future.

Since joining the WaMu board in 2005, Leppert has had a front-row seat on the mortgage boom and bust that caused the biggest bank failure in U.S. history and contributed to what is becoming the world's worst economic downturn since the Great Depression.

WaMu's ascent to the heights of American finance, the risks it allegedly took to get there and the collapse that followed illustrate some of the origins of the crisis that has vaporized home equity and retirement savings for millions of Americans.

The company's downfall is also affecting the roughly 100 branches and nearly 2,500 employees it had in the Dallas-Fort Worth area when it failed. WaMu's assets were acquired in September by J.P. Morgan Chase & Co. Some local branches are being closed.

It's unclear what advice Leppert – a successful businessman who has based his political appeal in part on his business savvy – provided on the WaMu board. He and other directors declined to comment for this article.

Leppert remains a director of WaMu's holding company, which is in bankruptcy. The company, its officers and some directors, including Leppert and Dallas attorney Regina Montoya, who joined the board in 2006, are defendants in legal action stemming from the company's troubles.
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One of the written questions submitted to the mayor asked why he didn't resign from the WaMu board at the same time he resigned from the board of Leighton Holdings, an Australian company, in early 2007. He resigned from two other corporate boards shortly after being elected.

Though he declined to answer, some insight into Leppert's thinking might come from brief comments he made to Dave Levinthal, city hall reporter for The News, in early September last year, soon after Killinger resigned as CEO and two weeks before WaMu failed.

"The feeling is that there's sufficient capital and good things ahead," the mayor said of WaMu's prospects. "But that's about as far as I can go. I'm not a designated spokesman."

The errors of regulators have been widespread in the financial industry's massive fall from grace. The formerly booster role, usually played by friends of the management, turned suddenly into one of sheriff. The new direction was felt recently by the Enron functionaries, and that fraudulent business's Board of Directors came under scrutiny that could have cost individual members huge fines. The administration of the past eight years was a big boon to those former directors, as no action was ever taken against them.

The inaction by S.E.C. has enabled fraudulent business practices in the case of Enron, the financial industry in subprime mortgages and bundlings, and most recently in failing to oversee Bernie Madoff's ponzi scheme. That body, too, is under new requirements as public interest replaces enrichment of business leaders under this administration.

If Ms. Schapiro does not whip the SEC into shape, her job and her legacy as a career regulator could be at stake.

The pressure is on her. Even a cursory glance at recent SEC action in the area of enforcement shows that the agency has been slow or inefficient in a number of matters, both large and small.

For Ms. Schapiro, foremost is an explanation as to why the SEC neglected to act on a credible tip that Bernard Madoff's investment business was a sham.

Although the function of the regulatory boards became one of purely figurehead functions under business servicing leadership, it is time for our regulatory restructuring to require more. The role of enabler is no longer possible. The country needs business to return profits instead of losses for society, and that is going to be a new consciousness for members of the boards.

The boom is swinging, and some heads are at risk.