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healthy skepticism that could reduce future scandals. Gray’s reregulation set off two wars involving the S&L control frauds. The Bank Board rules limiting growth struck at the most vulnerable chink in control frauds’ shields. Every control fraud collapsed within four years. The control frauds, however, counterattacked using their political power, and blocked any chance that the president would renominate Gray for a second term. Gray’s successor, Danny Wall, and his key lieutenants tried to appease Keating. This set off a civil war within the Bank Board. The appeaseof a financial institution in U.S. history and ultimately forced Wall’s resignation. Unfortunately, neither regulators nor politicians have learned enough from the debacle. They are repeating the many mistakes we made in fighting the S&L control frauds, but few of our successes. To date, the effort to “reinvent” government has failed to show any utility against waves of fraud. the central reinvention plank. It led to two practices that could have prevented a new wave of control fraud. GPRA required agencies to formally define their missions and to develop strategic plans to achieve those missions. The General Accounting government activities. ple, properly defines itself in its recent strategic plans as “a civil law enforcement agency.” The SEC’s annual reports during the 1990s, however, despite the record-setting, inflating stock market bubble, never defined a wave of control fraud as a central risk to the accomplishment of its mission. The SEC had grossly inadequate resources, did not see the wave of control frauds coming, and was overwhelmed. The GAO’s definition of high-risk functions includes fraud risk as a key factor. The GAO, however, limited its concept of fraud risk to situations in which someone was stealing from a public agency. It did not consider a fraud risk that would impair the SEC’s ability to meet its mission as a law enforcement agency and protect the public from trillions of dollars of losses. Indeed, the GAO still has not classified the SEC’s antifraud function as high risk. Placing an individual who does not believe in regulation in charge of a regulatory agency can cause great damage, especially if that agency has to deal with control frauds. Deregulatory economists argue that private market mechanisms deal adequately with control fraud. People who believe that claim \(and those who have taken one course in law and economstatements are truthful and that auditors will not aid control frauds. They are taught that public-choice theory has shown that it is naive to believe that government workers act in the public interest \(instead of simply maximizing their personal tees, according to the economic theory of regulation. Government officials who argue that control fraud is material exemplify an agency problem: They are trying to distract attention from their own failures. Externalities such as pollution are not a valid rationale for regulation. Antitrust laws need not, and should not, be enforced, because markets quickly sweep away the rare problems that arise, and antitrust laws are used primarily by unsuccessful competitors to bludgeon rivals they could not outcompete. The book I use to teach intermediate microeconomics makes most of these points. It is intensely anti-regulatory, which means that it presents the conventional neoclassical tions in the above paragraph is going to be personally unprepared to identify or deal with a wave of control frauds. Indeed, such a wave is impossible under their beliefs. Further, if fraud is immaterial, then there is no reason to learn about fraud mechanisms or the means to reduce fraud. If the person who believes such theories is a senior regulatory leader, the agency will be unprepared to deal with a wave of control frauds. Indeed, such a leader would be strongly inclined to believe that any employee who vigorously argued that a corporashould be closed must have taken leave of his senses or be engaged in a vendetta. Control fraud is not random. Criminologists know that some environments produce increased crime. The S&L industry in the first half of the -1980s was a nearly optimal environment for control fraud. The incentive to engage in both reactive and opportunistic control fraud increased sharply. The ongoing wave of control fraud, by contrast, arose from the growth and collapse of an enormous financial bubble and the evisceration of regulatory and ethical restraints on fraud. Virtually every federal agency in America has a chief economist. Most have several chief economists at various subunits. As far as I can tell, no federal agency has a chief criminologist. The federal government does not have a job classification labeled criminologist. All financial regulatory agencies are civil law-enforcement agencies that must concern themcommonly staffed, however, with people who have received no professional training about fraud. Lawyers, accountants, and finance and economics majors dominate the SEC. None of these disciplines, traditionally, have studied fraud. \(A few I do not suggest that the chief criminologist must have a degree in criminology. The goal is to have someone who thinks like a criminologist and is familiar with fraud techniques and indicia of fraud. We know enough to do much better against control fraud. We can tell what environments are most likely to produce waves of control fraud. We can figure out the fraud schemes that are most prevalent and the best ways to identify such schemes. There is a basic paradox about trust in the regulatory context. Trust is vital for efficient commerce, social harmony, and 18 THE TEXAS OBSERVER MAY 27, 2005