What happens when the feds stop enforcing laws meant to prevent fraud? There’s a drop in the number of enforcement actions by the federal government by the CFTC and SEC, with members of the FBI taken off white-collar crime to terrorize brown people.

First let’s start with the same claim that the vast majority of white collar criminals make: “I never intended it to become this bad.” Whether it’s embezzling or insider trading, it starts off mild. The sales person that books a sale before its final, because the person who signs off on it is out until the day after the quarter cut off. And if they book it, they make their bonus numbers, and it’s “just this one time.” Or the person who took just a little bit from one account because they were short on money this month, but intended to pay it back. Most white collar criminals aren’t intending to set up a scheme, although Trump has pardoned quite a few of those.

If it’s not discovered by internal controls, or the management just overlooks it, over time the crime snowballs. It was just this one time they tip off their brother in law with a hot tip, based on non-public information. But at some point it becomes a regular thing, with larger and larger amounts. Insider trading destroys confidence in the system and cheats other investors, but is rarely catastrophic for the company. Same with embezzlement, as long as it’s not so large as to be material.

I’m more worried about the following kinds of problems, starting with creditors not coming clean about the actual value of their loans. In this case the NBFI has a portfolio of loans and claims a book value well in excess of the actual, impaired value of the loan. They essentially hid their “cockroach” loans. NBFIs, unlike banks, don’t take deposits and instead have investors and often loans from traditional banks. When investors begin to worry about the quality of the loan book, they start to withdraw their money. The NBFI may suspend redemptions. Any creditors to the NBFI now have a counter-party risk. One bad NBFI could have an outsized impact when it implodes.

The next problem I think is material is garden variety bribery. As the administration runs “pay to play” schemes through its crypto sales or deals like Amazon’s Melania documentary, it harms other companies. And it represents a tax on businesses. Once discovered by a future administration, it could be catastrophic for the company involved. Although the Supreme Court has watered down bribery to the point that short of saying “I am giving you this money with the express purpose of doing this thing for me,” it’s is hard to prosecute.

Next, I worry about material misstatements by public companies, related to revenue, expenses, or liabilities. What if a major AI infrastructure company is over-stating its sales? Or the size of the commitments it has from customers, or has been using off-balance sheet vehicles to hide debt? Auditors are limited in their ability to discover fraud as they only evaluate the information provided by the company they audit. If they are presented fraudulent documents that say it’s actually a joint venture that owes the money, they may agree that its not a liability on the financial statements. Collusion with the company (Enron style) is not necessary. If it came out that tens of billions of dollars in financing needed to be written down to zero because a major AI infrastructure player was insolvent, that would have ripples.

Finally, I worry about the growing prevalence of gambling. Not just through sports books, but through prediction markets and vehicles like 0 DTE options. Unlike the one big event of a NBFI going under or another Enron, this is just the grinding away of both risk management and exposure to risk. If the market did suffer an event like another Enron, the damage is compounded.

Yes, the lack of enforcement is a bug, not a feature. No one likes auditors or letters from bureaucrats, but at the end of the day, the long term health of the markets is the goal of that regulation. Oil shocks and inflation are one thing, but when credit markets (especially) break down, the entire economy can stall. The only reason the GFC wasn’t a depression is that the government stepped in with aggressive measures. And with the debt as high as it is, and deficits as high as they are, a lot of that room is gone.

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