Friday, June 12, 2009

The Regulators are Trying to Herd Cats

Timothy Geithner is about to unveil a new regulatory regime in the US that will probably include two more levels of bureaucracy, according to the Financial Times. One will likely be a council of the heads of all the big regulatory bodies, the other a structure to watch over credit card and mortgage companies. While I applaud the effort, and have been a strong supporter of better regulation especially with regards to risk management, the proposed structure is unlikely to help. Regulating and monitoring financial services firms is akin to herding cats. You get them all corralled with the promise of Fancy Feast (TARP money) and then one-by-one they find reasons to wander off in different directions. With or without eating said cat food (or immediately regurgitating it - again TARP money). The reason? There are some big, fat mice out there to catch (read: new markets, bubbles, or derivatives). The problem with the regulators is that they are always one step behind the cats, or the smartest guys in the room in financial markets terminology. The reason they didn't cotton on to the impending credit crunch and various Ponzi schemes is because they inherently believe that people are honest, that they abide by the regulators' rules. They do and they don't. Scratch the surface of compliance and you will find a virtual can of 'getting away with it' worms. Regulators can only go so far without violating privacy laws or something. What I'd like to see is fewer regulatory agencies with more power and more investigative experts - say,ex-traders who like conspiracy theories. With super-duper snooping technology like complex event programming that can be programmed to dip in and out of the markets and detect patterns among certain trading firms. I'd like the regulators to be the smartest guys in the room.

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