I wash my hands of this shit.I have stated my case about the prospects and proper outlines for reform of financial regulation in this country before. Apparently, no-one with any scratch or power to do anything either a) read those pieces, b) agreed with me, or c) gave a rat's ass what I think. Fine, have it your way.
As you already know, Obama, Geithner, Summers, and crew have released their 85-page white paper outlining the Administration's proposed reforms. The most I can say about it on a family website is that it appears to have been composed with the objective of winning an obscure federal competition for the white paper which uses the largest number of capitalized initials and incomprehensible acronyms in a single document. There certainly seems to be little actual policy content of interest discernible in the mess. (Although I have sent a copy to NSA cryptographers to see whether it is really a cleverly disguised instruction manual for the conversion of sugar beets into synthetic diesel oil. It does sort of look like organic chemistry.)
Of course, everybody else in the commentariat and his hamster has already weighed in on the plan. Feel free to expose yourself to this spectrum of opinion, if you will. For those of you with limited time or tolerance for having your face sanded with a cheese grater, however, let me offer up my comprehensive, unbiased summary instead: [ white noise ].
It just doesn't fucking matter.
Many members of the punditocracy, including your Frustrated and Increasingly Irritable Correspondent, have commented at length on what is charmingly known as "regulatory capture." This is the phenomenon—most aptly demonstrated by the historical relationship in this country between the financial sector and its regulators over the last several decades—whereby the regulatee worms its way into the mind, practices, and governing philosophy of the regulator to such an extent that it effects something like a reverse Stockholm syndrome. The regulator adopts the objectives, goals, and mindset of its supposed charges, and becomes hostage to the institutions it is supposed to regulate.
Let me suggest here that this conception, while empirically valid, is at once both too narrow and incapable of explaining why the current Administration, with the mighty wind of a once-in-a-generation financial system collapse and the massed voices of millions of pitchfork-toting Americans at its back, has been unable to deliver a policy document which is worthy for use as anything other than toilet paper in the visitors' restrooms on Capitol Hill. Rather, in order to understand this epic regulatory fail, we need to broaden our concept to encompass the idea of complete inside-the-Beltway capture.
Forget the no doubt significant fact that substantial portions of the Administration's regulatory proposals were authored by products of a government-to-industry-to-government merry go round like Hank Paulson, Larry Summers, and Tim Geithner. Forget the fact that the Administration is said to have consulted heavily with industry participants and lobbyists for input on proposed regulations. No, what really matters at the end of the day is that the Commodity Futures Trading Commission is overseen by the House and Senate Agriculture Committees.
"Agriculture committees?," you say, "You're shitting me, right?"
Sadly, no, I am not shitting you.
You see, the story goes that the West Wing politicos read the tea leaves and figured out that the most important and effective thing they could do to reform financial regulation in this country—consolidate the current alphabet soup of ineffectual, overlapping, squabbling bureaucracies into a coherent, unified agency that would be able to regulate entities across markets and industry subsectors according to what they do, as opposed to what they are—was politically impossible to get through Congress. Too many Congressmen and Senators have made a lifetime meal ticket out of the industry lobbying and political contributions that come from the financial sector, and too many have accumulated meaningful institutional leverage within their legislative bodies by virtue of membership on powerful regulatory oversight committees. Through various historical accidents and parliamentary shenanigans over the years, oversight of the grab bag of financial regulators has gravitated toward a host of separate and often competing Congressional committees. There is no way on God's green earth that any Congressman in his or her right mind (or the rest of them, for that matter) would give up that kind of political power voluntarily.
And, notwithstanding concerted efforts by certain elements of the conservative press to the contrary, Congress has largely escaped blame for the situation we find ourselves in. Sure, there are good arguments that political and legislative agendas over the past decades helped contribute to the financial sector pile-up we have just lived through. But let's face it: no-one in this country honestly believes their Congressman or Senator knows anything about finance, derivatives, or the capital markets. Based on recent evidence, it would take a heroic effort to convince them otherwise (and you would still have to explain Maxine Waters). No knowledge, no culpability. Congress has gotten off largely scott-free.
But this is the problem. If the voting public truly believed Congress had been an integral part of the problem, the Administration would have a legitimate political rallying point and enough momentum to push through a regulatory plan that entails a parallel shake-up in the committee oversight apparatus in Congress. We might have ended up with a plan that combined the regulation of securities with the regulation of their siamese twins, derivatives, in the form of a merged SEC and CFTC. Instead, the only existing regulator to get the axe is the pathetically underpatronized and unprotected Office of Thrift Supervision. Good riddance, I say, but it's sad that it has to take the pipe alone.
So here we are, with a proposed Administration reform which leaves the regulation of derivatives—the most complicated, sophisticated, and dangerous financial instruments we have, and ones which have enjoyed the least supervision and created the most havoc of any such instruments out there—firmly under the purview of an agency which is overseen by a bunch of tobacco-chewing, cowboy-hat-wearing hayseeds. Hayseeds, by the way, whose brilliance and incorruptible devotion to economic welfare and the public good has been demonstrated by their support of corn ethanol and agricultural subsidies. Fucking socioeconomic geniuses, these guys.
I have said it before: if you want to regulate financial geniuses, you had better employ some of your own. It'll cost you, but it will work. Otherwise, you are stuck with trying to control international drug dealers with helicopters, numbered Swiss bank accounts, and high-powered machine guns by using broken-down beat cops with bad knees and rusty six shooters. Law enforcement and the military have figured it out: you need elite units with state-of-the-art training, weapons, and esprit de corps to tackle the nastiest, smartest villains. When will it occur to the dim bulbs charged with supervising our financial system that they need the same set-up?
Apparently that is a bridge too far for these times. From all indications, whatever political momentum the Administration anticipated for financial reform has already begun to dissipate, even for the pathetically watered down trash they offered up yesterday. Barring some additional financial catastrophe, it appears that we will be stuck with even more ineffective bullshit regulation in the future.
Which, frankly, is just fine by me. As I said, I would have much preferred a more streamlined, effective, and efficient financial regulatory regime. Better regulations and rules not only would have helped create a healthier financial system for all of us, but also would have made the regulatory burden for the majority of us in the industry who try to make an honest living less stupid, inefficient, and nettlesome. Smarter and more effective regulators would be quicker and easier to deal with, and could actually speed and guide industry innovation for everybody's benefit. Enlightened and knowledgeable Congressional oversight could help regulators adapt and respond to inevitable changes in industry structure and environment. And actually appearing like we know what the fuck we are doing for a change might inspire other countries around the world to cooperate more closely with us in developing coherent international regulatory regimes.
But investment bankers adapt. Change is the water we swim in, the air we breathe. We will adapt to whatever stupid new regulations and incompetent, undertrained, overmatched new regulators you throw at us. And we will come out on top, as always.
It's just too bad we're gonna have to charge you extra for the added headache.
© 2009 The Epicurean Dealmaker. All rights reserved.
