Editorial Note

No good deed goes unpunished.

— Anonymous

My recent exercise in flag-waving seems to have generated some confusion in a few quarters. If I interpret his telegraphic tweets aright¹—always a risky business, under the best of circumstances—reader "CorneliusZH" seems to have interpreted my post as an attack on the banking industry qua industry, and that I implied that all its denizens, from lowest recent recruit to highest panjandrum, should be tarred with the brush of anticompetitive, plutocratic misbehavior.

This was not my intent at all.² Let me be clear: as CorneliusZH wrote, many of the people who work in the investment banking industry are indeed Horatio Alger stories themselves. (For what it is worth, so am I.) Careful readers will recall that I alluded to the current CEO of Goldman Sachs, Lloyd Blankfein, as an admirable exemplar of that very thing.³ I have known very few, if any, colleagues or competitors over the years who have achieved success at (or even entry into) investment banking based on nepotism or anything other, really, than a rare combination of high native intelligence, relentless hard work, and grand ambition. There have been a few people I know who got a start based upon who Daddy was, but they quickly got winnowed out if they couldn't deliver the goods like their peers. (Most of those were hired with the implicit understanding that Daddy would hand out fee business to the investment bank which hired Junior, anyway. Unless they proved themselves otherwise, such quid pro quos were always viewed as temporary investments in human capital only.)⁴

There was also nothing in my post which should lead a cautious reader to assume I advocate the dissolution of investment banks, the imposition of punitive taxes on finance industry compensation, or the passage of badly written, excessively repressive legislation on the industry itself. Number one, that just isn't in my piece. And number two, have you read anything I've written in these pages over the past few years? Shit, man, carve out a couple days, pour yourself a few beers, and read it. You will quickly find such impressions to be badly mistaken.

I did respond to Mr. ZH by Twitter, but I thought I would share my remarks, in slightly edited form, with you here. I think the thoughts they express are important to convey to a broader audience.

Look, if people want to misinterpret my work, that is their privilege. I cannot control how my words are read. Anyone who cares to can spend a few weeks reading my back catalogue and discover that I am neither a mindless bank booster nor a mindless bank basher. Having spent 20 years of my life in the business, I appreciate it in ways most cannot. It's funny, but the bulk of reactions I have generated over time paint me as an apologist and defender of the banks for that very reason.

Let me be clear: I think both extreme perspectives are wrong, and either lazy or disingenuous. There are not enough hours in the day nor enough money in my bank account for me to try to right the idiocy of the world by myself. Therefore, I write what I write, and biased and lazy readers be damned. If anyone agrees with 100% of what I have said, 99 times out of 100 that means they have not read it carefully. I defy easy characterization, on purpose.

And to respond directly, it pisses the hell out of me that a bunch of lazy, greedy fucks have taken over my industry and crapped all over what was always an imperfect but all-in-all pretty good—and, sometimes, even noble—thing. And they don't even seem to realize it. I am critiquing my industry from the inside, and my primary intended audience is my fellow brethren. I just wish to hell the goddamned bastards would listen. It is their stupidity, not the often mindless rage it has generated, which has screwed up my livelihood and likely will lead to bad regulation, over-legislation, and decades of stagnation.

I pity the stupid and ill-informed. In contrast, I am mad as hell at the assholes in my business who should have known better.

And, for the avoidance of doubt—as my British colleagues like to say—let it be understood that the assholes I am talking about run these businesses from positions of senior executive authority.

* * *

I am a dyed-in-the-wool capitalist and investment banker. Unlike many of my fellow citizens at the moment, I continue to believe both of these are good things, and better than the alternatives. Nevertheless, I acknowledge, apparently unlike many of my blinkered brethren, that there is a good way to run capitalism and investment banks and a bad way. I think the senior muckety-mucks in my industry have done the latter, and I would prefer that they—or someone else with half a brain and a smidgen of humility or even empathy—would realize that, and try to correct the error of their ways before the vastly more numerous fellow citizens outside the industry decide there is nothing worth preserving and burn us all to the ground.⁵

There. Is that fucking clear enough for you?

¹ And if, as he now seems to suggest, I may have misunderstood him, I apologize. But let this be a lesson to you, kiddies: never try to conduct a nuanced conversation about a complicated matter in 140-character bursts. The medium just won't support the message. To be honest, I still can't figure out what CorneliusZH was objecting to in my original post.
² Frankly, I thought it was a happy, cheerful, optimistic piece. (At least for me.) Just goes to show how you can't control how others interpret your words.
³ It should not require saying so, but I will: my admiration for Lloyd's pulling himself up to the highest levels of global finance by his own bootstraps does not extend to the damage he has done his firm and the alleged injuries he may or may not have visited upon his clients. Capisce?
⁴ One of the admittedly lesser evils which will result from the calcification of the finance industry into giant, unassailable behemoths untouchable by regulators, markets, or clients—known elsewhere as crony capitalism, which blights vast swathes of the developed and undeveloped world—is that this will change. Not only will Daddy's idiot son get hired at Goldman Sachs, he will end up running the joint.
⁵ And, given that these muckety-mucks have driven my livelihood into the ditch of public opprobrium, I would appreciate a little humility and openness on the part of all people in the industry vis-à-vis coming to a consensus on proposed solutions. The fact that it was us who cratered our own industry—never mind with how much and whose help—leads me to suggest that it is at the very least impolitic and at the most expressive of an unjustified hubris of the first rank to deny that anyone outside the industry might have any good ideas on how to fix it or even the political, social, and moral standing to propose them. Seriously, if we don't, why should anyone listen to what we have to say about the subject ever again?

© 2010 The Epicurean Dealmaker. All rights reserved.

American Baby

If these walls came crumblin' down
Fell so hard, to make us lose our faith
From what's left you'd figure it out
Still make lemonade taste like a sunny day

Stay, beautiful baby
I hope you
Stay, American baby
American baby

Nobody's laughing now
God's grace lost and the Devil is proud
But I've been walking for a thousand miles
One last time, I could see you smile

— Dave Matthews Band, "American Baby"

Let me just say at the beginning of this that I am no mindless patriot.

As a native-born citizen of the United States, I am deeply suspicious of the doctrine of American exceptionalism,¹ if only because I am deeply suspicious of exceptionalist theories—not to mention doctrines—of any kind. I am a fox, not a hedgehog, and 40+ years of observation of my species has disabused me of the notion that our behavior fits neatly into any coherent, circumscribed box. World- and system-builders need not apply within.

That being said, I concede that large aggregations of people, organized into semi-permanent sociopolitical entities persisting through time, do tend to develop distinctive and identifiable sets of behaviors and attitudes. Some people call this culture. And, notwithstanding the staggering breadth and variety of semi-permanent subcultures collected under the all-encompassing banner of the United States of America,² I think one can indeed identify a distinctly American culture.

Like most cultures, I think the American culture can best be described by a set of stories, or myths, we tell each other and ourselves. One of the most important and enduring of these is that the United States is the Land of Opportunity. Cynics both inside and outside the US and outsiders from cultures older, wiser, and/or more tired than ours may scoff, but I believe that deep down almost every American truly believes anyone can become President (or a doctor, or CEO of Goldman Sachs).³ This is an incredibly powerful belief. There is nothing magical, or special, about the political economy of the United States: nothing is materially different in the socioeconomic constraints and arrangements that characterize our country from myriad others now and in the past. Inequality and class divisions are real, persistent, and serious barriers to true socioeconomic mobility. But the mere fact that so many of us believe social mobility is possible, and indeed valuable, means that as a people we devote more time and energy into bettering our condition in life.

As a point of contrast, I have worked off and on for many years with both clients and coworkers in the UK and Western Europe. Almost to a man (and woman), these are intelligent, hard-working, and sensible individuals. Successful, too. But, like many of my compatriots who have worked with these people, I have often had to stifle a smile when my European colleague prefaces an otherwise cogent analysis about how to address a problem or opportunity with the remark

"The problem is ..."

Do not laugh. Such verbal tics are extremely revealing of a speaker's world view: what they believe is possible, and the probability of success thereof. Americans do not say such things. We are a "can do" people, and we stick to that, whether whatever we are talking about can be done or not. We are natural optimists. Most Europeans I know, for example, are not. That is culture.

* * *

Americans are famous for admiring success. Americans do not begrudge successful people their success, no matter how they earned it: through hard work, natural intelligence, luck, or a combination thereof. We admire Horatio Alger stories of scrappy youngsters who clambered their way out of the urban backwater of Queens, New York (for example) up to the pinnacle of the most successful, admired, and feared investment bank on the planet. We admire, at least in an abstract way, the youthful community organizer from a broken home who clawed his way into the most powerful political office in the world, even if we can't stand his politics. We admire talent, and brains, and hard work rewarded, because we instinctively know they are not enough. Good luck matters, too.

And, as long as we can believe that we have a chance, too—that luck has a chance to find us and reward our own faith and effort—Americans will pull contentedly at the grindstone while simultaneously ooh-ing and ah-ing over the social and financial success of our betters. But central to this implicit social contract is the idea of fairness: that the deck is not stacked against the little guy, and that he or she has just as much chance of becoming the next Warren Buffett, or Lloyd Blankfein, or Barack Obama as the next guy. It is not a belief in fairness of outcome, but rather one of fairness of opportunity. There is nothing that raises the cultural hackles of most Americans more than learning that the game is rigged, and that the guys at the top are gaming the system in their own favor.

Now, cynics (and Europeans) might laugh at such naïvete. Of course, they say, the game is rigged; of course the guys at the top skim more than their share of the cream and leave the dregs for the hoi polloi. What's new about that? But Americans understand that too, at least instinctually. That's why we have such a long history of suspicion and hostility against Big Business, and Big Government, and Big Anything. That's why, among other things, the Tea Party movement has gained such broad-based traction in this country: it is the natural outpouring of frustration and suspicion grounded in the most basic American myths and beliefs about ourselves. We may acknowledge that is the way the human cookie crumbles in any society with unequal distribution of wealth and privilege, but we do not accept it, at a very fundamental level, as the way things should be.

* * *

That is one big reason why the ongoing scandals rocking the financial sector are creating such outrage and upset among the American polity. Citizens are discovering that a very large percentage of people whom they used to admire and envy for mouth-watering financial success earned a large portion of that success by cheating, by gaming the system, and by rigging the rules in their favor. What seems to outrage many Americans even more is that these very financiers do not seem to recognize that they have violated the implicit social norms almost everybody else seems to accept. They hide behind a defense of arrogance, superciliousness, and moral obliviousness which makes most Americans' teeth grind in frustration.

This is a dangerous situation for the plutocracy. For, when you get right down to it, most Americans are not really interested in supporting a system that is designed to preserve the wealth and privileges of those who have already made it to the top. Instead, they want one that will give as many people as possible a reasonably fair shot at reaching the top themselves. That is a distinction which seems to elude many of the wealthy and powerful. They misperceive the struggle as one of capitalism versus socialism, when what it really is is a struggle for the heart and soul of capitalism in this country. On one side is a new aristocracy of money, entrenched interests, and cronyism, and on the other is an ethos of equal opportunity for all.

It will be a long, difficult fight. Given the money and resources arrayed on the other side of the ledger, it is by no means certain the country will come out of this struggle with a cleaner, fairer system. The Augean Stables look like an afternoon's Spring cleaning by comparison.

But I am optimistic we will arrive at the right solution. Heck, you knew that already: I am an American.<sup>4


1</sup> As always, apologies to the multitudes of people who live in the Americas, North and South, who do not reside anywhere inside the capacious boundaries of the United States. If you have not already noticed, we inhabitants of the USA have an ingrained difficulty distinguishing our country from the entire hemisphere in normal conversation, if not in our own minds as well. In our—admittedly weak—defense, it is awfully awkward to say "USA-ers" or "United States-ans" all the time. (I make no apologies for Dave Matthews, who is a musician and therefore perfectly capable of defending himself.)
² It is my firm belief that someone from outside the USA who wishes to understand our culture could do no better than rent a car and spend a week or so driving across the country. The diversity of regions, people, and geography one would encounter on such a journey would truly stagger an observant pilgrim. Such an exercise, in my opinion, would also have a highly salutary effect on most Americans, who tend to be distressingly parochial and pathetically ignorant about their own country.
³ Or, perhaps what is more powerful, most of us believe anyone should be able to become President, even if we doubt it is possible. In the context of human history, this is a surprising and extraordinary belief.
⁴ History is littered with the smoldering wreckage of nations and peoples who mistook Americans' native optimism for childish naïvete, softness, or lack of resolve in the face of difficult struggles. It is unwise to underestimate us.

© 2010 The Epicurean Dealmaker. All rights reserved.

Didja Miss Me?

The President: "Jiminy Jumpin' Jesus, I can't believe we're gonna pay that madman! I got nukes up the ying-yang. Just let me launch one, for God's sake!"
Commander Gilmour: "Sir! Are you suggesting that we blow up the moon?"
The President: "... Would ya miss it? [looks around the table] Would you miss it?"

— Austin Powers: The Spy Who Shagged Me

1.) For those of you who haven't noticed, I've been missing lately. Sorry. Been busy. Day job, you know.¹

2.) I have continued to be amazed by the sheer number of visits to this site during my bloggy hibernation. Either all your RSS readers are set to auto-refresh, or a hell of a lot of you need something much better to do. Don't you have jobs? Or homes? Or at least demanding girlfriends?²

3.) I have been reliably informed that something scandalous has recently been unearthed which involves a recurring target of Your Formerly Diligent Blogosopher's ruminations. I even believe the word "fraud" has been bandied about liberally.

Given that a) I have been occupied elsewhere, and b) I really couldn't give a flying fuck in a rolling donut whether the Great Vampire Squid of West Street (new digs, natch) vanishes into the singularity or not, I frankly have not paid much attention to the scandal beyond a cursory perusal of the headlines and a couple of blog posts. Honestly, life is just too short.³

However, in the spirit of duty which compels Your Humble Servant to satisfy every bloggy whim my Peremptory Audience demands of me (and also because Natasha has temporarily left the hotel room to get more caviar and ice cubes), I will make the following brief observations:

i.) The parties which Goldman supposedly defrauded were large and supposedly sophisticated financial institutions. The managers of these institutions were or should have been paid quite large sums of money to, among other things, protect their stakeholders from fraud, unethical sales practices, and general office supply stealing. I have no sympathy whatsoever for the knuckleheads at ACA or IKB. And, frankly, neither should you.

B.) Whether the alleged fraud rises to the level of an actionable civil claim or simply represents unethical behavior is a question for a court of law. I am not qualified to judge, but the criteria which ultimately determine the nature of Goldman's alleged offense will be legalistic ones, akin to judging exactly how many mortgage CDO investors' brains can be fitted onto the head of a pin. While the answer may be definitive, it will not be particularly revealing to the vast majority of us who live outside the cloistered halls of Americus Litigalis.

4.) I must agree with Felix Salmon and others, who claim that the real damage to Goldman Sachs has already been done, with its formerly venerated name being dragged publicly through the mud with an accusation of fraud. While this may have little effect on the majority of Goldman's business on the sales and trading side of the house—where counterparties are generally too smart to raise a stink about the 800 pound gorilla of the global financial markets (and often too unprincipled themselves to care)—⁴ it should and will have an effect on Goldman's extensive investment banking business with governments, corporations, and other entities.

The Squid has been living for years off the simple fact that, like the fabled IBM of yore, no-one ever got fired (or sued) for picking Goldman Sachs. That calculus has been changed, and I and every one of my red-blooded peers in the industry who is not currently drawing a paycheck signed by David Viniar are making damn sure that CEOs, CFOs, government officials, and Boards of Directors know it. For those of you who were wondering, this is the real reason why Goldman's market capitalization has taken the vapors to the tune of more than ten billion dollars in response to an action likely to cost it no more than a tiny fraction of that amount: its reputation premium is quietly and rapidly evaporating. There is no shortage of competent investment banks and adequate investment bankers available to conduct the financing and M&A business of the global corporate and government economy. No longer can Goldman rest assured that it will win mandates simply because it is Goldman Sachs. In fact, it may lose many for that very reason.

The playing field has been leveled to a material degree. I and others like me could not be more pleased.

* * *

Now, if you'll excuse me, I must get back to disparaging Lloyd Blankfein's appalling taste in neckties to his former clientele. It's a dirty job, but somebody's got to do it.

Cheerio.


¹ This condition is likely to persist for the indefinite future. The good news is that this means things are looking up for M&A deal lawyers, Ukranian hookers, and purveyors of overpriced French champagne. The bad news is that, well, you won't get to read about these things quite so much as before. I suspect most of you will manage.
² It is my firm belief that more than 97% of my readership consists of unmarried, overworked males, a figure which matches the composition of my chosen field of employ. To the extent I am wrong, and any of you reading this now are female, I will of course demand proof. An 8" by 10" glossy photo of you in lingerie or a thong bikini, along with a detailed description of any identifying birthmarks, verbal tics, and favorite fetishes, should be mailed to the address listed on this site. Upon receipt, my trusted amanuensis Igor will contact you with further instructions.
³ If you agree with this sentiment, stop reading now. Go back to snorting coke or washing your dog or walking your gerbil, or whatever it is you do in your spare time. I will join you shortly.
⁴ Although just wait and see what happens if enough of them sense that Goldman is mortally wounded. They'll gang up and rip it to shreds without a second thought, just like they did to Bear Stearns and Lehman Brothers and almost did to Morgan Stanley. Live by the sword, die by the sword, baby. Booyah!

© 2010 The Epicurean Dealmaker. All rights reserved.

Poachers Turned Gamekeepers

As the slow-motion train wreck which was Lehman Brothers unfolds once more before our eyes, if not in the pages of our mainstream media—who continue to proclaim against all available evidence that they really, really do perform a valuable function in democratic society and hence should continue to be paid more than bupkis for it—then in the febrile, overheated backwaters of the econoblogosphere, Your Oft-Ignored Pontificator has been inspired to venture a few modest observations.

My aperçu of the day was inspired by readings among several of the more rational and composed voices in said bloggy peanut gallery, including David Merkel, Mike Konczal, and Felix Salmon. It was Felix's piece which offered the most direct spur to my reflections, with the following remarks:

In other words, the Fed has the ability to regulate; all that’s needed now (and was missing in 2008) is the willingness to do so and to bare teeth once in a while.

A good way to institutionalize that is to implement what David Merkel calls “dumb regulation” — once you put simple rules in place, it becomes much more difficult (although never, of course, impossible) to override those rules or to ignore them. The problem with Lehman was that there were no simple rules, and that no one at the Fed or the SEC felt comfortable making up new ones on the spot, like “you’ve got to be able to pass the stress test which we invented five minutes ago”. I, for one, wouldn’t want to be the regulator who had to receive the phone call from Dick Fuld after implementing a rule like that, using dubious legal authority.

One of the problems with giving lots of supervisory authority to the Fed is that the Fed is run by economists who care primarily about setting monetary policy, as opposed to being run by bankers who care primarily about bank regulation and systemic risk. The base-case scenario is that unless and until we start staffing the Fed with a bunch of poachers-turned-gamekeepers, the biggest banks are likely to be able to smooth-talk their way past the Fed’s regulators.

Like Felix, I agree with David that "dumb regulation"—or, in less pejorative language, simple and relatively inflexible regulation—is far more likely to do the trick than the kind of complex, encyclopedic, tick-all-the-boxes regulation exemplified by the bloated pig currently wending its way through the legislative python in Congress. But I also agree with Felix (and, so it would seem, with David) that simple regulation will only work if it is overseen, enforced, and modified as necessary by extremely intelligent and motivated regulators.

I have argued in these pages before that delivering regulations which are comprehensive, detailed, and complex only encourages the institutions being regulated to immediately try to engineer their way around them. Simple, broad-brush regulations have a much better chance to operate as a set of principles which are well understood by both regulator and regulatee alike. But having such principles-based regulation is not enough. They must be enforced, as financial collapse in the face of a decidedly principles-based regulatory regime in the United Kingdom amply demonstrated. Not only does this mean, in Felix's example, that regulators must have the authority to make up rules, tests, and procedures on the fly on behalf of preserving systemic stability, they must also have the balls to take that phone call from Dick Fuld. And, moreover, to tell him in no uncertain terms to go fuck himself if he doesn't like it.

* * *

Now Dick Fuld, at least in his prime, was a forceful and scary man. It takes a certain kind of personality to tell such a man to go fuck himself to his face. Fortunately, we just happen to have a substantial supply of brass-balled, take-no-prisoners, kill-'em-all-and-let-God-sort-'em-out people ready to hand. By happy coincidence, these individuals also happen to be intimately familiar with the ins and outs of the global financial system, the nature and construction of the myriad securities and engineered products polluting financial markets, and the numberless tricks and stratagems large financial institutions use to end-run rules and regulations designed to keep them in check.

These people are called investment bankers.

That's right, boys and girls: It's time for the chickens to band together and hire themselves some foxes to guard the chicken coop.

I have made this argument before. Forgive me while I indulge my present lassitude and quote myself at length:

Many observers of the smoking wreckage which now passes for our banking system have opined that, in addition to being hobbled by a fragmented regulatory system riddled with overlapping and ill-defined responsibilities, the regulators who were supposed to be watching the chicken coop were woefully overmatched by the foxes. Staffed primarily by lawyers, on government pay scales, the SEC almost by definition is not up to the task of monitoring Goldman Sachs, JPMorgan, or anyone else, if by "monitoring" we should expect true informed oversight and control. If Harry Markopolos couldn't get the SEC Enforcement Division to understand and investigate what appears to have been a particularly simple—if breathtakingly successful—Ponzi scheme, how can we possibly get comfortable that our government watchdogs can effectively oversee the hugely complicated, mind-numbingly sophisticated, globally distributed trading operations of a modern investment bank?

This shortfall in regulatory intellect has been exacerbated by what the Japanese call amakudari, or "descent from heaven": from time immemorial, a steady stream of former regulators has resigned their posts to assume positions on Wall Street, sometimes at the very firms they had been charged with overseeing. There is very little incentive to push a little harder or dig a little deeper into a question if it irritates a powerful firm that might be your future employer. Furthermore, this practice provides a steady stream of inside knowledge on current regulatory focus, practice, and ignorance that is of tremendous value to oversight-minimizing investment banks.

The answer, of course, is obvious, if politically difficult to put into effect. Staff the SEC, or whatever "Super Regulator" the government decides to deputize to oversee this mess, with a bunch of highly-paid, tough-as-nails, sonofabitch investment bankers. You will have to pay them millions, just like regular bankers. (You can tie their incentive pay to improvements in the value of securities held under TARP and TALF, if you like.) Pay them well, and investment bankers won't be able to treat them like second-class citizens at the negotiating table. Pay them like bankers, and your regulators won't hesitate to read Jamie Dimon or Lloyd Blankfein the riot act, because they won't give a shit about getting a job from them later.

Trust me, these are the kind of people you will need on your team: highly educated, financially sophisticated, psychotically hard-working, experienced professionals who know or can figure out CDOs, SIVs, balance sheet leverage, and credit default derivatives just as easily as the idiots who created and trade this shit. Leading your enforcement and supervision teams you need a bunch of smooth, smart, plausible, grandiosely self-confident senior bankers who will not hesitate to tell Vikram Pandit to go fuck himself, his mother, and the cow she rode in on if he ever tries to fuck with the United States government, the US taxpayer, or the pizza delivery boy again. You know: psychopaths.

This is not a new idea. For yonks, the Brits have known that the best person to hire as gamekeeper on your ancestral estate is a former poacher, someone who knows what they know, how they think, and where to punch them in the genitals to get maximum negotiating effect.

* * *

Of course, my initial reflections on this topic this morning were inspired by an eye-opening and dispiriting exposé of the well-meaning, dedicated, but patently overmatched bank examiners of the Philadelphia Fed by Dennis Berman of The Wall Street Journal. I think the lines which caught my attention most effectively were

The Fed has a peashooter to the AK-47s of Wall Street.

and

[Fed bank examiner] salaries range from about $40,000 to $140,000.

To which my reactions can best be summarized as: 1) No shit; and 2) What the fuck?

Just to put things in context, the best-paid examiners which the Federal Reserve Bank of Philadelphia relies upon to audit, inspect, and guide the financial institutions under its charge get paid less than a good personal assistant at an average Wall Street firm. Fed examiners make less than Dick Fuld's secretaries, for Christ's sake. Go ahead, tell me that doesn't strike you as a problem. It strikes me as a big fucking problem.

So I rattled away on Twitter this morning, laying out my poachers-turned-gamekeepers theory for the umpteenth time in rapid 140-character bursts. Among other details, I fleshed out my proposal by suggesting regulators get hired from Wall Street banks, big law firms, and elsewhere. An effective wholesale financial regulator ¹ should be comprised of forensic accountants, corporate and securities lawyers, investment bankers, derivative structurers, and the like. They should all be paid market rates for their services, which will make their compensation much, much closer to that of the people they regulate. They should be prohibited from accepting positions in private financial industry—and, most especially, at any individual firm they ever directly or indirectly regulated—or firms working for financial firms (law firms, accountancies, etc.) for a minimum of at least three years after they leave government service. Five would be preferable.

While individually expensive, I don't believe you would need to hire many such people to make this kind of regulatory regime work. Given that you really only need high-powered regulators for the very biggest institutions, I am guessing you could get away with fewer than 100 to start. In fact, it might be less, because you really only need these people to direct and train their junior staff, and to interface directly with senior executives of the regulated entities. Fully loaded, I imagine you could fund a financial regulatory SWAT team like this for less than $150 million per year. That's a drop in the bucket compared to the financial losses these supposedly regulated institutions have already inflicted on the American taxpayer, not to mention in comparison with the normal run rate of your average stodgy, inefficient, and ineffective government bureaucracy.² Even better, you could fund such an agency with a levy indexed to the size of each financial institution under its jurisdiction. The larger and more complex a bank, the more fire-breathing, table-throwing, nail-spitting investment bankers and lawyers you could afford to throw at it. Talk about an incentive to shrink your balance sheet.

* * *

No plan is without its drawbacks, however, and I knew I could rely on my intelligent and well-meaning interlocutors on Twitter to supply some. Among the more cogent of these, Graeme Hein noted that "Smart regulators can always make more money in [the] private sector." This has always been true, and always will be so, but my plan could be structured to minimize this defect. For one thing, you do not need "the best" investment bankers, traders, or lawyers—whatever that's supposed to mean—on the regulatory case. All you really need is good ones, and there are plenty of those. A certain doggedness, and a commitment to preserve systemic stability and enforce rules and regulations regardless of the wealth, prestige, or lung power of their charges would be necessary as well. Remember, you are not looking for the best traders, or the best M&A advisors, or the best derivatives structurers out there; you are looking for people who can understand what those people do and who can stand up to their counterparts across the negotiating table.³

For another, while pay should be very attractive, and likely many multiples of current front-line regulators' salaries, it does not need to equal that of industry practitioners. It can be paid 100% in cash, which dramatically shrinks the gap with nominally much bigger pay packets stuffed to the gills with unvested, restricted funny money. It can also be far less volatile than industry pay, since it should not depend on the vagaries of market performance the way real investment bankers do. Add to that the psychic compensation from working at a powerful, elite organization which generates fear and respect among its regulatees, and you will have a potent package. You might just be surprised how many top flight industry professionals apply for the job.

Now some people might object to the prospect of a federal agency staffed with lots of employees pulling down half a million dollars or more a year, as loadeddice observed. But the answer here is simple: for socially critical functions, money has never been an object when it comes to government spending. Just look at the military. By the same token, I would find it very easy to argue that the cost of a several dozen government employees earning more than the President of the United States is a very reasonable price to pay for financial and economic security. Unlike the military, however, you don't need to spend millions or billions on hardware to do the job. Instead, you spend millions on the software walking around in wingtips and Gucci loafers.

The most frequent objection among those who deigned to comment, however, was simply that—regardless of the attractiveness of my proposal—such a radical change "would never happen." Perhaps these naysayers are right. It certainly would ruffle a lot of feathers, both in the finance industry itself and in Washington, D.C. But I tend to think that is a good thing, and a reliable indicator of the value and importance of the plan, rather than a defect.

At the end of the day, I do believe most Americans actually prefer their government bureaucrats to be slow, bumbling, and ineffective. It reassures them they can stay one step ahead of City Hall, which, as we all know, you ordinarily should not try to fight. Smart, aggressive, and committed government employees terrify most people, because they have so many natural advantages without such personal qualities. The only solution to this, of course, is constant oversight, which is a sine qua non of my proposal.

* * *

So anyway, I'm excited about all this. When do we get started? Mrs. Dealmaker is already calling moving companies to price out the transfer to Washington. And between you and me, I never like to keep her waiting.

She scares the shit out of me.


¹ "Wholesale" means big commercial, investment, and universal banks, and any other systemically important financial entity. As opposed to retail oriented firms, which should be regulated by the CFPA or whatever bastardized, emasculated entity the political meat grinder decides to come up with. My focus here is on institutions which can bring the system down, not on the ones trying to screw Grandma out of her last $50,000.
² Even less in comparison to the tens of billions of dollars in compensation the systemically important financial institutions pay their own employees. A pittance, I tell you.
³ Sadly, given the revelations coming out of the Lehman examiner's report and other sources, this may actually be a very low bar. Perhaps we need regulators who are better than the "best" investment bankers.

© 2010 The Epicurean Dealmaker. All rights reserved.

A Corporate Finance Bestiary

M

is for Managing Director:
Crafty, elusive
Kowtows to clients; but to juniors abusive

Sleek and well-groomed, he
Swans about like a diva
Steal clients or credit?
He attacks with a cleaver

Pompous, self-loathing
His wife and kids hate him
Knows everything and everyone:
You can't educate him

* *

V

is for Vice President:
Long-suffering, put-on
Screwed by MDs and clients, otherwise no-one

Chubby, disheveled, he
Rues weekends spent downtown
And longs for the day he
Can call in from the Hamptons

Bossy, intrusive
Associates hate him
Lusts for the VP in Bond Sales
But she just won't date him

* *

A

is for Associate:
Feckless and eager
Thinks he's Felix Rohatyn but his skills are too meager

Hair-slicked, suspendered, he
Wanders the 3:00 am hallway
Boasting how little he's slept
Since a week ago Tuesday

Loud-mouthed, annoying
Hot young models despise him
No matter how many bottles
With which he plies them

* *

F

is for Financial Analyst:
Bitter, exhausted
Never fucks, sleeps, or earns as much as his boss did

Tousled, unshaven, he
hunches over a keyboard
While vacations and nights out
Flash past like waves on a seashore

Rueful, uncertain
He ponders his Faustian bargain:
"For two years of this shit
I skipped screwing my girlfriend?"

* * *

With apologies to Guillaume Apollinaire. And everyone else, for that matter.

© 2010 The Epicurean Dealmaker. All rights reserved.