Month: October 2014

Dancing on the edge of absurdity

Posted on by j.giglio

There can be little doubt that one of the causes of the 2008 financial crisis was diminished regulatory control , the seeds of which were sown during the three preceding decades.

Recent legislation re-regulates financial markets, but attracting the best and brightest to regulatory jobs is proving to be a major challenge. The congressionally authorized Financial Industry Regulatory Authority, a not-for-profit self-regulator,  may offer a solution to the problem.

Beginning with the Carter administration and accelerating during Reagan’s presidency, the banking industry,  among others, was steadily deregulated. Not only were leveraging requirements continually lowered but watchdog organizations such as the Securities and Exchange Commission were weakened both by legislation and the appointment of free-market advocates.

Successive administrations were enthusiastic advocates of deregulation. The dominant economic paradigm was that markets are efficient and inherently maximize welfare and work best when managed least. Moreover, with free-market advocates in charge of regulatory agencies such as the SEC, many existing laws were ignored or rarely enforced.

For example, observers repeatedly warned the Securities and Exchange Commission about suspected irregularities at Bernard Madoff’s investment firm, which was later revealed to be a multi-billion dollar Ponzi scheme. In spite of several warnings, no serious investigation was undertaken until after the firm’s spectacular collapse.

One reason offered for poor financial regulation is that government agencies are seriously disadvantaged when it comes to attracting the best and the brightest. The salaries of elected officials tend to impose an artificial ceiling on how much public employees can be paid. Even though these ceilings ignore marketplace realities, elected officials are reluctant to raise them by advocating higher salaries for themselves because it looks bad to voters.

Consequently,  Americans are told that many government regulatory agencies lack the talent to regulate financial markets because they can’t pay the going rate for good people. Thus, the regulatory agencies’ best and the brightest flock to higher-paying jobs with firms they regulate. This leaves the public to complain that our regulatory agencies are less effective than they need to be.

But not all regulators are underpaid. According to the Bond Buyer ‘s annual salary survey of 21 industry regulatory groups, compensation for the chairman and CEO of Financial Industry Regulatory Authority , which oversees the 4,100 securities firms and over 636,000 stockbrokers in the United States, was $2.63 million in 2013.

The perks aren’t bad either, he receives $20,000 annually for admission fees, dues, and house charges to one club each in the Big Apple and Washington, and up to $20,000 annually for personal finance and tax counseling, as well as spousal travel for certain business-related events. Financial Industry Regulatory Authority also paid four of its top executives more than $1 million in 2013. These folks can spend more for one dinner than the average American -whose wages have been flat for decades – spends on a vacation.

Let’s put these salaries in perspective: The President earns $400,000 annually. Janet Yellen, the chair of the Federal Reserve who has sway over the entire world economy as opposed to just American stockbrokers, earns $201,700. Securities and Exchange Commission Chair Mary Jo White makes $165,300. White’s predecessor at the SEC, Mary Shapiro, was fresh from running Financial Industry Regulatory Authority, which gave her a $9 million severance to ease the pain of a low government salary.

These are clearly difficult times for national financial regulators. They are challenged with implementing hideously complicated Dodd-Frank legislation that is supposed to safeguard and stabilize the financial system to avoid another financial crisis.

At 2,319 pages, the Dodd-Frank Act is the most far-reaching financial regulatory undertaking since the 1930s, requiring regulatory agencies that had been withering to enact 447 rules and complete 63 reports and 59 studies within tight congressional deadlines.

It may be at the edge of absurdity, but just maybe the best way to attract the best and the brightest would be to expand the number of one-percenters by outsourcing all regulation to not-for-profit entities such as Financial Industry Regulatory Authority.

originally published: October 25, 2014

Dancing on the edge of absurdity

Posted on by j.giglio

There can be little doubt that one of the causes of the 2008 financial crisis was diminished regulatory control , the seeds of which were sown during the three preceding decades.

Recent legislation re-regulates financial markets, but attracting the best and brightest to regulatory jobs is proving to be a major challenge. The congressionally authorized Financial Industry Regulatory Authority, a not-for-profit self-regulator,,  may offer a solution to the problem.

Beginning with the Carter administration and accelerating during Reagan’s presidency, the banking industry,  among others, was steadily deregulated. Not only were leveraging requirements continually lowered but watchdog organizations such as the Securities and Exchange Commission were weakened both by legislation and the appointment of free-market advocates.

Successive administrations were enthusiastic advocates of deregulation. The dominant economic paradigm was that markets are efficient and inherently maximize welfare and work best when managed least. Moreover, with free-market advocates in charge of regulatory agencies such as the SEC, many existing laws were ignored or rarely enforced.

For example, observers repeatedly warned the Securities and Exchange Commission about suspected irregularities at Bernard Madoff’s investment firm, which was later revealed to be a multi-billion dollar Ponzi scheme. In spite of several warnings, no serious investigation was undertaken until after the firm’s spectacular collapse.

One reason offered for poor financial regulation is that government agencies are seriously disadvantaged when it comes to attracting the best and the brightest. The salaries of elected officials tend to impose an artificial ceiling on how much public employees can be paid. Even though these ceilings ignore marketplace realities, elected officials are reluctant to raise them by advocating higher salaries for themselves because it looks bad to voters.

Consequently,   Americans are told that many government regulatory agencies lack the talent to regulate financial markets because they can’t pay the going rate for good people. Thus, the regulatory agencies best and the brightest flock to higher-paying jobs with firms they regulate. This leaves the public to complain that our regulatory agencies are less effective than they need to be.

But not all regulators are underpaid. According to the Bond Buyer ‘s annual salary survey of 21 industry regulatory groups, compensation for the chairman and CEO of Financial Industry Regulatory Authority , which oversees the 4,100 securities firms and over 636,000 stockbrokers in the United States, was $2.63 million in 2013.

The perks aren’t bad either, he receives $20,000 annually for admission fees, dues, and house charges to one club each in the Big Apple and Washington, and up to $20,000 annually for personal finance and tax counseling, as well as spousal travel for certain business-related events. Financial Industry Regulatory Authority also paid four of its top executives more than $1 million in 2013. These folks can spend more for one dinner than the average American -whose wages have been flat for decades – spends on a vacation.

Let’s put these salaries in perspective: The President earns $400,000 annually. Janet Yellen, the chair of the Federal Reserve who has sway over the entire world economy as opposed to just American stockbrokers, earns $201,700. Securities and Exchange Commission Chair Mary Jo White makes $165,300. White’s predecessor at the SEC, Mary Shapiro, was fresh from running Financial Industry Regulatory Authority, which gave her a $9 million severance to ease the pain of a low government salary.

These are clearly difficult times for national financial regulators. They are challenged with implementing hideously complicated Dodd-Frank legislation that is supposed to safeguard and stabilize the financial system to avoid another financial crisis.

At 2,319 pages, the Dodd-Frank Act is the most far-reaching financial regulatory undertaking since the 1930s, requiring regulatory agencies that had been withering to enact 447 rules and complete 63 reports and 59 studies within tight congressional deadlines.

It may be at the edge of absurdity, but just maybe the best way to attract the best and the brightest would be to expand the number of one-percenters by outsourcing all regulation to not-for-profit entities such as Financial Industry Regulatory Authority.

originally published: October 25, 2014

Federal Reserve, Americans must listen to Carmen Segarra

Posted on by j.giglio

To most people, the name Carmen Segarra means nothing. But to a few, her fate validates their worst suspicions about regulators who exist to protect the interests of the regulated.

Segarra is a former bank examiner whose job was to be the Goldman Sachs’ watchdog for the Federal Reserve Bank of New York, which regulates many large New York banks and is the Federal Reserve System’s primary connection to financial and credit markets. She secretly recorded 46 hours of conversations inside the Federal Reserve and Goldman Sachs and released the tapes to Pro-Publica and the radio show, “This American Life.” You can listen to the episode online at ThisAmericanLife.org.

Segarra was fired by the Federal Reserve after seven months, apparently because she refused to budge on her findings that Reserve officials on numerous occasions seemed to treat Goldman Sachs with too much deference. In particular, she insisted based on her fact-finding that the company did not have a policy on conflicts of interest that met regulatory standards.

Her story underscores how regulators have become too cozy with the industry they are charged with policing. Academics call it “regulatory capture.”

This is hardly breaking news. Lax external oversight was among the chief reasons the world’s biggest economy was brought to the brink of depression in 2008. Put bluntly, regulators have to shoulder some of the blame for the financial apocalypse that unleashed the worst economic crisis since the Great Depression of 1929, at a galactic cost to the American taxpayer, and threw millions of Americans out of their jobs and homes. The economy still bears deep scars.

The 2008 financial crisis demonstrated more than ever that the self-regulating financial system was pure myth.

The public has come to catch the joke that on Wall Street, if you represent everyone there is no conflict of interest. Transparency and the financial services industry don’t exactly waltz around arm in arm. In fact, for some bankers transparency is an occupational hazard.

The coverage in the media since the Sept. 26 release of Carmen Segarra’s recordings of Federal Reserve officials not doing their jobs has been minimal. Hers is not a household name like Edward Snowden, who leaked classified information from the National Security Agency that advertised security vulnerabilities and spying on Americans and international leaders.

It may be that the public’s default mode is indifference; they would like to care but there’s just too much going on at the moment. The average American is too busy worrying about making ends meet. And after all, they already knew that banks hold regulators hostage.

Sure, Sens. Elizabeth Warren, D-Mass., and Sherrod Brown, D-Ohio, both members of the Senate Banking Committee, want Congress to investigate Goldman Sachs’ relationship with the Federal Reserve, but it’s more likely that the issue will quietly disappear.

Wall Street makes generous campaign contributions to the guardians of democracy in Washington and spends big on lobbyists to communicate their policy preferences to government apparatchiks. Despite the rosy rhetoric, that makes it highly unlikely that Congress will hold hearings.

Another problem is that many people see government regulatory jobs as stepping stones to lucrative private-sector careers. They develop useful contacts with key employees in the private-sector firms whose behavior they are supposed to regulate and quietly impress these contacts that their “hearts are in the right place.” In this culture of coziness, nothing should be taken at face value.

In the final analysis you can write all the tough regulations you want to regulate the financial system and its participants to prevent future financial debacles. But for those regulations to have any teeth, they must be accompanied by closing the revolving door between lavish private-sector executive suites and the basic steel-desk offices of government agencies.

originally published: October 11, 2014