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