Regulations are Boundaries
Rules are important. Regulations are important. Boundaries of acceptable actions are important. Just as the rules guiding the behavior of a child, regulations are boundaries. Telling a child they have to finish their meal and if they don’t finish, they won’t have dessert. Giving a teenager a curfew which if broken will result in their being grounded provide boundaries for behavior. If boundaries are crossed, the proscribed punishment will be enforced. But regulators have to enforce noncompliance.
Regulations & Consequences
Walk into any compliance officer’s office and you will find row upon row of rule books. But those large leather-bound rulebooks can only offer the framework. They can’t enforce the appropriate body to be in compliance.
Madoff Investment Fund was reported to the SEC 9 times by an asset manager in Boston nothing further than a cursory investigation was undertaken. An investigation that would have taken an hour (at most) comparing “Madoff” trades to actual times and sales. The amount of heartache and destruction a full investigation could have prevented is staggering.
Jon Corzine, directly or indirectly allowed desegregation of clearinghouse funds, the most fundamental cornerstone of clearinghouse safety. To date, Corzine has yet had to answer for either his actions or lack of oversight. Investors received 84 cents on the dollar and the industry seems to have moved on from the event.
Along comes the credit crisis and Washington bangs on their tables saying a solution must be found!! I have to question their surprise. Didn’t they think the process through before loosening the lending rules and allowing for no doc mortgage borrowers? Why did they completely dismantle Glass-Stiegel brick by brick? Regulations without consequences are meaningless. Unless reports of non-compliance are investigated, unless obvious violations are punished completely, any regulation is just words on a page. Little more.
Regulations & Moral Compass
Dodd-Frank must include enforcement with punitive measures. Using the sandbox as an analogy, if a person cannot follow the rules of the sandbox, they should be removed from the sandbox. Permanently.
Madoff has spoken barely a word (other than that he feels so much less stress amongst the trees of North Carolina’s Butner Federal Corrections Facility).
Jon Corzine has still not answered for MF Global.
Businesses where large amounts of money are involved require people to examine their personal ethics, moral compass and their need for luxury items. Maybe if summer homes and new cars became secondary to fiduciary responsibility to clients and ethical responsibility to their employers, an underlying culture of morality would expand organically.
Summary & Conclusion
Don’t get me wrong, I’m not a charity. I work with the client offering the most money. It’s just good business sense. But I examine the ethics and integrity with which I make my business decisions.
While the handshake agreement may be out-dated in reality, “you’re done” is still a binding contract in financial markets. Those who are not playing by rules need to be removed from the sandbox. Lest the sandbox resemble another kind of box and no one will play in a dirty (cat littered) sandbox.
Well, at least that’s how I see it.
April 27, 2013