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Give Them a Small Bank

It takes a thief to catch a thief.  Thus I have a modest proposal for bank regulation.  This could be applied more broadly to other forms of financial regulation also.

Why not require that all regulators spend time managing banks before they are appointed to be regulators?  I think this would be very instructive to those who would become regulators, because they would see how issues at banks appear from the other side.

I am not suggesting that potential regulators “go native” and become sympathetic to banks.  Working inside a financial institution can do the very opposite, and inform a regulator on what to be careful about.  I want regulators to have the smarts that an insider perspective gives.

Think of me for a moment.  I am not a fan of the insurance industry; I also don’t hate it, but I know it well.  I know where the warts are.  If I were a regulator, I would be feared by the industry, because there is almost nothing that I don’t know about insurance in broad.  (I.e., I am not trying to brag, but I think that I am competent in analyzing insurers.)

My point is that we want intelligent regulators that cannot be bamboozled.  That only comes with significant industry experience.

But industry experience isn’t enough.  You want people who are intelligent critics, who can look at the industry and say that certain practices are wrong from a solvency or market conduct standpoint.

And thus I say, “Give them a small bank.”  Let the Federal Government set up a bunch of small banks for prospective regulators to help manage for a few years.  Being part of a senior management team would cue them into a wide number of problems as they try to make money in a competitive market.  Let them interact with their regulators as well.

I write this because when I read what most broad bank regulators at the highest levels say, I think, “All you can do is suggest things should be tighter, but you have no good reasoning for what or why.  Would that you understood the industry you are regulating.”

In general, it is a bad idea to have academic economists in regulatory positions, because they do not understand what they are doing, but merely follow their ideology.  Far better to have practitioners that are skeptics be regulators, because they really know what is going on, and will not spare the industry over abuses.

As a dear friend of mine once said, “To truly loathe the public schools, you have to be one of the teachers.”  In the same way, I say make the regulators work for the banks before they regulate them, so that they can properly loathe them.






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Banks, Fed Policy, Insurance, public policy | RSS 2.0 |

4 Responses to Give Them a Small Bank

  1. Brad says:

    Funny, as a young Finance undergrad 10 years ago the FDIC paid a visit to recruit. They were selling it as ‘do a couple years as a bank regulator then move into bank management”. Pretty much the opposite of your proposal.

  2. Greg says:

    Henry Paulson was a banker (Goldman Sachs) before he was a “regulator” (US Treasury Secretary). For a few months of working/looting the Treasury (to the benefit of Goldman), he was legally allowed to divest his Goldman stock without any tax liability.

    Former SEC enforcement chief Robert Khazumi was the chief compliance officer at Deutche Bank North America. After leaving the SEC, he is a $5 million/year attorney at a Washington DC law firm that lobbies on behalf Wall Street.

    Khazumi is far from the only SEC alum that went on to be a compliance chief on Wall Street. List the primary dealer banks — all of them have SEC, Treasury and CFTC enforcement alumns running their compliance departments. This was already the case back in 2008 (and it wasn’t new then).

    And the current Treasury Secretary got to collect several million in “deferred” compensation from Citibank; a “modest reward” for going into public service and serving the bank’s interests.

    Err, umm, I meant the public’s interests. Yeah, that’s the ticket. Or maybe the bank’s and the public’s interests are the same? Screw it, the banks will tell the public what their interests should be.

    Speaking of, which Fed governor was it that just floated the trial balloon of allowing banks to CHARGE for the privilege of depositing money?

    Wall Street obviously bares a lot of the responsibility for the mess, but it is dishonest not to point out that everything Wall Street did — we did it with the help and consent of regulators.

    Heck, Congressman Barney Frank even convinced the public that FNMA was perfectly solvent, and even if it somehow had a problem taxpayers would not be on the hook for the losses. FNMA had already been run into the ground by Franklin Raines, a politician (not a banker) who was advocated into FNMA’s CEO slot by … Barney Frank.

    And just as Congressman Frank was assuring the stupid public that FNMA wasn’t insolvent … none other than Warren Buffett (my favorite holding period is forever) was dumping his FNMA stock. Buffett never made his concerns about FNMA public, but if he liked the company, why was he selling it?

    The only honest guy in the bunch? The only one willing to point out that FNMA was insolvent and a danger to taxpayers? Former Treasury Secretary John Snow … a guy who had previously been CEO of a railroad. For his honesty, he was run out of Washington.

    Washington is a city of corruption — it is arguably more corrupt than Wall Street itself. It certainly is not any less corrupt.

    I don’t understand the logic of making the revolving door between Wall Street and Washington swing faster…

  3. Doug says:

    Dave:

    This is a great idea. Would be good for ratings-agency dweebs, too. No possible chance of it being implemented, though.

    As part of a multi-bank holding company, I was examined by the OCC, FDIC, FSLIC, and the Fed. The FDIC and FSLIC were a joke: kids with clipboards. The OCC and Fed looked at process, and specific outcomes. Their professionals were very competent.

    Unfortunately, the status of these agencies is more determined by the political skills at the top rather than the competency of the troops. Hence the elevation of the FDIC over the others b/c Sheila Bair knew which skids to grease. Too bad.

    But that’s often the way it works: a division succeeds not because it has a superior product but because that boss knows how to sell.

    Putting regulators, ratings-analysts, and auditors into real-life situations would be good for them and good for those regulated. It would be a disaster for the small bank, though, in the short-run. Which is why it will never be tried.

  4. onepoundone says:

    I too interviewed wthe Cleveland Fed, even I had no intention of working there.

    but as Greg mentions…I thought using industry bigwigs as regulators is what attracts negative attention, etc.

    Look at the food industry. The USDA and the other regulatory agencies being revolving doors for Monsanto execs….that type of thing…there are good reasons to be leery of these types of relationships between regulators and industry insiders. The food processing industry just happens to be an obvious example (if you’re concerned about that kind of thing..)

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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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