Rise of the Regulators

Currently, congress is considering all sorts of new regulations of the financial sector. It's a good time to be a regulator. As all the major financial institutions put ex-regulators in prominent posts in their company, the current regulators anticipate this. A financial regulator who plays his cards right should be very valuable after working for a couple of years in this new regime. If I were a lawyer, I'd get into securities law, because every financial firm will need senior people with legal backgrounds, who will be able to negotiate all the fruitless, but complicated, rules that are coming down the pike.

The net result are rules and enforcement that, like most regulation, merely raises the barriers of entry. This makes it hard to enter the business, and should set the stage for nice monopoly profits for current players, all under the pretext of helping main street and the soundness of our financial system.

Once you pay the fixed cost for dealing with regulators, in terms of having protocols for filling out the right forms in place, the effects of regulation are pretty small. That is, in finance, regulation is invariably a fixed cost, plus prohibitions on the ability to do more than one thing at a time. These are really the only regulations that are put in place (think about Glass-Steagall, interstate banking restrictions, Securities Exchange Act of 1934). Have you ever filled out an ADV? Signed the recent rules from Sarbanes-Oxley? Just a bunch of fluff, saying, in effect, you wont break the law. I guess this makes it easier to find and prosecute you if you break old laws, but does it promote more honesty? I doubt it.

If I were securities czar, I would take a deep look at off-balance sheet liabilities, perhaps mandating they mark them to market in a footnote in their quarterly financial statements. Further, I would mandate greater disclosure on what securities are being held, on or off balance sheet. I'm still shocked by those tens of billions of AAA rated ABS on all those I-bank balance sheets. It made no sense, and suggested something really wrong was going on. But they never had to report that modest amount of information.

Increasing disclosure is a great new regulation, because it does not invite gaming, it discourages it.