Wall Street vs. Regulators

“Herod: I’ll tell you what, I’ll be a Good Samaritan. What’s the cheapest gun you got? Not in a case. I mean the cheapest piece of worthless crap you have in the whole miserable store.

Kid: All right. (Brings out the cheapest gun and slams it on the counter). 5 bucks.

Herod: Sold!

Kid: (starts putting bullets in the gun)

Herod: What are you doing? Preacher here’s got the Lord on his side. He only needs one bullet. Just one. Otherwise he might be tempted to shoot his way out of town.”

The Quick and The Dead.

The current dynamics of the regulatory overhaul is a depressing development. While I’m normally quick  to criticize regulators, and for good reason, I also have to admit that monetary deprivation of such agencies by Republicans, as evidenced by budget cuts for CFTC, place some blame on anti-regulatory forces in Congress. Regulators that are currently entrusted with the task of policing Wall Street are facing a well-funded, well-connected and politically shrewd beast.

In essence, regulators are not writing the rules for Wall Street. Wall Street is writing the rules for regulators.

A few months ago, for example, the CFTC was given the power to oversee derivatives and the futures markets. At the same time the Congress plans to cut $25M (a 12% cut form a year before) from CFTC budget in a time when they desperately need more resources to effectively accomplish their new responsibilities. The regulators have resource allocation problem that will prevent them from properly enforcing their mandate.

It is remarkable although not surprising that the most restrictive language in the bill came from Wall Street lobbyists. What’s more amusing is to hear the authors of the bill vying for fair and effective regulation, offering suggestions on how that sort of regulation should be achieved and then cutting funding that would undermine the implementation of those very suggestions. This is schizophrenic!

The new appropriations bill carves out very specific amounts to be spent on very specific assignments. For instance, the Republican lawmakers are absolutely certain that to update the crumbling IT infrastructure at CFTC would cost $32mln. The authors of the bill also demand that before regulators implement anything they must conduct a comprehensive quantitative analysis of the impact of the rules. Shouldn’t the public, by the same logic, demand that before lawmakers make such definitive decisions about how much money the regulatory agencies will need, they, too, should conduct a thorough analysis of the needs of those agencies? I am very curious to know how they came up with the figure of $32 mln to revamp the CFTC antiquated computer systems. Do they expect regulators to hire new IT personnel, buy new equipment, write/purchase new software, not just any software, but the kind that would effectively monitor a number of important markets, including high-frequency trading (HFT), an obscure but powerful Wall Street niche that commands the brightest minds and the thickest purse? And do they also expect the CFTC to conduct a thorough analysis of the possible consequences that may harm the business, a grotesque request in itself, and report the results to Congress in 30 days? And the most curious question of all, is Wall street ready to open their books and submit their HFT trading codes to regulators in order to ensure the analysis they themselves insisted upon is truly “thorough”? Are you, like me, suspecting that no matter what kind of results the CFTC submits, the Wall Street (via Congress) will never be satisfied?

I think it’s a brilliant business model for Wall Street. First, it doesn’t get any headlines – do you expect an average person to read anything that has ‘regulatory’ and ‘appropriations bill’ in it? Second, you can pass as many as 100 tough Dodd Frank bills and placate the public, but then quietly get to work on carving loopholes, exceptions and if that isn’t enough, just starve the damn beast of the funds! Wall Street arms itself with heavy sophisticated weaponry (no amount of money and resources are spared when building a high-frequency trading desk, it’s a multi-billion dollar business; and no amount of money is spared on lobbyists), then, with the complicit help of Republicans in Congress, they deliberately put themselves into position of handing out weaponry to their watchdog, and, surprise, hand him an old 19-century pistol. And then, to add insult to the injury, they also demand the watchdog to conduct an analysis, a thorough analysis, not just and “administrative check”, of what kind of harm that 19-century pistol can wreak on fragile Wall Street “lemonade stand”.

Even during Wild West times, so revered in American mythology as the time of true rugged individualism and unfettered capitalism, not even a conniving villain had the chutzpah to demand the sensitive treatment. If you love allegories, like I do, there’s a fitting scene from The Quick and The Dead, where Gene Hackman (Herod) is buying a gun for his dueling opponent Russell Crowe (Cort). Except that Herod doesn’t demand Cort to be gentle.


Our regulators are no Cort. They have not been trained to shoot. Especially with one bullet.


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