The third deficiency of the current regulatory focus
presents less of a systemic risk to the financial system, but clearly creates a
substantial risk of the different type.
One can hardly consider regulations just if they overlook stealing.
Perhaps the policy
wonks should come up with the simple regulation that overrides all their other
regulation and states simply “no other regulation implies a right to take other
people's money.” It is when until uncle Billy loses a deposit, in other words until money disappears, that regulators and law-enforcement become involved. In
“It's a Wonderful Life” misappropriation of the depositors’ funds is among the
most serious charges Potter levels at George when Potter really wants to be
nasty. How refreshing!
The
media, bank regulators, the judicial system, and policy wonks all seem to be
totally unable to distinguish between out-and-out theft and
perfectly honest activities. For
example, on Christmas eve day, the same day the WALL STREET JOURNAL reported
the investigation into Regions Financial, the paper had an article entitled “MF Global Trustees Cut 'Gordian Knot.” This
second article reported on the current status of efforts of the courts in
relation to MF Global”s bankruptcy. It was an
amazing juxtaposition of a complete failure of our legal system and the waste
of our regulatory system.
Recall that the banks are not being accused of
taking depositors’ money: what has been in question is how they were investing
it for the depositors. Regulators are
focusing on issues such as: Whether investments were prudent, were reserves adequate
for the types of investments being made, and did banks adequately disclose
their investment activity? Those are
important issues but pale compared to ensuring that no one is just stealing the
money.
The situation at MF Global is totally different from
that of the regulatory focus. As the
article reports: “In the months after the bankruptcy, trustees estimated that
about $1.6 billion in customer money had been moved from its proper place in MF
Global's final days.” It's incredible
that no one explicitly states the money was stolen from customers’ accounts. These were not funds deposited with MF Global
for use by other than the owners.
One should note this is very different from the
example of Prime Reserve, a mutual fund that broke the buck. In that case, the funds were at all times
invested within the mutual fund for the benefit of mutual fund owners. In the case of MF Global, funds from
depositors were pledged, (i.e., loaned), and the proceeds used for the benefit
not of the depositors but of MF Global.
In short, they took the depositors money and used it for their own
benefit. It is the possibility that a
similar event occurred at Bailey Building and Loan that brings the law into
play in “It's a Wonderful Life.”
MF Globel involves a violation of depositors’ intent
as well as a phenomenal demonstration of dishonesty on the part of MF Global’s
management. It is a regulatory disgrace
that this could be done. So, one would
suspect that given the emphasis on reforming our financial system there would
be severe penalties for those involved and a serious effort to ensure that such
regulatory loopholes are eliminated.
Instead, as reported in the WALL STREET JOURNAL article, the
result is an agreement that “signaled a new détente over how money from the
eighth-largest U.S. bankruptcy should be distributed and whether creditors or
former customers of the company's brokerage operations should take precedence.”
“Regulators and plaintiffs' lawyers also are looking
into MF Global's bankruptcy. Plaintiffs' lawyers have sued Mr. Corzine and
other former executives of the firm, hoping they could win funds to compensate
MF Global customers.” One is forced to
ask: Why in the world is it necessary
for customers to sue in order to get their money? Common sense would suggest that one of the
primary purposes of financial regulation should be to ensure that people do not
steal other people's money. Instead our
regulators set up a framework that allows them to pursue trivial issues while
ignoring what was clearly intended as a misappropriation of funds.
It isn't any wonder that there is active opposition
to regulation? Regulators have no one
but themselves to blame for it. They are
not focusing on institutions that represent the greatest risk. In addition, they seem to be more interested
in pursuing witch-hunts, then protecting individuals from dishonest
behavior. The Hedged Economist considers
this nonsensical behavior on the part of regulators extremely unfortunate. A healthy regulatory environment would go a
long way toward producing a more stable financial system and one that the
public could trust.
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