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Jun 19, 2008 7:17 pm


An irreverent Wall Street Blog
by Bill Singer Subscribe to RSS Feed: Blog Home | Past Entries A Generation of Inbred Regulators Written: June 19, 2008

I just listened to Treasury Secretary Paulson’s news conference and came away with the idea that he remains confident in the ability of our economy to weather the current storm but remains concerned about the need to overhaul the current regulatory system. All of which put a smile on my face…a bitter one…some might even say a sardonic one.

For years I have warned that America’s tripartite system of federal, state, and self-regulatory regulators was showing signs of age and falling apart. Alas, much like the cursed Cassandra, I was but another voice doomed to sound an alarm that no one would hear.

There had been clear signs of smoke, and then even clearer signs of fire – but nary a firetruck sped to the scene. Only after buildings started burning down did our regulators seem to take notice. It’s not that the current class of regulatory executives are evil and incompetent; they are not. However, they are flawed (as are all human beings, including myself—just ask my wife). Too many of those regulating Wall Street are from the same old crowd that is regurgitated back and forth from the same old law firms and brokerage firms and regulatory agencies. It’s not that these executives don’t want to fix things. To the contrary, I know that they do. The ultimate problem is that they lack the skills and life experiences to equip them to do things differently than they do. We are all products of our environment and upbringing. None of us can escape where we came from. Unfortunately, Wall Street is now crippled by an inbred generation of regulators who cannot change the way they do things and perpetuate a failed system. We need new bloodlines.

Ultimately, I am reminded of a recent line I heard about Tim Russert. As the story was told, when he joined Senator Patrick Moynihan’s staff he was troubled by the Ivy League pedigree of many of his colleagues. Russert, ever the blue-collar boy from Buffalo, felt out of place within such a coterie. Senator Moynihan purportedly pulled his new aide aside and comforted him with the following assurance: “What they know, you can learn. What you know, they can’t.”

For lack of a better line, that’s about how I would explain the failure of Wall Street’s regulators. They are educated. They come from the top schools and firms. By virtually all measures, they are the cream of the crop. Nonetheless, they keep missing the scandals and have consistently failed to redress the shortcomings. Sometimes you just can’t learn Street smarts—you need to have gone to the school of hard knocks for such an education. Like I said, we need some fresh blood on Wall Street.

Jun 20, 2008 2:51 pm

For all of us blue collar guys, nice post!  I agree with you completely!! People that live in a hypothetical world can’t adjust to reality.  They just have no basis to fall back upon.

Jun 20, 2008 3:39 pm

LOL!  The good ol’ boy network has always been in place.  Some day look at the Goldman Sachs Alumni interspersed throughout the government, media, and regulators.  Don’t get me wrong, I love GS.  They have a brilliant organization, but from Paulson on down, they are in most of the major power postions and have been for years.  I would be interested to know where and if they fit in international government positions as well, but not enough to actually research it myself

  CNBC is mostly ex-Goldman as well.  Just a thought....
Jun 20, 2008 4:23 pm

Oh I agree completely.  The big thing right now is the 401k fees.  Bloomberg did a great expose over them yesterday.  I agreed with much of the story, but they broke down the trading costs within the funds.  Although they should probably be more clearly disclosed, they should not be demonized.  If you choose a managed fund as opposed to an index fund, you have to expect some trading of stocks.  It is silly to think otherwise.  However, the pumping of the index funds and 60/40 diversity as the single best way to go does “walmartize” the system.

  Since I am not a mutual fund guy, I don't care a whole lot for myself and my clients, and I have been beating the same drum for years on the fees, but complaining about trading costs within a fund is just over the top. 
Jun 21, 2008 2:48 pm

Realistically, the goal of the regulator should be to enusre that clients and potential clients have faith in the industry. The legislation and regulations should be about ensuring that some minmum level of ethics and professionalism is consistently demonstrated by all participants in the market so that clients can be more at ease when seeking or receiving advice.

Im not sure how important the break down of expenses is from a client point of view. I think what is important is that the total cost is known and the net return is clearly stated. The client should be made aware of the relative level of risk in a portfolio and that they are being adequatley compensated (over the medium to longer term) for taking that risk.   I also wonder if the trend towards "settlements" in the industry (Ie where a firm will settle with a disgruntled client out of court) is retarding the growth of legislation. I can appreciate that fighting these things out in court gets expensive, however an out of court settlement means that no legal precedent is set for future cases. Perhaps it may be beneficial for the industry in the longer term to spend the money on legal fees now to get some precedent set and hopefully this will force the regulators into a postition where they need to make some real statements and bring the regs up to date.  At the very least give them some case summaries to read while at school so they can understand what actually goes on in the industry.