Today the Corporate Observer welcomes guest co-author David Martin, Office Manager at Berk Law and Director of TCO. Please enjoy.
"Insanity: doing the same thing over and over again and expecting different results."
– Albert Einstein
You reap what you sow. Lazy farming yields poor crops. Lax practices train an undisciplined basketball team. A poor diet leads to health issues. The failure to regulate will inevitably lead to even more dangerous market disruptions and crises.
That’s “crises,” plural, because we’re headed for another one if the Commodity Futures Trading Commission continues to delay regulations on over-the-counter derivatives trading. Though the Commission’s ability to meet the July 16th Dodd-Frank rules deadline has long been doubted, yesterday the CFTC officially announced it will not meet the statutory deadline. Merely a year after the passage of Dodd-Frank, the lobbyists have retaken the highest hill on the battlefield and the regulators are pinned down, unable to protect Main Street. Main Street is left with nothing in its collective cookie jars to save a financial sector wired on greed and designed to maximize risk and profit over long term growth and stability.
Michael Lewis’ The Big Short superbly chronicles the role played by unregulated credit default swaps in fueling risk to a degree never contemplated by the regulators or markets and spurring a financial crisis that brought our economy to its knees. Investor faith collapsed, financial institutions went from unassailable to insoluble in weeks; in some cases overnight. Some of the most venerable names on Wall Street disappeared, others became irrelevant, and we saw exactly how quickly in the age of the Internet and instantaneous trading that not just a market, but an entire economy could be crippled.
As devastating as the crisis was—nationwide unemployment is still at 9.1 percent—we survived, barely, and had the opportunity to return from the brink stronger and smarter. The proverbial “fool me once, shame on you” situation; instead, we are headed towards “fool me twice, shame on me” territory. The lobbyists and future private-sector employers of the regulators have efficiently forced the CFTC to push back its estimated date of rule finalization. Meanwhile, if I’m heading up a bank or financial institution today, my takeaway is, “Don’t take the regulators seriously.”
A year ago, the regulators had all the momentum and political capital in the world. On the heels of a financial crisis that pitted every average American against the financial institutions that created the mess, rules were necessary and urgent. Sadly, that momentum has evaporated quicker than the Miami Heat’s, and it continues to dissipate—pun intended. Those creators of “synthetic derivatives” and other newfangled instruments that leverage the level of risk to extraordinary heights are back, and with this delay they will surely lap the field, leaving regulators in the dust.
The mission of the regulator is not to please the industry it regulates (that’s called a trade association). It is to regulate, to be an irritant, to ask tough questions, to be obstinate at times, to trust in some cases, but to always verify.
It may already be too late, but the CFTC must tighten their chin straps and take the field.
Post co-authored by David Martin and Steve Berk