fine print - February 2010

Who watches the watchmen?
By G.D. Gearino

Elsewhere in this issue you’ll find an article I wrote about Ken Lewis, the beleaguered (and now former) chief executive officer of Bank of America Corp. In the course of researching that piece, I realized that while there is near unanimity about the need for reform of securities regulation — after all, no one is so foolish as to make the case that things were fine just as they were — there is much debate over the shape, and severity, of the overhaul. In one regard, managing the securities business ought to be a straightforward proposition, something akin to supervising a swimming competition: Your primary job is to make sure everyone stays in their lanes, no one leaps in before the starting gun sounds, the timing device is operating properly, etc. Beyond that, you simply get out of the way and let the swimmers swim. But the reality is that the financial marketplace is like a swim meet in which the competitors assume everything and anything is OK until you tell them it’s not. They’re buying and selling lane-swap agreements with one another while you’re flipping through the rule book before the race in the faint hope of finding some prohibition against it.

That’s why all the discussions about reform tend to focus on such nut-and-bolt issues as reporting requirements, compensation limits and supervision of exotic investment instruments. The one thing not being debated is the moral underpinning of financial regulation — or more specifically, the utter lack of moral authority among the people who now seek to rein in the excesses of the industry.

I’m talking about Congress, where 535 elected officials operate an unregulated, trillion-dollar market for the trading of influence and favor. The world has never seen anything like it in terms of scale and riches. Congress is where votes are commodities to be bartered; where stockholder money (otherwise known as “taxes”) is used for political reward; where continuance in office is always the first consideration; and where the only independent effort at outside regulation — the ballot box — long ago proved to be no impediment at all to the marketplace of favor swapping and influence trading.

This may sound like raw cynicism, but the sad and simple fact is that Congress wishes to impose standards of conduct upon the financial world that it doesn’t want imposed upon itself. Congress demands fiscal discipline from the private sector at the very moment the national debt is climbing into calculator-shorting numbers and the country can’t meet day-to-day operating costs without borrowing from other nations. It wants apologies from business leaders for their recent excesses even as elected leaders lard various spending bills with pork and earmarks. Congress musters outrage at bankers who turned a blind eye toward the fact that the piper eventually must be paid — that the subprime/credit default/collateralized bill would someday come due — yet without breaking stride insists that a hugely expensive, taxpayer-funded expansion of health care can be accomplished at a savings.

By the way, this isn’t an expression of partisan unhappiness. Republicans and Democrats are equally adept at bending the reality curve to their own ends. And within that fact can be found the engine of despair, because it means that it doesn’t really matter who’s in charge: Each party has done its share of squandering moral capital. There is an undeniable need for regulatory reform. But having Congress be the reformer feels a little like having the mob fix your crime problem. There’s little chance you’ll actually be better off.

The relationship between politicians and business people is simple. Politicians have power and use that power to attract the money they need to stay in office. Business people have money, and they use it to influence those in power. But it’s not a relationship of equals. Just as business leaders have to respond to market forces, they must respond to political forces. No competent CEO would ignore proposed legislation affecting his industry any more than he would ignore an eroding market share. He has to be in the game and have money on the table. Problem is, where business people are unabashed in their desires — they want something, and that’s clear to all — politicians declare (with varying degrees of sincerity) to have only the public good in mind. Except they’re also in the game, and they have the power to direct its outcome.

Needless to say, this is not a situation in which moral authority flourishes. For Congress — which, if polls are to be believed, is held in low regard by an overwhelming majority of Americans — to present itself as the standard-bearer of acceptable business practice is cause for amusement of the sour kind.