Home > Legal Issues, Primacy of Society, Public Service > Throwing Cold Water on the “Regulate More” Compulsion

Throwing Cold Water on the “Regulate More” Compulsion

When financial companies blow up there always emerges a Greek chorus of poor pundits calling for more regulation, or worse, “smarter” regulation.  Megan McArdle takes the recent failure of MF Global and  its Chief Political Operative Chief Executive Officer Jon Corzine and uses it as a good example of why piling regulations on top of regulations simply will not help us out much

Don’t we need tighter regulations to prevent this from happening again?

No.  Or at least, probably not.
 
To start with, this is really illegal.  There are no “loopholes” that allow you cover your losses with client funds.  There is only the fact that it’s actually pretty difficult to catch embezzling, even if you’re looking really hard.  As I understand it, despite fairly tight internal controls and obvious incentives to prevent it, banks suffer quite a lot of embezzling every year, and hush much of it up rather than suffer the bad publicity.
 
The problem is that the embezzler knows where to look, and you don’t.  There are all sorts of ways to remove money from an account so that it will look fine to an auditor.  (A favorite, especially with bookkeepers, is simply writing a check to a shell company).  Eventually, of course, something won’t add up–the client will realize their statement is off, corporate accounts will run dry, or in some other way, reality will expose the fraud.  As accountants like to say, “recessions uncover what auditors can’t.”  Hello, Enron. 
Of course, understanding this requires some understanding of the actual regulatory climate as well as some sense of human nature, and it is rare to find a pundit who possesses these. 
 
In case you are wondering how I am qualified to judge these things if the punditocracy is not, I am a regulatory lawyer and with a practice in the investment management industry at that.  Having been on the front lines, the idea that we simply do not have enough regulation fails to pass even the laugh test.
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