Regulatory Capture

The MF Global mess is dragging on as accounts with only cash balances are frozen and others with positions are transferred only to receive immediate margin calls. One of the gold trading professional gurus (I forget his name) was on TV complaining that he was out six figures – I guess the encouraging thing was that he apparently trades for his own account, which many gurus do not.

Anyway, this whole mess is yet another example of failed regulation. Hardly surprising, as the revolving door staffing cycle for these agencies – the SEC, the CFTC – goes like this:

  1. Get a job with a large financial services company, work at it for a while and come to the realization that you are going to be laboring in the trenches indefinitely.
  2. Offer yourself to the regulator as an employee on the basis of your relevant industry experience. Get hired for a considerable increase in salary.
  3. Spend a few years browsing porn sites, while ignoring any and all industry malfeasance.¬† Develop a specialized skill in looking the other way, especially where the malfeasance involves politically well connected heavy hitters. If you get bored with the porn (understandable) then it is OK to alleviate the boredom by prosecuting a few customers for insider trading, especially if they are female or brown, or can’t afford to defend themselves.
  4. Present yourself to a large financial services company that you are supposed to have been regulating on the basis of your regulatory experience and contacts. It is perfectly OK for it to be the same one you left. You don’t actually have to mention that you could rat them out in the press.
  5. Accept the partner/MD/executive salary that you previously envied. Flash your new NetJets card and head to St. Barths.

Of course it is embarrassing when one of the rackets you are supposed to be regulating is caught with its hand in the till, but it blows over pretty quickly. Who remembers Refco, the last CFTC blowup? In the present case it is no coincidence CFTC chairman, Gary Gensler, had to recuse himself ex post facto due to his close ties to Corzine.

The moral of this story is that you have to remember that the government and the broker are both your enemies. I mean, they’re pretty much the same thing, but it is important to remember that they are both intent on stealing from you.

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