More problems with the regulators than with the banks

This is a guest post on trading from Tusk Trader (check out the newly launched site:, an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader

There is continuing coverage of the Libor scandal. This is a rare case because I believe there cannot be too much attention paid to this issue. Many analysts in the media are trying to draw parallels between the massive trading loses at JP Morgan and the Libor fixing at Barclays. I see these issues as two very different and distinct problems requiring very different solutions. The JP Morgan issue to me is really a shareholder problem. I think it is impossible to craft a legislation that will prevent large firms from doing very stupid things that erode shareholder value.

The Libor scandal is a different beast. It reflects the massive overhaul needed in how we regulate the capital markets. The overhaul required does not just pertain to the rules the regulators are trying to defend but how they are defended and the basic framework of the regulatory bodies. The complete lack of action (on the well-known rigging of Libor) for many years at the highest levels of regulatory institutions leaves me disgusted. This was not just a problem with one person completely ignoring the responsibility of the office they hold  (although I do currently harbor particular distain for the behavior of the UK Governor, Mr. King). Overall, I have a healthy respect for most of the people who work for regulators. One element that needs a rethink is the career path and the selection process for people within regulatory bodies. A revolving door needs to be developed within many departments where particular positions are reserved for traders and bankers. Having experience on a trading floor or on a syndication team from 15 years ago is not enough. Recent experience is necessary to properly assess current market rules and the process for discovering who is breaking the rules. The Volker Rule is a great example of a rule that is created by people who are out of touch with the day to functionality of a trading floor. Paul Volker had been trying to get a similar rule to the Volker rule passed for about 20 years and 20 years ago, it would have made a difference. That is not the case now and the JP Morgan loss proves it. Paul Volker is a very smart guy, but his solution is out of date.  This is the crux of the regulatory problem. The capital markets are highly responsive to their environment. We need to shape regulatory bodies in the same way.

There is some movement between private compliance departments and regulators (IIROC, OSC etc.) here in Toronto but I have yet to see a meaningful swinging door between a trader or an investment banker and a regulatory position. The regulators need to re assess the career path they like to see in their employees. The people are not the problem, the system of how they groom their people is. I am not saying every high level position at these oversight bodies needs to be a temporary 2 year stint, but there should be some positions that are viewed that way.

Is the best way to catch a thief, to hire a thief? Maybe. Or maybe it is just about hiring a front line person who knows what is happening day to day on the trading floor. It is not about the regulators being one step ahead of the markets; it is about the regulators becoming INSTEP with the markets. We have Mr. Carney, and not Mr. King, but that is just luck. How can we convince more qualified bankers and traders to take a pause for a few years and enter the regulatory framework? Right now I see many regulators as a soccer goalie. When there is a scandal, someone recommends different gloves. It does nothing to change the magnitude of the problem.

Is there a piece legislation that could have prevented the JP Morgan loss? I say no. It happened in the department it happened in because they were “ not allowed” to do it in another according to the Volker Rule. You can’t legislate against stupid. Only shareholders can alter that reckless behavior. What we can change is the gap between the regulators and the markets. Don’t change the people at the regulatory bodies, but change what is expected of their experience and career path they are directed in. I am not assuming this is a quick or an easy fix but to assume the capital market system needs an overhaul and the regulators do not, is devoid of logic. The Libor rigging shows more flaws in our regulatory structure, process and oversight than it points out in Barclays.

 Thanks Tusk. Make sure to check out the site: or follow Tusk Trader on twitter: @tusktrader


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Showing 12 comments
  • MarkWolfinger

    “Or maybe it is just about hiring a front line person who knows what is happening day to day on the trading floor.”
    The regulators hire too many lawyers and not enough (any?) traders.

  • HatterMike

    Too true. Maybe there’s a potential conflict though if a trader is on a two-year assignment with the regulator but needs to maintain relationships in order to land well after the two years. This could lead to industry- (or a particular player)- bias in monitoring.

    • Tusk Trader

       @HatterMike I agree that potential conflicts could develop. I think firewalls might have to be structured in some way. I just think over all some new ideas need to be thrown around. Thanks for the comments! 

  • gold_tracker

    Seems to me the biggest thing missing in all this is honest people who practice integrity. We’ve got a system now that appears to be reward the opposite of integrity. It doesn’t matter who is in a position to know what’s going on day to day if they don’t hold to a moral code.

    • HatterMike

       The system is entirely about winners and losers. When you win, the other party loses. The integrity in the trade is that each side is good for their word, i.e. is honest, and doesn’t offer to do something unless they can and will do it. This is the only moral code between market participants. The system assumes each party can figure out the angles and will act in their own interests when booking a deal, and it’s buyer beware.
      Of course, clients and firms have a different relationship, often mutually beneficial but sometimes predatory. Good, connected and intelligent regulators should be able to spot when the industry is being predatory and can make sure that the firms’ clients fully understand their risks.

  • loanprovider

    The system was, is and always be about winners and losers. Undortunately, in most of the cases we are the ones who lose. I mean  us, average people.Firms will never be telling us about the risk, as all they need is to have more clinets and who cares what happens next: you. They will support you if you are succesful and will not care if you have lost.

  • jay

    Hope Preet updates his blog …..not too many commenting on his post at GnM…$22 for out dated data an news?

    • Preet

      Hi jay, I have indeed updated the blog. And I hope to write to it more often now that I’m done with a big project.


    I agree we should have more industry representation with the regulators, and not just in the investment industry. I was at a life insurance conference last year where this issue was raised – insurance brokers were up in arms that there was no representation (and therefore precious little input) from the people actually affected by the insurance regulators.

    Unfortunately it’s difficult to convince a succesful industry person to give up their position and go to work for a government beauracracy. For many moving to a gov’t regulatory position would require a pay cut and a loss of independence.

    On the other hand, the financial regulators are doing a pretty good job. Perhaps even an excellent job IMO. The Canadian financial system is second to none worldwide in terms of stability and protection of Canadian consumers. Outside of exceptions, grandma’s retirement investments are in pretty safe hands.

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