Cat and mouse

Cynics frequently complain that highly paid quants in unstoppable investment banks and hedge funds will always manage to stay one or two steps ahead of the regulators.

Vanessa Drucker
Vanessa Drucker

Such predator prey contests are hardly unique to banking. Cops chase robbers. Tax attorneys earn their keep by spotting loopholes for tax avoidance. Pathogens vie with antibodies. In the enchanting animated film Fantastic Mr Fox foxes and farmers vie in a struggle over scarce resources (chickens).

How can we motivate the most talented people to join the good fight? It is often tactfully expressed that the best and brightest eschew public service, in favour of the millions to be made on Wall Street. Just look at our many supremely untalented politicians.

On March 2, Andrew Lo, professor at the MIT Sloan School of Management, discussed in the FT the need for a “Capital Markets Safety Board,” composed of expert professionals, accountants, lawyers and financial engineers. In a conversation last week, Lo discussed with me the pay disparity between government and private sectors. “Maybe we should provide more government support for financial PhDs, as we already do for engineers, so the pay scales would seem less skewed and government service not look such a poor choice,” he suggested. (article continues below)

Maybe it is time we focused on elevating, nay glamourising, public service roles. People donate large sums to charity; they are not driven by personal financial gain. Modestly paid journalists and teachers do jobs they believe in. Sustaining a functional financial system is as important.

Or is the adversarial cat-and-mouse relationship a defeatist excuse? In government (less so, finance) it is true different individuals create and enforce the regulations. But we need to start with the former. It begins with plugging a non-regulated black hole. For decades, from the creation of the Federal Deposit Insurance Corporation’s deposit insurance in 1933 through the 1980s, America suffered relatively few bank failures, and those were manageable. Then more banks started moving large swathes of their operations off-balance sheet, where they could maneuver without oversight. Until regulation is extended into those murky areas, there’s nothing even a crack squad of government commandoes could do.

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Vanessa Drucker is the American Editor of Fund Strategy, based in New York City.  She has worked as a financial journalist for 20 years. In the 1980s, she practiced banking and securities law on Wall Street, and is the author of two business novels. Vanessa can be contacted at vanessa.drucker@centaur.co.uk.