Last week’s issue of the Economist started with an opinion piece on the over-burdensome rules imposed on American business. While I agree with the stance for the most part, what it fails to do is suggest better, less burdensome rules. Because, as we saw in the Dot Com crash and the Financial Crisis of 2008, without regulation, Wall Street will consistently do their best to ruin the world.
Simplistically, the best set of rules would hold CEO’s and executives and their Boards personally and directly responsible for malfeasance. The rules that came out of Enron’s demise and the subsequent housing/mortgage boom bust throw a lot of babies out with the bath water. More rules seldom work. Better rules, however, can be helpful.
During the Great Depression, a slew of new rules and regs came into play. Securities Acts of 1933 & 1934. An Investment Advisers Act and Investment Company (mutual funds) in 1940. Perhaps most important to today’s scandals, the Glass-Steagall Act in 1933. What did these acts have in common? Brevity. Clarity. No person or attorney could confuse their intent. No Board of Directors could undermine and obfuscate them easily. For over 50 years, our country’s banking and investing systems avoided major calamities.
Glass-Steagall provisions were unwisely removed in 1998 when Citibank, led by one Sandy Weill, wanted to merge with Salomon Smith Barney and Travelers Insurance. They lobbied Congress hard to repeal the act. They won that effort. In the process, they removed one of the most effective pieces of regulation preventing investment scandals ever created. Thanks Sandy!
Recently, while following the well-worn path of Americans before him who gained their wealth in ugly ways and tried to sooth their conscious with giving small portions of it to charity, Mr. Weill spoke publicly saying the country could really use Glass-Steagall type rules again. He didn’t offer to give back the billions he made as CEO during the time he ran Citi and the world into near bankruptcy leading up to the mortgage crisis. He just mentioned, now that he is conveniently retired and massively wealthy, that banks should go back to banking the right way…nice.
Today’s new regulations in response to the scandals are neither brief nor clear. They leave boards and executives searching for ways to circumvent the rules. Thousands and thousands of pages of rules. But does anyone believe Wall Street is properly functioning? Not even Sandy Weill would tell you Wall Street is working.