Of Babes, Bucks and Corrupt Regulators

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Top Bloomberg columnist Caroline Baum in her hard hitting column decried the growth of corrupt and sychophant regulators hungry for "Babes, Bucks and Expense Accounts" in the U.S. She rightly pointed out that more regulation was not necessarily the answer to a better managed financial system. The law had enough provisions for the conduct of a disciplined market place in the U.S. What was fundamentally lacking was the will to regulate. The reason was none other than rampant corruption amongst the regulator community in America.

At the Fountainhead of the US regulatory system is the Federal Reserve. Since it directly is a stakeholder in the Banking business, it has no unearthly reason to regulate or control the Banks other than when the crisis is out of control and the thief has bolted. What the Fed did after the 2008 subprime crisis was effectively bring the thief to court and plead his case,and get him reprieve plus a trillion dollar aid to rehabilitate as a honourable citizen.

The Banks seizing the opportunity made the most of the TARP funds by hedging and shorting, growing from strength to strength as they all came back from the dead to mint billions of dollars, some of them duping corporates and countries of gullible Europe with the toxic wastes of the subprime fall out.

When finally ring leader Goldman Sachs was charged with fraud by the SEC it was a weak civil charge that could help Goldman get away with a minor rap, a few million dollars of fines at best. Fortunately Senator Levin, one of the few men in America who has the gumption and the guile to match the crafty bankers chose the same week to begin his cross-questioning of the Goldman boss and his fabulous fabricators. The Senate investigations which was going on for the last six months, ripped up the giant vampire squid and put it on to backfoot searching for a compromise settlement which could get it off the hook.

Caroline Baum is right in her assertion that the entire regulatory system in the U.S. is filled with officers who are surreptiously fed by the corporations they are supposed to regulate. It is highly unlikely that one would bite the hand that feeds, especially when babes and porn are part of the package, as blackmailing becomes easier once sexual favours are involved. So even if the regulators want to come straight they cannot once they accept the initial inducements offered to them by friendly corporates.

Besides regulators are often loaded with staff from the companies they are supposed to regulate in the U.S. So the expense account simply stays on along with enhanced perks, though the salary account changes once you become a regulator. Pharma major Monsanto and Goldman Sachs are past masters in this game, and plant maximum of their employees in the U.S. regulatory system, through a open door policy that breeds friendly regulators to manage the increasingly toxic environment.

Baum has suggested an 'eat what you kill' policy of wage structure for the regulatory staff to ensure better enforcement. It may help to some extent but not to a great extent. For if you are loaded with goodies for doing nothing, it is hardly likely that you will confront the offenders and take the risk of alienating them, just for better incentives, especially if you have Bernanke and Geithner at the head of the regulatory system.