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What happens on Wall Street stays on Wall Street

October 23, 2009

There’s talk now of ending the anti-trust exemption for Insurance companies, forcing them to really compete in each state without inter-firm ‘alignment’ of rates and coverage terms.  We’re now talking about changing the business model of medicine, where the service providers will be paid on outcomes, not procedures.  Wall Street is being pilloried for selling highly risky products and being paid based on sales or profits.  Now the talk is to change their compensation to a longer range plan, mostly in stock and as Goldman does, forcing them to keep 75% of their stock until retirement.  By the way, Bear Sterns employees had a similar culture and when their company blew up, so many homes went up for sale in the Hamptons  we had to mint a whole new generation of entertainers to buy them up. And for each suggested ‘fix’, our esteemed legislators, mostly lawyers (who are well known for their own efficient business operations), think up a new Agency to regulate them.  Soon, we’ll need the Agency Agency to regulate the regulators.  Let’s call a spade a spade; we already have an agency to effectively control Wall Street, no need for another.

The Nevada Gaming Commission was founded in 1959 to license, control, audit and tax the casinos in that state and has, overall, done a great job.  Currently, its functions include Investigations (of current and prospective employees), Corporate Securities (for publically traded companies),   Technology (wonder how they would look upon High Volume Trading if it meant the dealer showed me your cards 30 milliseconds before you got them), Audit, Tax – Licenses and Enforcement.  Say what you will, this is a tightly controlled industry which is why, even with the bad odds of beating the House, we all enjoy a trip to Vegas. When was the last time you enjoyed a trip to Wall Street, Second Grade?

Proving that my idea is not so novel and truth is stranger than fiction, Swaps (more generally, Derivatives) were specifically exempted from state gambling laws by Federal Legislation in 1992. In 2000, the Presidential Working Group on Financial Markets (PWG) recommended some minimal oversight on OTC Derivatives contracts but the power of Lobbying was in full force and hence the Bailout of 2008. Treasury submitted draft regulation to Congress, this past August, looking for “comprehensive regulation of all over-the counter derivatives”.  ‘Comprehensive Regulation’ would include open trading and clearing (the actual settling up on the bet) for Standardized OTC Derivatives (in casino parlance, think slots, table games, craps and ‘the window’) and new standards on non-standardized bets (like those made in the back rooms of the Social Clubs in my old Brooklyn neighborhood).

The likelihood of this occurring is near zero, which is a pity.  Too much money is being spent on K-Street and J-Street for this to take hold, no matter how good an idea this may be and then we have the Wall Street insiders comprising the PWG itself.  How ‘inside’ are ‘insiders’?  How about the Secretary of the Treasury, or his designee (as Chairman of the Working Group); the Chairman of the Board of Governors of the Federal Reserve System, or his designee; the Chairman of the Securities and Exchange Commission, or his designee; and the Chairman of the Commodity Futures Trading Commission, or his designee? You can hear the revolving door spinning. Even Congress, in hearings going on this week, expressed severe reservations about expanding the Fed’s reach because it and other regulators were asleep at the switch.

Main Street needs this new legislation.  Even if we are not actual users of derivatives to mitigate risk within our companies, recent events shows how secretive and not fully understood instruments hurt us all.  If not enacted we have a fallback plan – turn the Derivatives markets over to the Nevada Gaming Commission and comp everyone for a good dinner. Steve Wynn would run a great Goldman Sacks.

Rich Eichen is a Managing Principal of Return on Efficiency, LLC, who’s website is www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies, Operations and key initiatives. He can be reached at richard.eichen@growroe.com

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