Regulation is not a dirty word
Regulation has gotten a bad rap recently. It’s a combination of it being associated to finance, or big business, and it being complicated, and involving lobbyists and lawyers – it’s sleazy and collusive by proxy, and there are specific regulators that haven’t exactly been helping the cause. Most importantly, though, the concept of regulation has been slapped with a label of “bad for business = bad for the struggling economy”.
But I’d like to argue that regulation is not a dirty word – it’s vital to a functioning economy and culture.
And the truth is, we are lacking strong and enforced regulation on businesses in this country. Sometimes we don’t have the regulation, but sometimes we do and we don’t enforce it. I want to give three examples from yesterday’s news on what we’re doing wrong.
First, consider this article about data and privacy in the internet age. It starts out by scaring you to death about how all of your information, even your DNA code, is on the web, freely accessible to predatory data gatherers. All true. And then at the end it’s got this line:
“Regulation is coming,” she says. “You may not like it, you may close your eyes and hold your nose, but it is coming.”
What? How is regulation the problem here? The problem is that there’s no regulation, it’s the wild west, and a given individual has virtually no chance against enormous corporate data collectors with their very own quant teams figuring out your next move. This is a perfect moment for concerned citizens to get into the debate about who owns their data (my proposed answer: the individual owns their own data, not the corporation that has ferreted it out of an online persona) and how that data can be used (my proposed answer: never, without my explicit permission).
Next, look at this article where Bank of America knew about the massive losses on Merrill after agreeing to acquire them in September 2008 but its CEO Ken Lewis lied to shareholders to get them to vote for the acquisition in December 2008. The fact that Lewis lied about Merrill’s expected losses is not up for debate. From the article:
… Mr. Singer declined to comment on the filing. But the document submitted to the court said that Mr. Lewis’s “sworn admissions leave no genuine dispute that his statement at the December 5 shareholder meeting reiterating the bank’s prior accretion and dilution calculations was materially false when made.”
What I want to draw your attention to is the following line from the article (emphasis mine):
…the former chief executive did not disclose the losses because he had been advised by the bank’s law firm, Wachtell, Lipton, Rosen & Katz, and by other bank executives that it was not necessary.
Just to be clear, Lewis didn’t want to tell bad news to shareholders about the acquisition, because then he’d lost his shiny new investment bank, and he checked with his lawyers and they decided he didn’t need to admit the truth. That is a pure case of unenforced regulation. It is actually illegal to do this, but the lawyers were betting they could get away with it anyway.
Finally, consider this video describing what was happening inside MF Global in the days leading up to its collapse. Namely, the borrowing of customer money is hard to track because they did it all by hand. No, I’m sorry. Nobody does stuff with money without using a computer anymore. The only reason to do this by hand is to avoid leaving a paper trail because you know you’re about to do something illegal. I’m no accounting regulation expert but I’m sure this is illegal. Another case of unenforced regulation, or at worst, regulation that should exist.
Why do people think regulation is bad again? Does it really stifle business? Is it bad for the economy? In the above cases, consider this. The fact that we don’t have clear rules will cause plenty of people to avoid using all sorts of social media at all for fear of their data being manipulated. We have plenty of people avoiding investing in banks because they don’t trust the statements of bank CEO’s. And we have people avoiding becoming customers of futures exchanges for fear their money will be stolen. These facts are definitely bad for the economy.
The truth is, business thrives in environments of clear rules and good enforcement. That means strong, relevant, and enforced regulation.