Wednesday, January 19, 2011

The Pace of Financial Overhaul

The writing of new financial regulations required by the Dodd-Frank financial reform act passed last summer seems to be dragging. “Regulators have missed or postponed several deadlines to write rules needed to implement the financial overhaul…” (

The writing of such regulations in the world of modern finance is a very difficult and messy task at best and one that is even harder given the speed at which that world is changing. In some cases, definitions need to be revised such as who is an “accredited investor”; hearings are taking longer than expected; and disagreements need to be worked out. Furthermore, the regulation-writers are being careful because they “want to get it right.”

“In the next 18 months, U. S. regulators are supposed to issue more than 100 rules or studies in response to the Dodd-Frank law.” And, “The political deadlock in Congress over spending has left the SEC and CFTC without budget increases needed for the task.”

All this means to me, however, is that Congress and the regulators are just falling further and further behind which just makes what they are doing more and more irrelevant!

I have written many posts over the last two years or so about financial regulation and regulatory reform. Most of them have not been very encouraging concerning the positive benefits of the effort now going on to re-regulate the United States (and the world) banking system. The most comprehensive comment that I have made is that the re-regulation that is going on is already “out-of-date.” The reasons I give for this comment is that politicians and regulators are always fighting the last war and so start out behind and the bankers have already moved on into the future making the things being done even further “out-of-date.”

But, just notice three more bits of news that have been in the news in recent days, weeks, or months. First there is the phenomenon known as WikiLeaks. Not only has WikiLeaks “outed” the United States diplomatic system and threatened to disclose internal information said to be very embarrassing to certain United States banks, there is now the threat to expose 2,000 prominent individuals and companies that have been engaged in tax evasion and other possible criminal activity. This latter information was supposedly contained in two computer disks given on Monday to the founder of WikiLeaks by a former senior Swiss bank executive.

This “leaking” of information gets at one of the basic problems connected with information and information storage: security. The issue has to do with who has what information and who should be excluded from having certain information.

One of the fundamental ideas related to information theory is that “information spreads”. People try to control information and contain its spread, but this only slows down the speed at which information spreads…it doesn’t stop the spread.

Just ask the governments and religions that have tried to control information and thinking.

Just think of all the hackers out there. I very firmly believe in the “efficient markets” theory of hacking. That is, if someone can benefit in some way from hacking into a system, even to just embarass someone, they will find a way to successfully hack into that system.

Some information governments would not like others to have, like secrets related to national security. It was proven in the 1990s that all current “code” systems used to protect secrets are useless if someone has a Quantum Computer. Thus, a government like the United States believes that it needs to be “first” in creating a Quantum Computer so that it can keep these very important secrets. (

My point is that in the world of information technology in the 21st century where information, even secret information, is so accessible, shouldn’t the government and the regulators show a little more interest in the openness and transparency of the financial institutions and the financial markets than it is showing.

The politicians and the regulators are looking for very specific outcomes. History shows that governments that try to force “outcomes” on a system NEVER SUCCEED!

It is remarkable how systems and markets are more able to regulate themselves if information is open and transparent to all. Maybe this is what Congress and the regulators should be emphasizing.

Second, there is the Goldman Sachs/Facebook transaction. Rather than have a public offering of shares in Facebook, Inc., where a substantial amount of information on the company would have to be forthcoming, Goldman decided that a private offering was better for the company at this time. Now, with concern that the focus on the private offering could be deemed “public” because of the intense attention given to the deal in the media could be considered a violation of U. S. securities laws, Goldman has decided to only offer the shares to non-United States investors.

My point here is that something is wrong with the regulations for such a “mess” to exist. First of all, what is “private” information and what is “public” information? Secondly, if others, like the media, can get sufficient information and publish it so that a “private” offering becomes a “public” offering even if the bank conducting the offering does not actively violate the law, what really is the definition of a “private offering”?

Third, in this global world, an offering such as the Facebook shares, can be taken “off-shore” as easily as sending an email out to potential investors. Should our laws and regulations be set up so as to “force” companies to go elsewhere in the world and escape onerous” regs” or “out-of-date” restrictions?

Fourth, in the information technology world we are moving into how can any financial offering be considered “private.” The possibilities that the “private” offering might become “public” are almost infinite.

Just one final tidbit: the Wall Street Journal article “Battle for Techies: Wall Street vs. Silicon Valley.” ( The subtitle to this article is “Trading Companies Roll Out the Perks to Lure Top Talent; Shuffleboard, Paintball and, Yes, Higher pay; Outside the Bubble.” Wall Street believes it needs the best “techies” to compete in the modern world.

The point: information technology is very present in finance, after all, finance is just about information. Information technology is playing a bigger and bigger role in finance. See my book review of “The Quants”: ( And, information technology is going to play an even bigger role in finance in the future.

Obviously, my belief is that the current efforts to write new rules and regulations for the financial area are on the wrong track and wasting a lot of money. But, these efforts are creating jobs and that is helping the economy. Maybe the financial reform bill was really just a stimulus bill in disguise

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