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Is the mist clearing?

At the beginning of a New Year one must always contemplate the difficulty of coming back to work after enjoying a couple of festive weeks off.  So there I was last Monday embroiled in a taxing struggle to save myself from an hour or two of naval gazing and thumb twiddling and found myself listening to the Bernard Madoff hearing in Washington.

No, I was not stimulating an unhealthy interest in Ponzi scheme fraud cases my aim instead was to discover if there were any clear trends in how US regulation might change going forward and what this means for all of us outside the US.  Listening to the hearing it became clear that a number of themes are emerging:  

Firstly, the issue of how to regulate markets in the US is highly "political" – in a way that is very different from what we are used to in London. In the US, viewpoints from the right and the left are expressed – one Representative stated that less regulation was needed. I suspect he was a Republican! The majority however seemed to believe more, or better, regulation is needed. In London, by contrast, we focus more attention on the practicalities of who does what rather than having an ideological debate.

Secondly, while the majority of Madoff investors were professionals the story of its alleged defrauding of clients is "retail" in its impact. The political fallout and need for debate around policy is therefore likely to be far greater than that experienced after the fall of Bear Sterns, Lehmans and the others.

Thirdly, the vast majority of the discussion was focussed on the US.  The US political agenda will be driven by US constituents and not by faraway banks with funny names - despite huge losses incurred by many European victims of the alleged fraud.

Finally, the principal guest – inspector general H. David Kotz from the SEC – answered almost every question with a polite but firm “I agree but I don’t have the detail and it’s not my department so I’ll have to get back to you” answer. He clearly didn’t want to pre-judge any conclusions from the internal enquiry that the SEC is conducting – a process which may take many months.

So what can we conclude from all of this?

I think we were all hoping that by now the regulatory mist would have cleared a little - no such luck! The great regulatory talk-fest that happened in Washington in November has stayed at 40,000 feet and the plane still hasn’t landed. There is clearly there an appetite for change and also an appetite for justice, but there doesn’t seem to be a political consensus and the debate in the US is almost entirely parochial. Also questionable is how well understood it is in the US and how much influence US regulation has on the rest of the world – having worked for companies with a large presence in the US for the past 11 years I know that it’s likely to be more of a torrent than a trickle-down effect.

If the new President wants to make fundamental change to the US regulatory system, which he has stated he does, then he must start immediately and can’t wait for the result of the SEC's internal inquiry. Barack Obama also has alongside him Tim Geithner - a man who has no securities market baggage and a proven ability to instigate change. While the Washington establishment appears to be divided, indecisive or conflicted, it seems unlikely that Obama and Geithner will wait for a consensus to emerge.

We may be in a similar situation to when Tony Blair and Labour came to power in the UK in 1997. Four days after the election control of interest rates were given back to the Bank of England – a radical and completely unheralded change. At a stroke this simple and bold plan bestowed huge credibility on the new government. The market was stunned but ten years later there is almost universal agreement that it was a good thing. The plan worked and I’m expecting something similar in 3 weeks time from across the pond.


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