Platt Perspective on Business and Technology

Considering a cost-benefits analysis of economic regulatory rules – 13

Posted in in the News, macroeconomics, outsourcing and globalization by Timothy Platt on June 25, 2012

This is thirteenth installment in a series on the cost-benefits analysis of economic regulatory rules (see Macroeconomics and Business, postings 64and scattered following for Parts 1-12.)

I have, up to now, taken a primarily pro-regulatory control position in this series, and for a simple reason. I have focused on the development and imposition of effective regulatory control and oversight. I switch directions in this installment to discuss good and bad regulatory mechanisms and law, and some basic criteria that would go into identifying a proposed regulatory process as one or the other. And in that I begin with a current events story that I began discussing in Part 12 of this series.

In Part 12 I briefly outlined the news story of how JPMorgan Chase ran into multi-billion dollar losses from failed high risk trades this Spring, 2012 and how this has impacted upon the credibility of both that banking institution and that of its CEO, Jamie Dimon. Dimon has been actively lobbying against stricter regulatory control over bank investment practices, arguing that “good banks” should not be punished for the actions of “bad banks.” For the sake of argument I will simply accept that here as true. And I will also simply accept as a given, his assertion that JPMorgan Chase has in fact been a good bank and even an exemplary one. This institution did, after all, avoid most of the bad investment challenges that led to the massive institutional losses of the Great Recession – then. So let’s simply accept as a given that JPMorgan Chase is a good bank and that Dimon’s basic lines of reasoning are correct. How did those recent massive losses happen? That is where this story gets really interesting and particularly if you take Jamie Dimon’s assertions as valid.

He has argued that the recent flood of red ink and losses coming out of their London offices and spreading from there, happened because they had a tremendously savvy and effective executive managing trades for JPMorgan Chase and at an institutional level. Then she became ill with Lyme disease and was unable to maintain positive supervisory oversight of the traders who actually created and carried through on those toxic high risk investments. So JPMorgan Chase was a good, and even a great bank not so much because of its engrained and enforced institutional practices and policies, but rather because they were fortunate enough to have the right people in the right executive and supervisory chairs, and performing to their peak levels of efficiency and effectiveness.

Even when addressing the opportunity and value of “good banks” and other investment organizations, regulatory control and oversight are necessary, as those extraordinary executives cannot always be counted upon to be there. They can be ill and absent, or away on vacation when they would in retrospect have been most needed. These are precisely the people who the competition would be most eager to grab away, and with offers that might prove too good to ignore. So even when starting out assuming that Dimon’s assertions are true, we still find ourselves facing a conclusion that differs from his in broad prospective pattern. Even good banks need regulatory control and oversight – so they do not have to face imminent risk of switching away from good if some or even just one of their key people is suddenly unavailable.

• Effective regulatory control serves to institutionalize “good,” so adherence to effective and prudent practices when developing opportunity and wealth can be standardized to best practices.
• The goal here is to effectively balance off potential for gain with potential for loss.
• And this is where absolute risk and benefits levels enter this discussion as a valid point of reasoned conclusion.
• Aligning risk and benefits so levels of one coordinate with levels of the other and for all participating stakeholders involved, would serve to provide direct pressures to limit maximum allowable risks created, even if that means those participants have to coordinately limit their own personal potential benefits as a tradeoff.

And with this I add another basic regulatory best practices guideline to the approach I have been developing here.

• Effective regulatory control systematizes and standardizes risk management and related due diligence processes, taking the ad hoc out of them as an acceptable approach and operational methodology.

And bad regulatory oversight can be empirically, objectively evaluated as bad if it creates special exceptions and windows of opportunity for risk/benefits asymmetry. And this brings me to the topic of special interests and lobbyists, and I will delve into that in my next series installment. Meanwhile, you can find this and related postings at Macroeconomics and Business and also at Outsourcing and Globalization. See also Ubiquitous Computing and Communications – everywhere all the time.

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