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Financial Industry Regulations, There Needs To Be Consequences

Politics / Market Regulation Apr 24, 2010 - 01:08 AM GMT

By: Sy_Harding


Best Financial Markets Analysis ArticleRob a bank and you know you’ll go to prison if you’re caught. Fail to pay your taxes and you’ll personally pay a large penalty and perhaps spend time in prison. Drive your car recklessly and you know you’ll pay if you’re caught. Make bad or careless decisions in your business and the result could be bankruptcy.

Knowing there are consequences for illegal, questionable, dangerous, or mis-guided behavior is an important deterrent that works quite well.

Obviously requiring bank-robbers to merely return some of the money and promise not to do it again, allowing tax-payers to simply file and pay when caught, or reckless drivers to repeatedly drive off with just a warning, would deter none of the wrongdoers. Showing businesses that if they make repeated bad decisions that result in failure they will be bailed out and allowed to continue as before would only invite more reckless behavior and a larger failure down the road.

Obviously, such lack of consequences would also encourage many more to engage in similar behavior and activities in the future.

I bring that up as Congress considers re-jiggering financial regulations to protect investors, consumers, and ultimately the financial well-being of the country, from the sometimes questionable, sometimes dangerous, sometimes illegal activities in the financial industry.

There needs to be consequences for those who cross the line, as in other walks of life and business, consequences commensurate with the damage that results from their activities.

The majority of individuals and businesses in the financial industry are honest and upstanding, at least those I have met. They go after profits and successful careers in ways that not only comply with the regulations as written, but with the spirit and intentions of the regulations.

However, there are also individuals and businesses who prefer to game the system, looking for loopholes, or even ignoring regulations altogether, hoping they will not be caught, but knowing that under regulations as periodically revised over the last century, if they are caught the consequences will simply be an acceptable cost of doing business.

We’ve had many decades of examples. We’ve also seen each financial collapse, bursting bubble, or bank bailout since the 1970’s more severe than the last, involve more sections of the financial industry, and cost more to fix. If the spiral is not halted, the trend is toward a financial doomsday from which merely taking from future generations to bail the current system out will not work.

Unfortunately the spiral will not be halted by simply redefining financial industry regulations to close the latest loopholes, or the questionable practices the latest collapse has revealed, or by providing regulators with more people to supervise the complexities of financial firms, or more power to regulate.

The only hope for new regulations to finally succeed this time is if they implant fear of real consequences for those who ignore them or try to circumvent them.

It is no deterrent at all when the known consequences for those who are caught is that they will be allowed to make partial reimbursements and say they’re sorry, or get away with settlements in which they ‘neither admit nor deny guilt but agree not to engage in such practices in the future’, and fines paid by corporations while the decision-making executives do not even lose their jobs, at most having to move down the street to a similar position at another firm.

The need for real consequences is obvious. Let’s hope we see the need met in the new regulations that are apparently approaching their final stage of Congressional debate and negotiation.

It would be a shame to lose the opportunity. As the old cliché goes, fool us once, shame on you, fool us twice shame on us. We can add regarding Congress and the financial industry, fool us again, shame on you and heaven help us all in the future.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website, and the free daily market blog,

© 2010 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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