John Damgard bit his tongue as William Black addressed delegates at the annual Burgenstock Meeting in Interlaken, Switzerland.
It was early September, and Black, a professor of law and economics at the University of Missouri, was giving his take on the financial crisis that surfaced in 2008. He’d earned his cred as litigation director for the Federal Home Loan Bank Board (FHLBB) and deputy director of the Federal Savings and Loan Insurance Corporation (FSLIC) in the 1980s, and has been researching white-collar crime ever since.
Damgard, a consummate diplomat, had run the Futures Industry Association from its inception in 1982 until last year, when he passed the baton to former Commodity Futures Trading Commission (CFTC) Acting Chairman Walt Lukken. Normally ebullient, Damgard fumed as he watched Black blame the housing bubble on the twin cultures of corruption (among real-estate lenders) and trust (on the part of regulators).
When Black finished, Damgard strode to the dais and towered over him, waving his fist in the air as he turned to face the room.
“You don’t have to listen to this,” he told the audience. “More than 99% of the people who work in our industry are fine, upstanding and good people!”
The housing bubble, he said, wasn’t caused by a culture of corruption but by misguided government policies.
“It happened because do-gooders like Chris Dodd and Barney Frank believed that it was every American’s God-given right to have a house,” he said. “They provided government guarantees that distorted the market, and that’s where things went wrong.”
The raucous and wide-ranging debate — which we're told will be available online soon — veered from global rules of corporate governance to the vagaries of customer segregated funds, and from the philosophy of Adam Smith to the founding of Apple Computers. It echoed both the narrow debate that has engulfed the futures industry since MF Global and Peregrine Financial Group (PFG) violated the sanctity of customer segregated funds, and the larger debate that has inundated the entire financial services sector since that fateful day in 2008 when Alan Greenspan acknowledged that he may have overestimated the powers of benign self-interest.
Black drew parallels among the actions of Jon Corzine, Russell Wasendorf and Bernie Madoff, whose $65 billion Ponzi scheme remains the mother of all financial scandals (both in terms of size and regulatory failure).
“In each case, we had high-status individuals who, because of the status and respect they garner, ended up posing a much greater risk to the system,” Black said. “It’s very difficult to believe in the forefront of your mind as a regulator that the person sitting across from you in a nice suit is lying through his teeth to you and forging documents.”
If regulators aren’t given more support, he warned, the entire system will suffer. “Elite frauds are about the most aggressive assault on trust you can imagine,” he said. “They can shut down entire segments of the economy.”
Damgard agreed, but said the system basically was sound. “MF Global is a black eye, and a couple bad apples caused a lot of angst,” he said. “But the [regulatory] pendulum always swings too far.”
But how much regulation is too much — and how should it be targeted? To answer that, you have to look back at what has gone wrong over the past 25 years.
Damgard accuses Black of measuring regulation by its size and scope instead of its focus, and says we often end up with more regulation than we need because regulators fail to enforce the regulations that already exist. He concedes that over-the-counter (OTC) derivatives needed more regulation, but argues that the SEC should have caught Madoff with the regulations and resources at its disposal (see “Types of failures”).