Tuesday, October 16, 2012

Bad Regulations Don't Go Away

A poor guy in Iowa was dismissed via an absurd no-tolerance policy by the FDIC:
A 68-year-old Des Moines man fired from a Wells Fargo call center for putting a cardboard dime in a washing machine in 1963 has been cleared to return to work in the banking industry, the Federal Deposit Insurance Corp. said. Wells Fargo is under no obligation to rehire Richard Eggers, however... Wells Fargo said it was simply complying with the regulations, which carry a $1 million-a-day fine... A 1950 federal law prevents FDIC-insured banks from employing workers who have been convicted of a crime of dishonesty or breach of trust. In 2008, Congress passed a law that forced mortgage loan originators to perform similar employee background checks.
This dumb law was overturned, but it has to be this dumb, take 62 years, and merely generates an exception not a rewrite.

No-tolerance policies are primarily adopted by institutions when people have no faith in discretion. As Phillip Howard has argued, discretion dominates rules because reality is always more complicated than any rule contemplates. Yet by law bad outcomes can be legal under discretionary frameworks, so lawmakers like zero-tolerance policies because in theory that eliminates the perceived problem.

It's a classic example of the perfect being the enemy of the good. Anyone really enthusiastic about regulations fixing rather than causing problems in the financial industry can't rely on history, as financial regulations have been and continue to be generally irrelevant. We have one set of regulators who look over hard copies of all our traders personal stock trades, presumably to look for front running.  This is silly for two reasons. First, we don't have retail flow like a brokerage, so we would be hurting our company for personal gain in this case, and clearly we have a greater incentive to stop such individual malfeasance than regulators. Secondly, looking at literally hundreds of thousands of company trades, and comparing them to a stack of personal trades in hard copy (with various formatting), is like looking for a risk premium using covariances, a waste of time.


Mercury said...

If by "real banks" you mean banks that provide no liquidity, make no loans, pay no interest and are considered fail-proof by the government then yeah, this is the golden age of banking.

Slowly the government and our culture are removing human judgment from all areas of life. It starts with round the clock, cradle to college adult supervision of children and from there on out it’s basically compliance over liberty every day in every way. Human judgment itself is now viewed with suspicion socially and increasingly you’re putting yourself at risk legally for taking any action you aren’t explicitly authorized to do.

On the other hand we now have a more or less unlimited range of motion in the areas of sex and shopping so...there's that.

Unknown said...

You guys both make really good points. The narrative behind banking regulation, from what I see, has been about saving us from systemic risk. I think Falkenstein touches upon it when he says that regulating behavior that is already disincentivized is redundant. The key to good regulation doesn't ban bad behavior, but rather incentivizes good behavior.