Quote for Discussion: Financial Regulation

(11:30AM EST – promoted by Nightprowlkitty)

Some will argue that limiting financial institution leverage will render these businesses less profitable and less competitive with non-U.S. companies.  HCM’s response is – “so what?”  Perhaps less profitable investment banks will result in more of America’s talented students becoming scientists, engineers, doctors and teachers instead of investment bankers and mortgage traders. What would be so terrible about that?

~Michael E. Lewitt, Managing Member and President of Hegemony Capital Management, writing in the subscription-only Welling@Weeden newsletter for the clients of Weeden & Co. LP.  This excerpt of the article, which is not reproduced with permission but contains no advice or information that could be considered proprietary, is a long list of suggested regulations which Lewitt believes are needed in today’s financial markets.

The events which are taking place in today’s financial markets are bewildering to the uninitiated, and are only slightly less scary to those who are familiar with the concepts and terminology inherent to this world.  But it strikes me as significant to see so many people within the world of finance calling for drastic reform and desperately trying to demonstrate that the problems which are blooming now are the spawn of seeds planted in previous years and decades.  And one thing that a few such as Lewitt are saying is that perhaps it simply is unwise for us to pursue the sort of gains which have fueled Wall Street for the last quarter-century.

In his essay, Lewitt states, “At some point, society has to figure out that the way an investor earns his money is even more important than the amount of money he makes.  This is why human beings were vested with moral sentiments, so they could distinguish the quality of human conduct from the quantity of its results.”  I don’t know that I agree with this statement – by which I mean not that I consider it to be untrue, but I’m unsure that this isn’t already the case.  There are already significant status rewards (which, as Lewitt quotes from Adam Smith’s Theory of Moral Sentiments, were considered by Smith to be utterly entangled with market behavior) which are independent (or at least interdependent) with financial rewards.  Paris Hilton may be richer than Zooey Deschanel, but the public grants Deschanel far more esteem (although Hilton is clearly a savvy businesswoman, and Deschanel is also a beneficiary of nepotism).  Meryl Streep may not be wealthier than her agent, but again, has a far higher status reward.  The heirs of Sam Walton may be rich, but they are widely despised.  Leona Hemsley and Martha Stewart can also tell us much about how society in general does consider how people make their money to be quite important.

Still, I find this to be a fascinating topic for discussion.  And the quote in particular is illuminating.  Perhaps the regulatory scheme for investment which does not regularly court disaster will be significantly less rewarding (although, as Lewitt points out, creating the best, most transparent and “safe” financial market – beating the competition at regulating – would be a significant inducement for potential investors).  In which case, the incentives for talent to go to investment banks, hedge funds, and the like will change.  Which would result in a pattern shift of where talented and ambitious Americans seek to make their careers.  And that is an interesting idea, although not an outcome I think we can actively attempt to realize.