I am probably going to get myself in a heap of trouble with this one, but I am responding to a reader’s request. I left a comment on another blog and have been asked to elaborate on it.
Yesterday, I featured and commented upon a post by Willem Buiter, in which he ‘fessed up that, contrary to usual form, he didn’t have any great ideas for what to do to reform the financial sector once the crisis had passed. In particular, he despaired of being able to find regulators up to the task:
If regulation is to be effective, it may have to be hands-on and quite intrusive, if only for the regulator to acquire the information (s)he requires to make an informed judgement.
Effective supervision runs into some rather impenetrable obstacles.
First, a $5 million dollar a year trader will run rings around a $150,000 a year regulator.
Second, regulators involved in intrusive and hands-on regulation are virtually guaranteed to be captured by the industry they are meant to be regulating and supervising. This regulatory capture need not take the form of unethical, corrupt or venal behaviour by the regulators or members of the private financial sector. It could instead be an example of what I have called cognitive regulatory capture, where the regulator absorbs the culture, norms, hopes, fears and world-view of those whom he regulates. We cannot just appoint ethical Vestal Virgins to be regulators, regulators who start out pure and stay pure despite their daily associations with people who don’t instinctively play by the rules of the House of the Vestals.
As an aside, I’m not certain Buiter’s plutocratic assumption that pay scales equal ability to be persuasive. Lowly Nick Leeson, who blew up Barings, and Jerome Kerviel of SocGen did a great job of snookering handsomely-compensated higher ups. I imagine a lot of regulatory work would be with admin and back office types, with trading desk heads hauled on the carpet only to explain anomalies. And those explanations might be cross-checked with risk managers, which means that clever chatter would still need to comport with observable facts.
By way of analogy, a former district attorney told me that FBI detectives are not the brightest bulbs, but they often get their man by virtue of tenacity. I suspect with a regulator that belief in one’s mandate and doggedness can do a lot to level what might otherwise appear to be a very uneven playing field.
But nevertheless accepting Buiter’s observations as having some validity, I commented:
The issues you raise regarding how to attract and retain individuals who can stand up to traders and executives and avoid absorbing their charges’ mindset seems insurmountable, but let me offer a partial solution.
Women who’ve been in the industry.
I hate bringing up gender (the stereotyping is pervasive) but women have much lower odds of making it to the top and getting the same comp for their work as the boys and they are acutely aware of it. Many of the women I know who are in or have been in the industry don’t buy into the culture because they are ever and always outsiders.
Reports from boards in the US and Australia say that women directors are far more inclined to do their homework and ask tough questions than men are. Boards are as clubby as you get. If women aren’t cowed in those settings, that suggests they might also stand their ground in regulatory roles (the horrific example of Sheila Bair notwithstanding).
Women who’ve performed well in the City or the Street often find it impossible to work out part-time positions when they want to have children, except in those rare admin jobs that require substantive knowledge. You can get good women on the cheap with well-designed mommie track roles. Regulators should sit up and take notice.
Let me digress a bit. I am loath to single out women merely because I routinely read dumb generalizations in the business press about how women managers are more affiliative, more nurturing.
These stereotypes are galling as the Larry Summers “women are no good at math” because when you are talking about groups as large as men and women, the variations within each group are going to be far larger than the variations between groups. And since a comparatively small sub-set winds up going into Wall Street jobs, serious corporate roles, or scientific research, you can reasonably expect to find a sample that is quite different from the norm (even if we assume the norm is a product of genetics rather than culture).
Now admittedly, my own sample by nature is pretty skewed too, but I haven’t met a single woman manager or executive I’d call nurturing. I’ve met some who are highly competent and polished, some who are control freaks, some who are completely disorganized and terrible to their subordinates, but are so good with clients it doesn’t matter how much havoc they created internally. And I’ve met a couple, one in M&A, who are as tough as they come. And my impression is that the killer types didn’t adopt that behavior to keep up with the boys; instead, they found an environment where they could give their inner sadist free rein.
So the notion that women might be good candidates for these roles is not based on any romanticization about the fair sex, but in the recognition that (with a very few exceptions who figure out how to overcome considerable odds) they are outsiders who nevertheless would have gotten a good deal of product and industry knowledge. And the difficulty most competitive firms have in creating mommie tracks means that a regulatory job, which would keep them current and give them a lot of contacts, could look very attractive to women during their childrearing years.
As the reader who urged me to elaborate observed, “Think of the FSA being run by a British equivalent of Tanta :).”