Friday, 6 February 2009

Poll Results: Readers Say Bank Regulation in Latin America is Weak. What to Do to Resolve That Problem?

Chris Cox, the infamous head of the SEC who failed to ask himself
why people in the markets were making so much money with
some opaque instruments called collateralised debt obligations. He is one of the many we
should blame for the mess that we are dealing with these days.


I don't know the solutions to this problem. All I can say is that, out of 11 people who took part in our poll this week, six said that bank regulation in the region is deficient. There are several examples to mention, evidence is ample: the pyramids scandal in Colombia that has reached unimaginable proportions (the only way that this infamous activity was stopped was when one of the crooks involved in one of those companies accused the children of President Alvaro Uribe of doing business with his firm. The president should have slapped his children in front of TV cameras first.) The derivatives scandal in Mexico and Brazil indicated that the creation of financial products and the development of certain specialised markets are both outpacing the imposition of better and more effective regulatory controls, that accounting needs to be overhauled quickly, that corporate governance remains very incipient and is short of becoming an effective protection tool for minority shareholders.

We are moving towards an era of more stringent
regulation on the financial industry. Let's make sure we don't morph the teachings of the regulatory mistakes in the U.S. and other developed economies into an excuse for witch-hunting of financial institutions, or a reason for politicians to extract more rents from banks. Banks that fail to do their job properly should be let go down, so long as their bankruptcy doesn't hamper confidence in the system. It is urgent that governments begin to invest more in training financial regulators to avoid future Madoffs, pyramid schemes, Ponzi schemes, misuse of government bailout money, etc. The guy in the photo (right) is Harvey Pitt, the other infamous SEC chief who also was to blame for the poor oversight of the Enrons and the WorldComs and the Tycos that starred a spree of scandals in 2001 due to accounting malpractices. Pitt is the type of regulators that the media and investor groups ought to scrutinise since the very first day of their nominations. In general the press failed for its poor scrutiny of these people. Pitt was a former executive of one of the Big Five accounting firms ... he didn't want to deal with conflicts of interest faced by these forms in their commercial relations with companies that were inflating their books to win the favour of markets. Where is Pitt now? He is probably in Florida, drinking Cuba Libres ... libre because he was never sued nor tried for his negligence as SEC head.

Finally, one of the lessons that this poll brings, in our view, is the need that financial industry groups, the government and independent consumer watchdog agencies spend more of their time teaching the small investor about their rights, the pros and cons of financial regulation and how they can participate in the oversight process. The more we get investors engaged in overseeing actors in the system, the quicker signals of systemic problems will arise.

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