I’d like to share with you a key pair of sentences from the congressional report on MF Global’s collapse, summing up a long investigation led by Louis Freeh:
Corzine, an active trader at the firm, was supposed to be supervised by the company’s chief compliance officer. But the oversight mechanism was put in place to make sure he wasn’t engaged in insider trading or market manipulation — the officer had no control over the “economic rationale” of the trading decisions, the report said.
Right – and let’s suppose the firm’s back office was given oversight of the “rationale” behind firm trades…then what?
Can you imagine – the compliance officer of MF Global, a salaried employee replaceable on seven seconds’ notice – ever trying to overrule a trade being done by the illustrious Jon Corzine, former CEO of Goldman Sachs, former Governor of the State of New Jersey, chartered and card-carrying Master of the Universe, rainmaker extraordinaire?
The compliance officer! Can you imagine that? Can you picture that conversation?
“Jon, we need to talk about some of these trades you’ve got on…”
“Get the fuck out of my office.”
“Okay Jon, sorry.”
End of discussion.
I’ve witnessed it firsthand countless times. It’s no one’s fault – it just is. The kind of guys who end up running brokerage firm compliance depatments are rarely the alpha male in the room, the kind of guys who end up owning or running Wall Street firms definitely are. Period. Testosterone poisoning is almost a prerequisite.
The endless cycle goes something like this:
Owners want to see more profit at the firm.
Compliance officers want to tighten up the activities they’re allowing producers to engage in so as to alleviate regulatory pressure and scrutiny.
Both sides can’t win simultaneously in a competitive business.
Producers will eventually gravitate to firms where their hands are untied. Profits will follow. Owners won’t like that. Career-oriented compliance professionals will stand their ground and sometimes be fired. Or they’ll get creative with disclosures and written supervisory procedure interpretations, thereby keeping their employers happy.
Something or someone will blow up.
Everyone will get serious again.
The cycle starts fresh when the stench of uncaptured money wafts its way into the corner office’s window from elsewhere on The Street.
Repeat ad infinitum, ad nauseum.
I view the entire SRO conceit similarly – self-regulatory organizations for broker-dealers are a good idea in theory until you realize they’re ruled by large firms at the end of the day because that’s where the funding comes from. Yes it’s true that the wirehouse brokerage giants allow the small firms “a seat at the table” so to speak – but in reality this is a bit like a lion pride allowing a handful of carrion birds to alight around the grassy perimeter of a freshly killed carcass they’re dividing up. “Yes, yes, by all means – peck your little beaks into a puddle of blood or two, just mind you stay clear of the real feast.”
Don’t ask me whose “fault” this is. It is not anyone’s fault – this is human nature, laws can’t preclude the formation of eons-old social hierarchies just because we’re wearing two-button suits now and not mammoth skins, they can merely seek to contain them.
The compliance guys are not in control. They never were, As their intra-firm influence ebbs and flows, they are always mindful not to interfere too much with the Swagger that truly rules on The Street.
Now you might be thinking “But isn’t it in the firm’s stakeholders’ best interest to have a strong compliance voice so there aren’t blow-ups and massive fines?” Good thought, have you forgotten that we’re dealing primarily with sociopaths who make a million dollars a month to take risk for a living? You go to the back of the class.
Wall Street’s “Original Sin” – as I see it, it’s fundamental flaw, is the beholden nature of compliance officers to the Big Swinging Dicks who cut their checks. As the tech bloggers say, this is not a bug, it is a feature.