Why regulation fails

An article reported by AP June 17, 2009 says in part:

Obama's sweeping change of business regulation also embraces new powers for the Federal Reserve and new rules that would reach into currently unregulated regions of the financial markets. An 85-page draft details an effort to change a regime that Obama's economic team maintained had become too porous for the innovations and intricacies of the today's financial markets.

This of course is not the first attempt to close up loopholes in the regulatory structure. Sarbanes-Oxley was supposed to improve reporting on corporate governance and prevent disasters like Enron and MCC. Before that many other regulations were published to deal with other loopholes.

But people are resourceful. Whenever a strategy that makes money for its practitioners is prohibited by regulation, people put their lawyers to work to find workarounds, or entirely new strategies. Over time the regulatory structure begins to look like Swiss cheese, because it’s impossible to anticipate and evaluate every strategy an innovative investor or his lawyer will devise. Some of the strategies of course are perfectly reasonable and perhaps even benefit society. Legislators and regulators don’t always make that distinction.

So what’s the solution? I argue for minimal government regulation and lots of transparency in the conduct of business affairs. The transparency ought not to be achieved by government regulation however, or we will end up with another expensive nightmare like Sarbanes Oxley. Transparency can be best assured by the most basic of laws, trade associations, and customer due diligence. With less regulation customers will realize enough additional profit to more than make up for the occasional shyster that slips past law, trade association policies, the Better Business Bureau and customer due diligence.

Reflections on the firing of Rick Wagoner

I worked for GM during most of Rick Wagoner’s tenure as President/CEO and chairman of GM.
On balance I believe Rick was a good chairman. He reputedly got GM’s management into the computer age by requiring managers to take courses in computer literacy, and he pushed for GM to develop its internal and external web presence.

He certainly had his share of mistakes. The abortive deal with Fiat comes to mind. GM purchased a 15 or 20 percent equity stake in Fiat, which was perhaps defensible. But the contract also required GM to buy the remainder of Fiat if the management of Fiat decided to sell out. They did and GM had to pay several billion dollars to get out of that obligation. Perhaps that infusion of cash has made Fiat healthy enough to be able to contemplate an alliance with Chrysler.

On another occasion, before he was chairman, Wagoner orchestrated one of GM’s many reorganizations. This reorganization had people all over the corporation not knowing who they should be talking to in order to get things done. In the midst of all the confusion Wagoner said, “If we didn’t get this one right, we’ll do another one tomorrow.” That of course was the exact opposite of what was needed. Like many GM managers Wagoner seemed to think that you could change how something functioned by renaming it.

But at least he didn’t get caught in any major snafus like Roger Smith’s BOC/CPC reorganization which did away with Fisher Body – the only organization in GM responsible for maintaining standards for making dies.

Whether or not Wagoner was an able chairman, it must be asked whether the Obama administration made a wise choice in asking him to step down. It seems incredible that a government task force, after few months of study, can make such a decision. Other corporations should look at this example carefully before accepting loans from the government