All the King’s Horses and All the King’s Men

[Note: Originally published on the TABB Forum: Opinion, 15 August 2012].

Mother Goose’s nursery rhyme about Humpty Dumpty is a silly little ditty told to English-speaking children the world over. It goes this way:

Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall.
All the King’s horses and all the King’s men
Couldn’t put Humpty together again.

It’s not often thought of as a cautionary tale, but in light of the recent news items and bulletins clamoring for the “overhaul of Dodd-Frank” or the wholesale “repeal Dodd-Frank” (an election promise of withering merit), Humpty Dumpty has earned a second look that we can apply to our industry.

All of the King’s horses and men, or in this case, all the laws, regulations, regulators and politicians, failed to fix what was already broken. The fall has happened: our industry has been fundamentally shaken, the global economy is still in a sorry state despite glimmers of hope, and nothing can be done to turn back to clock to make it all run as it did pre-2007.

In speaking to change professionals who are actively buried under Dodd-Frank and forthcoming regulation in Europe, Asia and Australia, there’s a vague hope that maybe this will magically go away. That Dodd-Frank will be sufficiently overhauled or repealed, the regulators will go back to their ineffective hidey-holes, the money flow will be strong and the deal flow bountiful, and that this is just a nightmare we haven’t woken up from.

After the publication of the swap definition rules in the Monday, Aug. 13 Federal Register, I think we must acknowledge the above is a pipe dream. Therefore, instead of playing at becoming compliant with the new rules of doing business and waiting for them to go away, financial institutions can take advantage of the focus and the energy and move their organizations forward in a strategic and decisive manner. I’ll point out the four areas which quickly come to mind.

Cultural Evolution
It’s a painful thing to admit, but culture played a significant role in getting us to today. While it’s reasonable to apply hindsight to the profits-first culture in global finance, it would be specious to pretend that any type of effective change to that culture could have happened then. Also, to be fair, banks should want to be profitable and to reward their employees in alignment with that; they are not utility companies, despite the seeming efforts to turn them into such.

Still, let’s have some plain honest: prior to 2008, there were corners cut. There were circumstances where one blind eye (or two) were used in allowing certain irregularities or ‘fringe practices’ to continue; practices that now would be wholly unacceptable. Our appetite for asking forgiveness after instead of permission first has been significantly reduced. And rightly so.

Therefore, opportunity exists now to keep that appetite reasonably reigned in. While banks and capital markets firms are not utility companies, they do have an outsized impact on the world at large – that needs to be acknowledged not just by codes of conduct and compliance with laws, but with culturally-enforced guiding principles for why and how business is done. It is a shrewd management committee that uses the current environment as a catalyst for implementing widespread and far-reaching cultural evolution.

Getting in front of the regulatory freight train
At one investment bank there was a project that exemplified “getting in front” of the train. The original regulatory requirement was to implement a policy for a specific set of regions. However, the management team decided to implement the policy globally and cross-divisionally because it recognized both the reputational benefit of those controls and the clear eventual end-state that this regulation was headed towards.

Likewise, there are a number of active consultative papers, proposed rules and finalised rules pending compliance from a number of regulatory bodies. The smart approach an institution could take was to think past the next rule or 10, but to consider the larger implications, the general thrust of regulations, and to react or be prepared to react quickly to these “known unknowns.”

Let’s stop feeding the myopic focus on the letter of the law and become involved in the bigger picture.

Partnering with IT
All institutions that operate within the financial arena must give due attention to who does what within its systems, when they do it and how they do it. By “all institutions” I mean more than banks, hedge funds, asset managers and clearinghouses. Include financial technology vendors, market data vendors, ratings agencies, industry groups, and regulatory organizations in that mix. All of these play a part in the mandated improvement of market and industry controls.

There are some organizations where little-to-no attention is given and there are places which double as maximum security penitentiaries. For better or for worse, it’s best to err on the side of a penitentiary. IT security, risk and audit are not the enemy. These functions are there to help protect the reputation of an organization and to protect people within the organization from avoidable mistakes and violations. Don’t short their value; we truly do need them.

Instead, revisit dusty protocols and manual process flows. Become thorough about periodic renewal and review. Get your house in order: there are cost-savings to be gained and reputational capital at stake.

Winning the Mandate
In consulting, there are two end goals: obtaining the customer’s agreement to go forward on an engagement and maintaining the business relationship so that the door stays open for winning additional future business. As an industry, during the pre-crisis heydays, we got a little slack. Business was so easy that it became too easy.

Those times are no longer here, and every firm needs to be back out pounding the pavement to win business. However, the stakes are higher and here’s why:

Public trust in financial institutions is at an all-time low. There are individual citizens, interest groups, politicians calling for actions that would upset or overturn the rule of contract law. The general opinion of mortgage brokers, those who help fulfil the American Dream, as it were, are all corrupt and self-feeding crooks. Unfortunately, nearly once a news cycle, the industry contributes to bringing another “hiccup” to light (Libor, anyone?) that results in new public hearings, head-hanging, hand-wringing, and “apologies.”

Instead of just accepting this as the cost of the crisis, management committees should be motivated to take a look at what can be done. Stop rolling over, playing dead and hoping that the storm that’s passing over won’t bankrupt the firm. Has there been some market contraction? Of course. That doesn’t mean that the opportunities aren’t out there to be found, high and low, if institutions are willing to invest in doing the needful to rebuild trust, to rebuild relationships and to get back to winning mandates instead of just stumbling into them.

Patching It Up As Best We Can
Sweeping regulatory reform is far from over. Mandatory clearing is on the horizon, coupled with the various other hobgoblins such as extraterritoriality, firm size-capping, mandatory capital reserve requirements and anything else you can think of. This is the new world.

So, while we’re understandably still leery of what regulators and governments have in mind for the industry, the time for grieving over past glory days is over. It is time to seize opportunities as they’re put in front of us. Evolve our individual corporate and industry-wide culture, drive regulation and self-police, strategically leverage IT capabilities for internal audit, self-certification, and controls and most importantly: get back to the business of doing business.


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