Don’t Let the Door Hit You on the Way Out, Barney

Retiring Congressman Barney Frank, the Frank of Frankendodd, felt compelled to share some parting wisdom on whether in the aftermath of MF Global it was appropriate for the CME to exercise self-regulatory powers:

“I have no doubt about the CME’s integrity, but nobody should be in the position of having a dual role,” Rep. Frank said. “We should make sure [a conflict of interest] doesn’t arise, that the temptation isn’t there, that people are not unconsciously influenced

. . . .

Rep. Frank pointed to the separation of the Nasdaq Stock Market, now owned by Nasdaq OMX Group Inc., from the National Association of Securities Dealers.

That process began in 2000 and saw the NASD become a full-time regulatory body now known as the Financial Industry Regulatory Authority, or Finra. Part of the rationale of that move was to separate the regulatory function from a for-profit exchange operation.

“I think it would be better if they did what NASD did,” Rep. Frank said.

He said that.  He really did.  He held up Finra–the Finra that couldn’t find Madoff and Stanford with a map and both hands–as the model to emulate.  Seriously.

Of course the Finra (or government regulation) models are superior because the people who work for them are saintly, and never subject to temptation.  They are never subconsciously influenced.  They are Spock-like creatures, incapable of being captured, influenced, or duped.

And they have the best information and the strongest incentives.

Sure they do.

As I said in my weekend post, perfection is not an option here.  A serious analysis of incentives and information is required.  And of course, as I said in that post, Barney Frank doesn’t provide any serious analysis.  His is the epitome of Beltway superficiality: he invokes “conflict of interest” as if that is the only relevant consideration, and cites some example that is ridiculous on its face.

And he doesn’t get called on it.

Would somebody please–please–ask the man a serious question in response to such bleatings?  Would somebody please  challenge him on the Finra lunacy?

* Because doors are expensive.  Note: click on the link only if you have a strong stomach.

About Craig Pirrong 223 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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