Over the last few months, I have read with increasing levels of disbelief the amount of criticism levied by the international press on the “mishandling” of the Abraaj affair by the regulatory authorities. In a year where it has almost been fashionable to criticise Dubai for everything, this “failure” of oversight was another reason why investors were supposedly losing their confidence in the emirate.
In a broader sense, this brings into question the nature of the criticism itself, both by journalists, as well as by financial commentators into sharp focus.
Regulation of markets will never guarantee an absence of failure. All you have to do is to look at the most regulated market in the world to ascertain the veracity of that statement. From the savings and loans (S&L) failure in the mid 1980s, to Enron and WorldCom in the late 1990s, to Madoff, and subsequently the sub-prime housing fiasco, Wall Street has seen an acceleration of regulatory failures over the last three decades, even as the underlying framework of regulation has become increasingly sophisticated.
Yet there has been little criticism or parallel commentary about investors “losing confidence” in New York. Why is this? Well for one, its clear that the data speaks otherwise.
Even as these regulatory failures have occurred, volumes have continued to rise steadily. For another, the bias inherent in the nature of the commentary becomes self-evident very early on in the narrative.
Commentators may well be addicted to the outrage of these failures that inflict economic damage. But beyond this superficial understanding, it is unclear that they have any insight as to why the failure took place or even the slightest idea of how to come up with a remedy.
But there are varying degrees of failures, says the protester in the room.
This is true but again once we look into specifics, it is astounding as to some of the failures that western regulators have gotten away without much criticism. From simple Ponzi schemes to ratings agencies, there are multiple occasions where in hindsight it was apparent that there was no oversight going on at all.
It is at this point that we arrive at the crux of the issue: all failures are fairly obvious to detect in hindsight. The reality is that we live in a world with dizzying financial innovation. Moreover, the rate at which the innovation is taking place is increasing, making the role of any regulator unenviable to the say the least.
Commentators do not appreciate the time and energy required to monitor, and continuously update a framework that at its base is constructed to minimise the probability of financial failure due to regulatory lapse. When these failures do occur, the automatic conclusion that investors are losing faith is patently ludicrous.
Any financial loss leads to a corresponding loss in confidence — a subduing of animal spirits in Keynes’ lexicon. But this does not translate into a loss in confidence of the city or the country.
Irresponsible commentary by supposedly respectable publications is part of the reason why the decline of trust in the published word is now so extreme. Now, more than ever, what is needed is an injection of some humility into the public level of discourse by these commentators, especially if the endeavour is to capture some level of “truth” rather than indulge in scoring of points where the only outcome are fleeting “sound bytes”.
Can the level of regulation be improved? Yes but that is true of any market. Will any regulation obviate financial failures? No.
It is about time that any discussion on this issue be a nuanced one, rather than filled with hyperbole. That will not restore any faith in the ability of expert commentary. It will only diminish it.
Nasser Malalla Ghanem is Senior Partner at NM Associates, which has a joint venture with GCP.