Why John Mack's Suggestion Of Single Global Bank Regulator Would Be A Disaster

Last Updated Sep 30, 2009 2:10 PM EDT

Soon-to-depart Morgan Stanley chief executive John Mack yesterday proposed "an uber-regulator" for the global banking system.

Mack said that he thinks a single global regulator would better handle the potential for another round of systematic risk, and that such an institution would also make sure that the U.S. was competing on a similar playing field with other global banks.

John Mack is somewhat of a legendary figure on Wall Street, having handled Morgan Stanley, one of the world's biggest investment banks, in both the glory times of the 1990's, and in its darkest hours last year.

Given that Mack essentially set up a sort of joint venture with Japanese megabank Mitsubishi UFJ when the going got tough a year ago, his apparent faith in the logic of one global regulator is noteworthy. To some extent, it shows how Mack is beginning to think of Morgan Stanley: not as a purely blue-blooded U.S. firm out to make a mark elsewhere, but rather as a heavily internationally-integrated, fingers-in-all-pies investment and financial service vehicle.

Indeed, it's hard to imagine Mack -- a former Wall Street bond salesman -- making these same assertions prior to Morgan Stanley's Mitsubishi UFJ tie-up.

The Issues With Global Regulators
The concept of a global banking regulator has been bandied about quite a bit since last year's stock market fall-out, though ultimately not to any avail.

That's a good thing: for most banks and consumers in the world, a global regulator would be a disastrous idea.

How, for example, would one regulator be able to effectively keep its eye on dealings in the Chinese A-Share market, at the same time as making sure investment banking activity in Tokyo was operating under precisely the same guidelines as it was in Manhattan?

The answer is that it wouldn't, and that as a result, bankers would run wild with various schemes and products designed purely to jump through what would ultimately be, massively broad-based regulations designed to apply equally to vastly different financing constructs.

On top of that, the suggestion misses the point entirely as to what caused the recent crisis. The mortgage-backed securities fiasco was not a result of a failure of lax macro-based regulatory conditions, it was because individual state regulatory bodies in the U.S. failed to do their job and make sure that people were not being overly-aggressively targeted by regional banks and mortgage lenders.

In that sense, it's not more global regulation that we need; it is more regional regulatory autonomy.

  • Daniel Harrison

    Daniel M. Harrison is a business journalist who has written for publications such as The Wall Street Journal, Dow Jones Newswires, and Forbes.com.

    In 2007, Harrison initiated Asian market coverage for TheStreet.com, reporting from New York and Hong Kong. He also served for a while as Opening Bell Editor at the financial blog Dealbreaker.com. Harrison is the publisher, editor and writer of The Global Perspective, and you can follow him on Twitter at Twitter.com/bizjourno.