The regulator

17th July 2012

by Ken Eisold 

Too Close?  Not Close Enough?

An investigation into why federal regulator's failed to detect the dangerous trading practices at JPMorgan Chase reveals a dilemma that has not gotten enough attention.  The examiners have to get close to the banks they regulate or else they won't understand what they are doing or why.  On the other hand, if they get too close, they will inevitably get sucked into identifying with them.  If that happens, they can either fail to see the danger or they will discount it.

According to The New York Times, the New York Federal Reserve Bank "in mid-2011 replaced virtually all of its roughly 40 examiners at JPMorgan Chase to bolster the team's expertise and prevent regulators from forming cozy ties with executives.

"But", the Times went on,  "those changes left the New York Fed's front-line examiners without deep knowledge of JPMorgan's operations for a brief yet critical time."  Enough time, apparently, for traders at the bank to lose at least five billion dollars. (See, "Regulators' Shake-Up Seen as Missed Bid to Police JPMorgan.")

The dilemma is familiar to virtually all professionals.  As "participant-observers" we become part of what we need to understand, while trying to maintain the detachment essential to seeing clearly.  Certainly as a psychologist I feel it all the time.  I have to get close to my clients to understand them and to empathize with the meaning and motives behind their actions.  At the same time I have to maintain sufficient objectivity to see the dangers in what they do and feel free to speak up about them.

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