The Woes of Regulation

54 | By Shah Gilani

Like most people, I hate to admit it when I’m wrong. But today, I admit it.

I have been wrong about regulation. All wrong. I’ve been calling for more, better regulations to stem the fraud and wicked ways of errant Wall Streeters.

But it’s come to light, in a sad and almost tragic way, that this whole regulation thing is wrong from the get-go.

After all, it ruined one poor man’s near-perfect life. And that’s where I draw the line.

Thanks to a suicide note, penned before (obviously) his attempted mea culpa exit stage left, which thankfully failed, we know why poor Russell Wasendorf Sr. was so distraught.

Yeah, that Russell Wasendorf Sr., the guy who founded and was CEO of failed brokerage house Peregrine Financial, also known as PFGBest.

Well, it turns out poor old Russ actually is poor – “poor,” as in he has no more money (still has that jet and a few other little assets, however) – and his firm is being liquidated because of those stupid, useless regulations and those horribly pesky regulators.

According to Russ’ suicide note, for almost 20 years, he ripped off his clients by stealing their money to keep his firm afloat so he could continue to service them, his clients, that is… and the regulators.

Now, that’s what I call service!

You see, the regulators were calling him out on some of those useless regulations that a lot of folks now know, for a fact, are completely useless (thank you, Russ, for your service in that respect).

These regulations were in place to ensure that firms properly tended to their clients’ deposits in their brokerages.

But since the regulations were there to protect the firm’s clients (and Russ was there too, to protect his clients and his business), and the necessary deposits that should have been there to readily count as part of examinations into the firm’s capital, and stupid stuff like that, weren’t there… well, Russ did the only thing he could. He fooled those stupid, onerous regulators by lying to them and saying he had money in drawer number two. In fact, he actually took monies from drawer number one (that one was marked “client money”) to put into drawer number two.

Of course, the regulators – being as adept as they usually are – didn’t really look into drawer number two. Russ actually fabricated a daisy chain mailing scheme to send them a note that said, don’t look in drawer number two, let this note to you idiots be all the proof that you need that what I say is in drawer number two is really in drawer number two.

Of course, there was nothing in drawer number two – except maybe for some real “number two.” And there was nothing in drawer number one, either.

That’s because, according to Russ’ note (you can’t make this stuff up) he had to spend what was in drawer number one (some $200 million clams) on paying fines and maintaining capital to keep the firm open to service his beloved clients, of course.

So, let me say this about that.

I’m wrong. I’m saddened by Russ’ plight and my own stupidity (it must be up there with Russ’) at not understanding that regulations are what’s really stupid.

Without regulations, Peregrine would be an ongoing concern today, Russ would be getting married (officially) and on his way to his honeymoon in his jet (the one paid for out of drawer number one).

So forgive me for my rants on regulation. We need less regulation, or maybe none, so we don’t have to hear about these tragic stories every day.

No… you just can’t make this “number two” up.


54 Responses to The Woes of Regulation

    • CAT says:

      Shah: I agree we do in fact need regulators and regulations, unfortunatley I don’t think you will ever get rid of the Petters, Maddoff;s, and Wasendorf Sr., by adding more regulations. 99% of us will follow the rules to the T, and the rest will figure out a way to circumvent any regulation you put in place. This goes for the inside trades our senators and congressmen are making on a daily basis, getting rich while we the idiot’s continue to pay them.

      • harley weiss says:

        CAT, Don’t you think there should be an attempt though. I still think we need a referee and I agree that goverment isn’t a good one but who else?

  1. Steve says:

    So more (or perhaps better?) regulation would have motivated the inept or lazy regulators to actually do their job?

  2. Larry says:

    Shaw, your tongue is firmly planted in your cheek. You ability to put levity with a sad tale is a sure sign of your own insanity. HA HA

  3. John Gislason says:

    Hmmm….I almost see your point. But are you stating that there was no regulation in place that prohibited using drawer one for Mr. Wasenfdorf”s personal use. Because if there was, what we have is a failure to enforce regulations – not a requirement for more regulation.

    The added regulation reminds me of two kids arguing. The first says ‘If you step over this line I’m going to deck you.’ When the second kid steps over it, the first kid draws a new line and says ‘If you step over THIS line, I’m going to deck you.’

    There have to be rules. Generally, simple, commen sense rules are adequate. But they have to be enforced. Adding new nuances to the rules that aren’t enforced doesn’t solve the problem, It only adds to the cost. (For 20 years the ‘regulators’ passed on the most basic regulation – not stealing customer money. Now I should want more of them?)

    Let’s cut back useless regulations and spend the extra money upgrading the quality of the gatekeepers on the meaningful regulations.

    • keng says:

      EXACTLY! You can’t legislate morality nor ethics. We don’t need more regulation, we need a justice system that swiftly enforces the law and competent auditors (of course they can be fraudsters, too) I generally like Shah’s viewpoint, but he is TOTALLY WRONG here.

  4. Jeff says:

    Seriously, I think that the mindset behind the likes of Russ pervades the financial industry. I’d love to see a research study of the psychology about how these people perceive themselves and thus how they rationalize their greed and horrible ethics. Their sense of outrage and entitlement implies a severe pathology.

    • Ross says:

      I seriously think that this study of psychology should be extended to our beloved political leaders to expose their similar pathological mindset of the financial industry.

    • Geoff says:

      I would check with Monsanto to see if some of their GM to corn has caused the problem. There are so many “idiots” out there trying to lie, cheat and steal their way to prosperity that it surely points to the food chain or water supply. How close is 3 Mile Island to the financial/political hub anyway ?

  5. fallingman says:

    Sarcasm is like seasoning in food. A little bit is great, but you ruin the dish when you get heavy handed.

  6. ray says:

    Shah…I agree with basic regulations, tightly enforced.

    Recently you have been pounding the table for more regulations. This missive leaves me baffled, as I don’t know if it is humorous sarcasm.

    On a prior recent article, I stated that the regulators are completely mentally outclassed and are easily susceptible to corruption.

    The only reason for ever-increasing, onerous regulations is to expand big government – the Unaffordable Care Act proves this.

  7. mike says:

    I still think boundaries need to be established for the largest banks and financial institutions. However, it’s unfortunate the regulators go for the smaller institutions to show they’re doing something. It would be nice if a small fee was paid by small financial companies for representation in Washington. In the end, it’s never a good idea to misrepresent your company.


    Your commentary is very relevant to the issue involving
    Romney’s financial status, specially his past tax returns. He
    is assuring us that these returns will not show any data that
    may question his character and integrity. His reluctance in being transparent has lead to a congressional proposal requiring all candidates for presidency to release at least 5+ years of tax returns. This is how regulations and laws come about. It is usually because someone is always trying to take advantage of the unsuspecting and the less powerful. Regulations and laws are to control the few who may not have a moral compass to control themselves from engaging in harmful behavior that effects others.

    • Terry says:

      Sheila–why don’t we worry less about what Romney has done with his money (clearly he is wealthy) and more about what Obama has done with OUR money. Isn’t that, after all, what’s really important. Romney’s tax return is of no concern of yours. Or mine.

      • Bruce says:

        Terry, you are presuming that Romney’s money was really *his* money. Can we be sure? Our bottom-line concern is that those that run our country have integrity among other attributes. A well-audited tax return may shed some light on that.

      • Steve says:

        Hear, hear Terry! Oh Sheila, you misguided statist. One of the few compelling reasons to vote for Romney is his reluctance to disclose his personal finances to the vultures of public opinion making! If he is determined in his fight to keep his private dealings private just maybe he’ll not approve legislation requiring the rest of us to do the same. Besides, your comment belies your lack of confidence in the government’s ability to perform their regulatory duties anyway. Would not the IRS already have brought charges against Mr. Romney had he engaged in the moral and ethical turpitude of which you fear. Do you not trust them to do their job? And really, the reason so many laws and regulations come about is to gain the system in favor of some politically connected individual or group. In this case particular case one political group is attempting besmirch another to gain a perceived favor but we ALL lose because of the law of UNINTENDED CONSEQUENCES…a consideration Shah appears to minimize here. There are already regulations enough to stop any behavior for which there is a will to enforce.

        • Joni says:

          I love how you guys miss Shah’s dark political humor. Terry and Steve, what do you mean it’s not our business? I don’t appreciate your condescending attitudinal remarks. We don’t vet these fellows nearly enough (in either party) when it comes to running for the highest office of the land. I think you are letting your Republican leanings show. But I digress….and Terry, don’t you mean in line 13,’ “game” the system in favor’……? Like Shah wrote in the prior article, “You can’t fix fraud” and I say you can’t fix Stupid.

      • Jim says:

        Of course, Romney’s tax return is our business. The speculation is that he paid 0 tax some years. I would want to hide that too. Why should anyone earning millions not pay taxes?? Does he have a vested interest in lowering taxes on millionaires? You bet. Does he want to continue to give favored tax treatment to investment managers? You bet. You had better be interested in seeing his tax returns. I and probably you are paying more in taxes to subsidize his low taxes as the government wallows in debt.

    • John Parken says:

      Puh-lease! This is the only thing that the Dems can “politic” on?? Maybe it’s because Obama can’t run on his “so-called” record?? Isn’t it funny that he trashes the “rich”, but who does he hob-nob with at Martha’s Vineyard, Hollywood, etc.? Who does he go to for campaign money?? If I were rich, I’d be telling Obama, “Nobama”!

  9. CE says:

    I agree with Ray, but more emphatically…we do NOT need more regulations. We need regulations that really work. Notwithstanding the intended humor of this piece, apparently there were suitable regulations in place, but the government (as it always does) failed miserably in implementation.

  10. Ben says:

    there are two sayings which come to mind here-“what comes around goes around”, and “God is not mocked:that which a man soweth shall he also reap”. I honestly can’t feel sorry for a man who used chicanery to get rich only to end up penniless in the end-it is the way in which just desserts are served.

  11. Rick says:

    You can have all the regulation in the world around you. First, you have to get the regulators do their job. Second, How do you get them to do their job? More regulation to enforce the other regulations? Don’t you all see this is a culture. You have to have indivduals in place that want to do the right thing. Naive maybe, it use to be like that.

  12. Perry Noblett says:

    Damn those pesky rule and regs. If we didn’t have so many we wouldn’y have so many crooks. It’s all the governments fault, yea that’s it.

  13. Joseph p bell says:

    RAY: they are not only out classed but out manned . Wjhat accountant would want to enter this field ,always on the go . Why not side with the “Gentlemen crooks “

  14. DarioC says:

    Come on Shah, you know the collapse of the financial markets was caused by all those folks who bought houses they couldn’t afford. The wild-a**ed speculation with leveraged financial gambling that the big boys were doing, with little regulatory limits, had nothing to do with the crash.

    We need get rid of all the troublesome restrictions to let the big dogs run, and do something about the peons out there that keep trying to live beyond their means.


  15. MJ says:

    Well I appreciate that bit of heavy handedness though it stung a bit, since I would lean toward regulation. Although I would always assume that regulation was the armour of a white horse. I need to stop believing in Santa too. Yeah thanks for driving home the need for leadership which is not equated to regulation obviously.

  16. DarioC says:

    But seriously, nothing is going to get fixed. Human nature is playing out it’s hand in typical form just like all the empires in the past.

    Here we have a country with huge resources and immense talent in the population, but the shortcomings of self-serving greed and a grossly mutated political system are going to destroy it all.

    It is a sad but interesting performance to watch. Unstoppable Slow-motion train wreck.

    • keng says:

      UNFORTUNATELY, you nailed our condition precisely. Shifting demographics make it inevitable. I’m glad to be be a senior citizen, considering the approaching train wreck….but my poor children and grandchildren……..

  17. JrS says:

    The only result of a regulation is how do I (we) get around it. It is a self propagating scheme! The only one that works is a firing squad. Eliminate apologies. Send em on to the deserved place and let the rest of morality exist as it should.

  18. Blair Doyle says:

    I don’t think more regulations are going to solve anything. The system is corrupt and broken beyond belief, including the so called regulators. I don’t pretend to have all the answers but for starters we could quit bailing out all the “too big to fail” institutions with taxpayer money. Next thing would be to make the regulators answer to us for not doing their jobs. Perhaps some prison time for them along with the bankers would wake someone up? I doubt that will ever happen because I suspect the corruption is deeper than even I can imagine. The revolving door between certain Wall St. firms and Washington is confirmation enough.

    • Lannon says:

      Persistent underfunding of regulatory bodies (ie., SEC) by our do-less-than-nothing Congress just might retard their ability to enforce regulations. You think?

  19. ray says:

    We had a real good regulation….it was named Glass-Steagall, which was rescinded via a number of administrations, last of which was Clinton. Both political parties were involved and in bed with the Banksters.

    In 1998, Citicorp took over Travelers (not allowed per G/S) and changed their name to Citigroup. In 1999, Congress and Clinton eviscerated G/S at the Banksters prodding ($$$$).

    Thus, it all comes back to the political system. Moral rot and greed. Eventually, our country is doomed.

  20. Jay Curtis, author of THE CODE says:

    I guess I should stop praising you because its becoming an embarrassing daily habit of mine, but as a writer (and a lawyer) I admire well written (and humorous) pieces like yours.

    But, my friend, you did leave out one thing. IF the department enforcing the regulations isn’t properly funded, if the regulators hired are all former Wall Street crooks themselves or Wall Street wannabes who look the other way, well, regulations are nearly useless (I say nearly because once in a while a regulator trips over a bump in the rug, hits his head on the desk and that drawer number two is accidentally forced open to reveal that its empty.)

    The anti-regulation Republican congress has managed to underfund enforcement dramatically (see the latest episode of Newsroom on HBO). So expect more crooks to steal more money and pretty much get away with it.

    Punishing white collar crime in this country, like cricket, is a sport that is seldom played ever (if at all) n the US.

    And what these crooks are doing just simply isn’t cricket.

  21. John says:

    Great sense of humor Shah about an increasingly obvious and common phenomenon in the financial world today–the stealing of clients’ money by trading firms. What an indictment of the system and the lack of regulation and the incompetency of the regulators! Thanks for ranting and using effective, poignant sarcasm to make this point.

  22. Craig says:

    Meaningful penalties as well as enforcement. I a $200 MM fine is useless against a $20 BB rip-off. Bring back the ropes and crosses. Make some examples of these execs from TBTFail banks and brokerages. Hang some regulators too. AND some insider-trading politicians for good measure.

  23. EndTheIllusion says:

    Great article.

    Be careful with sarcasm, there are some not so smart people who take it seriously and the wrong message gets across.It has Happened to me.

  24. Tom says:

    A quick search shows that Peregrine had trouble with their own auditors over ten years ago, and fired them – typically a big RED FLAG.

    So here we are now, and one wonders.

    I am not surprised the “government regulators” are either inept or corrupt, but wonder about Perigrine’s own auditors. Were they bluffed too?

    Love your sarcasm Shaw, beautifully stroked.

  25. None of the Above says:

    “As through this world I ramble, I’ve seen lots of funny men. Some rob you with a six-gun, some with a fountain pen.” Woodie Guthrie

    What damage is a fine to a CEO when the fine is paid with corporate money (which rightly belongs to the stockholders)?

  26. Dave says:

    Nice balance in the readers comments here today except for a few political agenda-based responses. Great work Shah, getting people to think a bit. As a retired military officer I can find parallels throughout my career in DoD acquisitions. Plenty of regulations and some adequate, some ridiculous. However, enforcement is more often than not lacking or absent.

  27. Elaine says:

    All the regulations in the world will not suffice if ENFORCEMENT is ignored and politics continues to play a heavy hand in its lack of enforcement. There most definitely should be jail time and much stiffer financial restituion from these thieves. Too much crony capitalism rules this country, and the taxpayer is on the hook for these shenanigans. There is too much “sweeping under the rug” for the well-connected.

  28. Mike says:

    Those of you expressing the thought that this country is “doomed” and dismissive of all the corruption (regardless of where it arises) are disgusting. It’s apparent to me that you’ve probably never done any service at all to your communities, much less this nation. Instead of just constantly being a member of the exploitative bunch, I challenge you to dedicate some area of your lives to serving others somehow. Perhaps then you’d care more about bringing this country out of the moral sewer it’s fallen into and less about the value of your brokerage accounts. If this country falls, it won’t, positively will not matter their value or your net worth.

  29. Alexandra Chapman says:


    Could you do a write up on the HSBC scandal? I think this is even bigger than Barclays/Libor.

    We now have two of the few banks which came through the crisis without needing a bailout, being found guilty of the sorts of criminal behaviour which would make them (for major institutions) “the bank you must not bank with.”

    Surely this will lead to deposits be pulled and banking arrangements terminated ie a bank run.

    What do you think?

  30. Mike L. says:

    I just loved this piece. Thanks for pointing out that regulations are bad for those who rob us blind and the enforcers who are letting it happen. It is a crime. Obama couldn’t have said it better in his interview with I believe CNN. He is hired to be a story teller just like all politicians. They rob us blind and then tell us it is the fault of someone else. When one of the Number 2 heads get caught, they take the easy way out instead of facing up to their crimes. I have no sympathy.

  31. Geoff says:

    Spot on Shah, regulation will never prevent willful and premeditated fraud only a robust legal system that is serious about punishing systemic white collar crime as a crime, rather than an accepted hobby of the Worlds Power Base.

  32. Simon says:

    I’m coming late to this, but what this story really shows is that regulations alone are not enough: they have to be enforced. I still believe in the essential goodness of human nature, and I see regulations as guides to correct behaviour, guide most people have no problems following. They are there to keep those people who do not have a clear ethical sense of their own close to the straight and narrow.
    So yes, we need regulation. Maybe more, maybe just adjusted and “improved”. But unfortunately, if it is not put into effect, if it is not effectively enforced, then we are probably worse off than if there were no regulation. Think of it: most of us think there are regulations in place (the laws have been passed, haven’t they), yet the people who want to flout them are allowed to. The honest majority get worked over good and proper. Now if there were no regulations, we would not expect any protection, we’d be warier and more careful…
    This is NOT an argument in favour of deregulation. It is one in favour of regulations that can effectively be enforced with the resources available.

  33. Tom Vito says:

    Agree with Mike & Ray,Glass Steagall was a simple document that was effective for many years.Bring it back with no additions.

  34. Mark Noeth says:

    Lesson to be learned? This: “Don’t steal! The government hates competition” Actually, “they” deliberately don’t look in drawer #2 because they need a compromised/ broken system so that we can all get down the road to one world currency (now that that Novus Ordo Seclorum is firmly in place). Over which I have no objection.

  35. Gary says:

    Yep, sure enough, we need new regulations. Never mind the fact that we already have so many regulations no one could possibly read them all in a lifetime. But, whenever someone does something like stealing the money of others and/or lying we need a new regulation to prevent that from happening again. Might have been easier just to enforce the existing regulation but nobody could find in in all that mess. Then there’s the problem of going through all that and finding that there are conflicting regulations. We wouldn’t want to try to sort that out would we? It’s easier to keep making new ones. That way, when we want to make regulations that will help you and me but screw everybody else we can do that too. Yep, lets have more regulations, fill up a few more encyclopedic volumes and then hire lawyers to figure out what they all mean. The lawyers will never mislead us.

  36. Guy says:

    This guy is a clever crook who fooled regulators for many, many years. The law belatedly caught him like it catches every other crook. Reagan didn’t get away with secretly selling US military weapons to Iran, and using the proceeds to fund a covert war. NIxon didn’t get away with cheating on his taxes. Agnew didn’t get away with kickbacks for government contracts. Dubya didn’t get away with insider trading. None of them landed behind bars, but the public was well aware of their crooked schemes.

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