Atlas Shrugged – The (Unintended) Impact of Financial Regulation: Part 2

Continuing on the theme of the unintended consequences from the new bank regulations we come to the recent, and increasing, exodus of senior players from the industry. It started with Mike Cavanaugh, the heir apparent to Jamie Dimon, (who is now recovering from throat cancer) leaving for a job in private equity. His reason? He couldn’t see his future in such a regulated industry. This was quickly followed by a large group of the senior ex-Lehman Barclays executives leaving. Same reasons. Now hardly a week goes by without another announcement of a senior banking executive leaving for a hedge fund, private equity or striking out to set up their own boutique investment advisory firm.

It’s not just that the regulation makes it harder to get paid like the old days (not to say that this isn’t a big reason) but it is also harder to get things done, be innovative, etc. Lower pay and spending the majority of your time on regulatory matters is leading senior executives to realize that life is too short for this kind of stuff.

The lack of upside isn’t the only reason folks are hitting the road. There is the matter of increasing downside. Who’s going to stick around until the uproar against “too big to jail” has the government pressing criminal charges against bankers? Even the lesser charges of violating new complex regulations holds little appeal. Hedge funds and private equity offer a less regulated environment with the opportunity for much more exciting and well paying work.

So why should we care about this? This recent, and growing, senior talent drain could have a longer-term impact on the business. Here’s how I think things could play out.

There will be increasing issues with succession plans at major banks. Cavanaugh leaving JP Morgan is the best example of this growing problem. There’ll be more. Shareholders will pick up on this before the government.

Next there is the continued dilution of bench strength. As we work our way down the food chain we see only the best are leaving (The people we want to leave never quit). Attracting fresh talent will also become problematic. This leaves us with a shallower gene pool from which to choose the next senior leaders of the banking industry.

The end result will be fewer experienced senior executives (i.e. less grown-ups) for the next crisis. The impact of this can’t be over emphasized. Seasoned industry executives were critical in navigating the 2008 crisis and all crises dating back to John Pierpont Morgan and the Panic of 1907. Legislating away the next generation of Dimons, Blankfeins et al could tip the balance in the next crisis in a very bad way.

Risk comes in many flavors and driving out talent creates more risk in the banking industry. People react to incentives and government regulation of the banks is creating the incentive for the best and the brightest to leave the industry for better opportunities. Where did all those bankers go anyway?

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