A break point in tennis is a chance to change the direction of a match. The structure of the game naturally lends an advantage to the serving player, and a break point is a pivotal opportunity for the receiving player to break a pattern of serving player victories.
In the recent Wimbledon men’s final that pitted the once unbeatable Roger Federer against Andy Murray, Britain’s best chance at winning a major tennis tournament since 1936, it took a number of break points for Federer to tip the match in his favor. Despite letting five break points slip away, Federer managed to convert a sixth opportunity into a victory, leading to a decisive shift in the direction of the game and eventually the Wimbledon championship.
The relationship between the financial services industry and its regulators, as well as the broader economy, does not necessarily need to be an adversarial one of direct conflict and competition. There was a time, as remarkable as it may seem, when banks did what they were supposed to do – provide access to credit, facilitate transactions, and put private savings into productive use – without plunging the global financial system and economy into a devastating crisis. Today, instability has become the norm and nine-figure losses barely seem to make the third page of the business section.
In the aftermath of the financial crisis, there was an opportunity to learn from past mistakes, hold banks accountable, and realign the world of finance with the rest of the economy and the public good. It seemed like the perfect break point for regulators and politicians, backed by the justified fury of a swindled public. These ostensible defenders of the public interest should have won the match and changed the nature of the game right then and there. But they did not.
Then, miraculously, another break point was served in the form of a rogue trader at Société Générale. Then another with Bernie Madoff. Then another with a rogue trader at UBS. Then another with MF Global. Then another with the discovery of the $9 billion black hole in JPMorgan’s balance sheet not long after its CEO, Jamie Dimon, dismissed a major set of banking regulations as “contrived.” These should have been easy break points for regulators and politicians. These moments should have marked a turning point in the way the financial system operated. But each time, regulators and politicians – from Capitol Hill and the SEC to Westminster and the FSA – opted for a spectacle of photogenic outrage and a few limited post-hoc fixes while allowing for the continuation of the same pattern of distorted incentives and egregious behavior.
And yet if there is anything that banks are better at than generating outsized profits and paychecks, it is generating more major scandals. The London Interbank Offered Rate underpins a vast portion of the global financial system, and its manipulation directly distorts the complex web of interest rates dependent on it. Moreover, the reputational disintegration of the industry’s gentlemen’s club that set Libor rates further erodes the financial system’s most precious commodity: trust. In this recent Libor scandal, we have what may be another perfect break point for regulators.
The question now is whether regulators and politicians will finally address the underlying structural flaws in the financial system of which the Libor scandal is merely one prominent symptom, making finance economically productive, safe, and boring once again. Or will this be another item to add to the rapidly growing list of lost chances for real change?
Read more in this column Kyle Chan: On Tuesday, A Day For Nation Building