When Brazilian bank holidays meet financial regulation


Rob Dwyer
Published on:

What gated communities can teach us about gaming the system.

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Brazil had three long holiday weekends in a row in April. The middle one found me with my family 75 kilometres outside São Paulo, spending a couple of nights at a house in an exclusive gated community. 

One half of the couple who rent the house is a senior private banker but – before there is any cry of corruption ahead of this year’s Awards for excellence decisions – my invitation had come by the way of his wife to mine: they have been friends since childhood, growing up in the same small town in the interior of the state. 

The complex is impressive. We passed through two large guarded gates to get to the house. Security was tight – or the administration was loose with the paperwork – either way the banker had to drive down to the first gate and vouch for us. We followed him through the complex – large houses sprawled lazily over the hills. All seemed to have a pool and a view to the impressively mountainous horizon. 

Many of the houses had football courts and pretty much all had shiny expensive cars parked on expansive driveways (the rest were empty this weekend).

In short, it was a lovely place and we had a very nice weekend. Tennis was played, BBQ was eaten. The wine and cheese were excellent. And the dark and silence provided sleep that São Paulo just can’t manage – and that was despite sharing our room with a six-month-old baby in a travel cot. 

Increasingly complex financial systems need correspondingly complex rules. Because any grey areas or loopholes will be exploited 

The sheer size of the place – the expanse of land – made it very easy to forget that the sense of security (no need to lock the car) and relaxation was created by deliberate and serious measures, and wasn’t just a rural throwback to simpler, happy times.

Over breakfast by the pool on the Sunday, I articulated my curiosity about the small buildings dotted around the nearby hillsides. They seemed slightly too large, numerous and ill-placed to house utility infrastructure. But they were far too small and basic to be dwellings. And, despite their roughness, they also seemed too new to be ghosts of a past when the inhabitants of the picturesque landscape might have enjoyed the views from abject poverty.

I was right: they were none of these things – I wasn’t even close. They had, in fact, been built by the owners of the complex. They had zero practical use. But their construction had an important financial purpose. 

In creating the complex, the local authority had been obliged to build some linking infrastructure – roads, power and water connections etc. 

To justify these expenses the authority had – reasonably – said the development must have a minimum number of residences. But the process of selling and developing the plots had gone more slowly than expected and the contract stipulated penalties to the owners if the threshold regarding the minimum number of buildings was not met. Hence these small boxes with roofs. 

In other words, the contract had been gamed. There were now the correct numbers of buildings within the condominium’s secured walls. And, clearly, the contract had never said they had to be a certain size. Or that they had to link to the internal road. It’s surprising they had roofs – I wonder if that was the only stipulation – four walls and a roof. There were no doors.

Bad press

The increasing complexity of financial regulation gets a bad press. According to The Economist, the law that set up the US banking system in 1864 ran to 29 pages. The Federal Reserve Act of 1913 went to 32 pages and the Banking Act that transformed American finance after the Wall Street Crash, commonly known as the Glass-Steagall act, was just 37 pages. 

More recently, however, Dodd-Frank was 848 pages long. And that’s not the whole story: Sections 404 and 406 of Dodd Frank were just a couple of pages but were the basis of a 192-page form from the regulatory authorities that hedge funds (and others) were obliged to complete. The same Economist article estimated the cost of filling out the form was between $100,000 and $150,000 (just the first year – costs could drop by $40,000 for subsequent years).

Clearly this is not good. But increasingly complex financial systems need correspondingly complex rules. Because any grey areas or loopholes will be exploited. The era of applying the spirit of the law has long, long gone. Any opportunity for exploitation will be aggressively taken. And so the pages grow and grow. And there is nothing to be done: as long as men and women take egregious advantage – and they will – regulators need to be as prescriptive as possible. 

My tranquil, rural Sunday breakfast was an unlikely source of contemplation about financial regulation. 

Perhaps it was a shame too that I was having these thoughts in Brazil rather than, say, the south of France, because I’m pretty sure there must be some French regulation that bans such work-related thoughts from impinging on an otherwise relaxing bank holiday weekend.