What to Make of Mack's 'Love' of Regulation

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John Mack, the Morgan Stanley chief executive who'll become non-executive chairman six weeks from now, has created something of a stir by saying he loves being under Federal Reserve oversight.

"We have probably 15 to 20 Fed regulators in our building 24 hours a day," Mack said Wednesday during a panel discussion hosted by Bloomberg News and Vanity Fair. "They test our models. They question everything we do. I've never been regulated like that before...." And then, the stunner: "I love it."

That drew a frown from at least one influential banking analyst. Meredith Whitney, chief executive of Meredith Whitney Advisory Group, likened Mack's willingness to "surrender control to another body" to admitting his firm lacked its own "compass" on certain key issues. Regardless how you're regulated, "Your resposibility as a steward of shareholder capital is to abide by norms of business," Whitney said in a Bloomberg TV interview.

From a career standpoint, our takeaways are somewhat different:

Firm Won't Ditch Bank Status

It's clear Morgan Stanley won't be looking to revert to a standalone investment bank any time soon. A couple months ago there were rumors (since denied) that Goldman Sachs was planning an exit strategy from its new legal status as a regulated bank holding company.

Status Boost For Regulatory Work

Mack's remarks are an obvious vote of confidence in the Fed and regulators in general. His sentiment certainly undermines the traditional attitude that Fed overseers (along with other government regulators) understand neither markets nor models on the level Wall Street participants do. At the margin this reinforces a belief widely voiced early this year, perhaps less so lately: that a stint as a regulator no longer darkens a private-sector banking resume, but brightens it.

No Cheer For In-House Risk Team

Conversely, Mack's comments could be seen as an indirect slap at Morgan Stanley's own risk management staff. Monitoring procedures, testing models and asking questions inside the firm was supposed to be their job. (Then again, there's a raging debate over whether risk managers at Morgan Stanley and elsewhere missed the ball or were tackled by their own executives when they sought to carry it against revenue-producing departments.)

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