Regulatory Arbitrage

[strad]

Definition of 'Regulatory Arbitrage'
A practice whereby firms capitalize on loopholes in regulatory systems in order to circumvent unfavorable regulation. Arbitrage opportunities may be accomplished by a variety of tactics, including restructuring transactions, financial engineering and geographic relocation. Regulatory arbitrage is difficult to prevent entirely, but its prevalence can be limited by closing the most obvious loopholes and thus increasing the costs associated of circumventing the regulation.

Regulatory Arbitrage is a term that came out of the fancy footwork finacial games that led to the troubles we're all in these days.
It sums up what has gotten my goat for many years about F1. For some time now we have had teams engaging in regulatory arbitrage.
They people on hire for whom their whole job is to engage in regulatory arbitrage. That's how in a throwback to the Clinton era we have arguements and discussions over what constitutes a hole.
And once we do, we have Ferrari figuring out that if they cut a 1/64 inch slot to the edge, well then it's not a hole and we can get away with what has been banned,,, so we have to make another rule which the regulatory arbitragiers (is that a word?) then set to work finding a loophole in.
To me it's crazy and to dance that close to the edge in a desire to do what's banned seems immoral. And no that's not aimed at Ferrari,,they all do it.

[Pup]

One of the problems is that the rules are simply too complex. The greater the complexity, the more opportunity for loopholes or 'creative interpretation'. Simplify the formula and you limit the chance for interpretation.

Of course the other problem is inconsistent rulings on the rules we do have, inconsistent policing of those rules, and inconsistent/nonexistent punishments for breaking them. The teams are encouraged to race a borderline illegal design because they know that the chance of them getting caught with it, then having it declared illegal, and then having their race result taken away, is slim to none.

And I also think this has led to the insidious TC, or 'technically correct' culture on pit lane that extends beyond the rule book. Like Vettel's 'technically-I-didn't-say-conspiracy' excuse for his safety car rant instead of just saying 'sorry, I was mad and said something stupid'. Of course, we deal with that culture among fans here every week, so nothing new, I suppose.

[bhall]

I think it's a bit unfair to compare Formula One-style circumvention of the rules with that which is found on Wall Street. F1 is but a sporting competition where teams who don't seek a competitive edge will quickly find themselves in an uncompetitive position. However, that's it. It doesn't go any further.

Wall Street-style skirting of the rules, on the other hand, brings down economies, and, as we've seen lately, it can happen on a global scale. People lose their jobs, their savings, sometimes even their homes because of the insatiable greed that exists within the contemporary, "me-first" financial sector.

I don't have any problems at all with the former; it's racing. And even a simplification of the rules will eventually lead to clever interpretations once those rules have been exhaustively developed. There's nothing you can do about that absent a major rules overhaul every four of five years.

Whereas I'm convinced Wall Street needs rules so strict that a banker can't go to the bathroom without notarized permission from the SEC. If you give Goldman Sachs an inch, they'll take $100 billion. So, you can't give them anything.

[strad]

If you give Goldman Sachs an inch, they'll take $100 billion. So, you can't give them anything.

Boy..I couold say that about Ferarri...McLaren..Brabham.
bhallg2k :How you think it's any different? I don't understand?
The idea is to find a way to cheat without being called a cheater. Same goal whether it's to find a way around a finacial rule or a F1 technical regulation

[bhall]

Yes, you could easily say the same about many teams and companies. But, the difference between a clever interpretation of the rules in racing and one on Wall Street is that my tax dollars didn't have to bail out Red Bull when the holes they put on the floor of their car were deemed illegal, and, as far as I know, no one lost a job because of it.

[strad]

Don't you see what you just said?
You just said that what Wall Street did was find a "clever interpretation " of the rules.
Neither in F1 or Wall Street is it just a clever interpretation of the rules. In both cases it's gfinding ways to circumvent the rules and I find it dis-tasteful,dare I say immoral, in both cases.
In both cases the rules and their intent are clear and to do otherwise is cheating. On Wall Street it can cost you money..In F1 costs your soul, your morality. And the heck of it is,,it doesn't even cost them any sleep.

[bhall]

Well, it should be said that a great deal of Wall Street's problematic behavior is just outright illegal, and it's enabled by a web of safe havens around the world and inconsistent regulations at home that are enforced by an agency with fewer than 4,000 people who operate with a yearly budget somewhere around $1.5 billion. The NYSE and NASDAQ alone each represent more than $20 trillion in market capitalization and facilitate more than $200 billion in stock trades every day, and that's to say nothing of the "ordinary" business deals that have nothing to do with the market.

Frankly, I'm surprised the relative few who do manage to get caught with their hands in the wrong baskets get caught at all.

"Wall Street," in its various permutations around the world, rules over all that we see and all that we do. It is what it is, and that's why I think comparisons to Formula One rule-stretching are simply unfair. They don't exist within the same metaphorical galaxy, much less the same ballpark.

Each team is scrutinized in F1. Beyond that, even the most clever of F1 rules interpretations are ultimately fair, because each team is free to avail itself of them once they've been exposed. For example, the legality slots on Ferrari's floor holes, a concept first seen on the exhaust apertures of the F10, have been copied by other teams. Caterham's exhaust is a virtual carbon-copy of the F10.

That's F1. That's the way it's always been.

But, I'm curious; why the apparent change of heart? I don't mean to cast aspersions or to take you to task for anything. So, please don't take it that way. I'd genuinely like to know what changed from last week when you left the following comment in the F2012 thread.

I love the way Ferrari accomplish the same thing as Red Bulls hole by using three louvers in the floor ahead of the rear wheel but legal because they cut this tiny little slot.The way all these guys can create and find loopholes never ceases to amaze me.
It's not holes, it's the design of the floor. Good work guys.

[Websta]

I personally love the loop holes that some of the teams find and manage to exploit

[strad]

I love the way Ferrari accomplish the same thing as Red Bulls hole by using three louvers in the floor ahead of the rear wheel but legal because they cut this tiny little slot.The way all these guys can create and find loopholes never ceases to amaze me.
It's not holes, it's the design of the floor. Good work guys.

Sarcasm boss...sarcasm...I don't love it...I find it repugnant
Finding a way to do an end run around the rules is not clever..it's finding ways to go outside the spirit of the rules.
They KNOW what they rules are there for and what the spirit of the rule is,,but they say I don't care what the rule means, because you used this word and I can torture the meaning of that word enough to create a loophole.

[SeijaKessen]

Don't you see what you just said?
You just said that what Wall Street did was find a "clever interpretation " of the rules.
Neither in F1 or Wall Street is it just a clever interpretation of the rules. In both cases it's gfinding ways to circumvent the rules and I find it dis-tasteful,dare I say immoral, in both cases.
In both cases the rules and their intent are clear and to do otherwise is cheating. On Wall Street it can cost you money..In F1 costs your soul, your morality. And the heck of it is,,it doesn't even cost them any sleep.

I would argue the main difference between Wall Street and F1, is that when Wall Street either exploits rules ---or lobbies to have them changed through laws to give it the guise of being on the up-and-up--- people get hurt in many ways. It may seem similar; skirting or finding of loopholes in rules. However when the larger picture is considered, it's apples and oranges strad.

Immoral is ruining people's lives through faulty financial products. The effects of what Wall Street has, and still continue to do, are felt everywhere.

Ferrari finding a creative interpretation of the rules doesn't.

It's always been about the pushing of the rule book in F1. I

Even the man many idolize, Colin Chapman, was notorious for bending/exploiting the rules to the absolute limit. Most of us celebrate what his engineering achievements were. Even though the things Chapman did may seem trivial in 2012, in the context of the time period, they were revolutionary...and they always explored the boundaries of what was allowed in those days.

[Cold Fussion]

I find it very difficult to believe you can truly believe that when a Formula 1 team circumvents the rules it's the same as when Wall street circumvents the rules.

[strad]

I think it doesn't matter who is hurt.
Immorality is immorality.
How can you call it apples and oranges?
It's exactly the same just different arenas.
Odd that you have such a sliding scale of morality.
So let's see...it matters who you steal from? If it's someone you don't like...that's ok?
Reminds me of some kids around here, that were upset that their friends who got caught were in big trouble for breaking into a pawn shop. Their rational?
It was a pawn shop and no one got hurt.
Look if your paid to find an end run around the rules it doesn't matter if it's Wall Street..the NFL..UFEA..golf...auto racing..political campaigning..It's all the same...Just the arena is different and it's just as immoral.
But I didn't expect, though I guess I should have, for this to be an arguement.

[bhall]

To be fair, I don't think you're seeing a sliding scale of morality; you're seeing a disagreement on the very definition of morality.

When, for example, Ferrari interprets the regulation that requires a single exhaust opening of X size to mean they can partially cover their single exhaust opening of X size with louver-like extensions, that's perfectly legal. It's a single opening of the correct size that just looks weird to be a single opening, because it's partially covered with louver-like extensions.

That's the nature of racing. It always has been, and it always will be.

Talk to Renault Sport about the spirit of the rules. They followed just that after the engine freeze and then lost about two or three years of competitiveness, because other teams followed the rules themselves.

If you don't like the nature of competition now when explicitly-worded rules are given various interpretations, your head would probably explode if teams were left to interpret an abstract concept like the "spirit" of the rules. Without exception, every race outcome would be decided by the FIA's International Court of Appeal, and the team with the most convincing lawyers would win.

That's why the rules are stated in the terms you see within the regulations. You can't ban double-diffusers by saying, "Double-diffusers are hereby prohibited." You have to dictate that bodywork lying in the area normally used by a double-diffuser be instead used in such a way as to try to make it impossible to implement a double-diffuser. Otherwise, teams would debate the meaning of the term "double-diffuser."

"No, Charlie. That's our new engine-fart extraction device. Fernando was complaining of the smell."

All of this is light-years away from what happens on Wall Street, which, due to the fact that I suspect we don't share the same political views, I'm going leave alone at this point. Suffices to say, I don't put Adrian Newey and Bernie Madoff in anywhere near the same category.

However, Bernie Madoff and Bernie Ecclestone...

[strad]

Just to take the holes er louvers that represent the exact thing that was banned for example...Have you actually seen them?
http://www.speedtv.com//video/formula-1 ... 01/1#_vtop
I find it repugnat..you don't.
nuff said.

[mx_tifoso]

If this is your opinion about what goes on in F1, I can't understand how you've been a fan for so long. This is what it is, and I fully support it. You try to get the most out of what you have, which means going to any lengths possible to make the car faster and more efficient.

Louvres, gills, engine "reliability" upgrades, etc... bring it on.