Posted by on February 27, 2013

I have just finished reading The Secret Race, Inside the Hidden World of the Tour de France: Doping, Cover-Ups, and Winning at all Costs, by Tyler Hamilton and Daniel Coyle. For cycling fans, this is a must read, if only to make you feel better about taking three times as long as the pros to make it up the Alpe d’Huez. But it is also a must read for those who think that financial regulation is the answer. It is a case study in how, in the “arms race” between the regulators and the regulated, the regulators will always be a day late and a dollar short.

Hamilton sets the tone early:

The tests are easy to beat. We’re way, way ahead of the tests. They’ve got their doctors, and we’ve got ours, and ours are better. Better paid, for sure.

Later on, he explains:

That’s how it works. The authorities shut one door, riders open two windows.


It took the drug-testing authorities several years and millions of dollars to develop a test to detect EPO in urine and blood. It took Ferrari (NB: A doctor working with the riders) about five minutes to figure out how to evade it.

Reading this reminded me of nothing so much as my career in banking, where I always used to say that you could tell last year’s tax, accounting or regulatory scheme by looking at this year’s new regulations. And by the time the new regulations were implemented, Wall Street bankers and lawyers, much smarter, better paid and more highly motivated than their adversaries, had already devised the new circumvention.

The thing to remember about cycling is that, compared to the world of financial regulation, the attempted control is super easy. All you are trying to do is stop a small group of people, who are all doing basically the same simple thing and over whom the regulators have almost total control, from engaging in a single activity: doping. You are not talking about multiple industries, with lots of overlapping and a hodge-podge of regulators. Unlike issues in financial regulation, there is no public policy debate on the costs and benefits of anti-doping measures. There is no argument that, if our US athletes are not allowed to dope, they will be at a competitive disadvantage versus the rest of the world. There is no fear that, if doping were suddenly curtailed, then we would be faced with mass layoffs in our pharmaceutical industry or that the manufacturing of dope would simply move offshore. Yet, with all this relative simplicity, Lance Armstrong – and most of the rest of them, because the book makes perfectly clear that Armstrong did the same as everyone else, only better – successfully evaded detection for over 15 years, notwithstanding that he was under suspicion for most of that time, he had dozens of co-conspirators and he wasn’t even that discrete. Why do we think that we are going to be successful with the infinitely more complicated task of financial regulation?

The book makes clear two further aspects of regulatory failure. The first is that the regulator, in this case the Union Cycliste Internationale, is a political organization subject to political pressure. Armstrong was actually “caught” twice in his career, once for the use of cortisone and another time for a suspicious EPO test, but by then Armstrong was “too big to fail”; the positive test results were simply ignored or rationalized. The second point is that the people in the business, the riders, knew exactly what was going on, just like the bankers, accountants and lawyers always do. But in the world of cycling, like in the world of banking, the code of omerta is very strong. Nobody has an incentive to break it and everyone has the ready-made excuse that, in any event, ONCE, Goldman, US Postal, Credit Suisse, etc. are all doing the same thing.

When reading The Secret Race, I was constantly reminded of No One Would Listen, the book about Harry Markopolis’ futile efforts to persuade the SEC to look seriously into Bernie Madoff’s flagrantly obvious Ponzi scheme. After reading this book, it is impossible to avoid the conclusion that the SEC is counter-productive: providing no real oversight itself and yet giving investors a false sense of security when caveat emptor should be their guiding rule.

In my business, we are constantly in the process of writing contracts with our external partners. There are two ways we can write these contracts: we can attempt to legislate in minute detail for all situations or, alternatively, we can structure a deal where incentives are aligned and where the external partner wants to do the right thing. The first strategy is a recipe for disaster and an open invitation to “game” the system, and yet this is precisely the approach followed by most regulators. We need to learn the simple lesson that regulation should be targeted at a single objective: creating the proper incentives. Until we do this, the regulators will continue to shut a door, while the bankers and lawyers open two windows.

Roger Barris, Switzerland

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