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Future Financial Regulation: Not a Question of Sufficiency, but of Transparency and Integrity

Posted by Larry Doyle on June 15, 2009 5:30 AM |

I hope people far and wide will listen to the interview I had with Bill Singer on last evening’s NQR’s Sense on Cents with Larry Doyle. Bill is the preeminent veteran Wall Street regulatory lawyer and market reform advocate. He pulled no punches in our conversation. My chat with Bill compels me to republish my posting from mid-May on the future of financial regulation.

Editor’s Note – this piece was originally posted on May 18, 2009:

Will our future regulatory structure of the financial industry allow capitalism to thrive? Will the political wizards in Washington prioritize personal agendas and expediency over unquestioned transparency and integrity? I believe we are at a critical regulatory crossroads not seen since financial regulations implemented in the Securities Act of 1933.

Do the powers that be both in Washington and Wall Street understand the magnitude of responsibilities and obligations involved in this process? Initial returns are decidedly mixed. The debate by those intimately involved in the regulatory oversight is typically framed as a question of sufficiency. That is, does the industry have enough regulation or not?

The media often frame the debate in political terms between laissez-faire proponents and those favoring increased government intervention. Both camps are missing the bigger picture, because both camps are feeding from the same trough. Allow me to expound.

The critical regulatory question facing our markets is not of sufficiency but is one of transparency. Regrettably, both ends of the regulatory spectrum do not want to address this glaring shortcoming because it exposes the very nature of the incestuous relationship between Wall Street and Washington.

The mainstream media, to a large extent, is dependent on both Wall Street and Washington for their financial well being so they do not press or pursue the need for total regulatory transparency. Fortunately, Sense on Cents and other leading financial websites are not under this restriction.

Let’s dig deeper and review where regulatory developments stand currently. As the Financial Times reports, U.S. Poised For Finance Regulation Shake-Up:

Congress will next month start the biggest regulatory overhaul of the US financial system in decades, bringing into the open a frantic lobbying effort between banks, regulators and policymakers on what it contains and who pays for it.

The House financial services committee, chaired by Democrat Barney Frank, will hold hearings early in June into reforms outlined by Timothy Geithner, Treasury secretary, say people familiar with the timetable.

Regrettably, before the debate even begins the premise of sufficiency versus transparency is accepted without question. Well, Sense on Cents is questioning the lack of transparency and resulting integrity of the process, which by its very nature strongly influences the outcome. Allow me to be more specific. Much as the Parliament in the U.K. is being rocked by a current scandal over expenses submitted by legislators, I strongly exhort those who truly care about capitalism, free market principles, and our democracy to address the very nature of the relationship betwen the banks, regulators, and policymakers.

Allow me to provide a significant headstart to the process. I resubmit How Wall Street Bought Washington as an expose of the billions of dollars in campaign contributions and lobbying spent by Wall Street to curry favor in Washington. I wrote in early March:

A great American and loyal reader (thanks FL) shared a report recently produced by not-for-profits Essential Information and The Consumer Education Foundation. This report, Sold Out: How Wall Street and Washington Betrayed America, has gotten little to no attention in the general media. What a shame. I find of particular interest the fact that a number of the currently discussed regulatory changes are directly addressing the points highlighted in this report. I personally view these proposed regulatory changes as substantiating this report and adding credibility to its effort. For the naysayers in the audience, I would ask you to review the report and reconsider your assessment.

Having established the premise not of sufficiency in regulatory overhaul but transparency, I would like to revisit the FT report from this morning:

But several people involved say the way the regulation is interlinked means it would be difficult to fast-track a resolution authority specific to bank holding companies. The current timetable envisages the legislation being voted in the House in the summer and in the Senate late this year.

Yes, there is little doubt that the regulatory bodies and their executive powers are deeply interlinked with the banks and the policymakers. To wit, the current head of the SEC, Mary Schapiro, most recently headed the Wall Street self-regulator FINRA. The newly designated head of FINRA, Richard Ketchum, came from the SEC. In the midst of rising temperatures on the regulatory front, I view the appointment of these two longstanding insiders to be nothing more than a veiled attempt by Wall Street and Washington to maintain the status quo. What a shame.

The FT further offered as to how . . .

Details of the regulatory overhaul – which also includes increased supervision of the retail market for financial products, standardising rules governing deposit taking institutions and increasing oversight of over-the-counter derivatives – are still being debated.

There is no doubt in my mind that the reference to increased supervision of the retail market for financial products encompasses the travesty involving Auction Rate Securities. Thousands of investors with tens of billions of dollars remain frozen with these ARS holdings. Wall Street and the regulator FINRA were totally complicit and negligent as banks marketed and distributed ARS to institutional and retail investors in a fraudulent fashion.

If Washington truly wants to address the regulatory failures in this area, I strongly encourage them to incorporate FINRA Is Supposed To Police the Market and NASD Knew Auction Rate Securities Weren’t Cash as compelling evidence of a massive regulatory failure which has had enormous costs, monetary and otherwise.

Will the media give the Wall Street, Washington, and regulatory triumvirate a pass as they pander about sufficiency when in fact the real regulatory question is one of transparency? In my opinion, the very future of capitalism and free markets lie in the wake.


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