AS WE SURVEY THE CARNAGE IN THE CAPITAL MARKETS, THE 2009 BURNING QUESTION WILL BE: WHAT REGULATIONS, AND OVERSIGHT ARE REALLY NEEDED GOING FORWARD?

The new president and his administration will have lots of issues awaiting them on “Day Two,” after the inaugural balls have ended and the partygoers have flown home.  One of the biggest headaches – one that may have President Obama up at 3 a.m. with that fabled phone call, unable to get rest – will be what to do with the financial system…the banking system…the condition of the capital markets…and the regulation needed to prevent a similar meltdown in the future.  It’ll be like 1933 and 1934 all over again – except for the notable presence of the legion of lobbyists who will be demanding breaks for their corporate clients.

 

As news of a big event or trend breaks, the cable guys and gals typically slap a logo and catchy headline on the screen – “Wall Street Bailout” is an example of what was trumpeted on broadcast and cable channels all through October (which naturally followed the “Wall Street Crashes” earlier treatment).

 

This morning MSNBC (owned in part by NBC / part of General Electric today) had a new banner up:  “Bail – OUTRAGE!”  (Get it? Bail – Out Rage) Recognizing the rising public outrage over the Wall Street and banking and insurance industries’ bailouts and now the pending auto industry bail out.  Next sector or industry up?  Stay tuned!

 

We have our own construct, which we’ve shared with correspondents and colleagues.  The rising anger, frustration and tragic lack of trust in our leadership in private and public sectors has been building for much more time than just the recent election cycle.  Watching this continued abandonment of leader responsibility, our construct is:

 

Americans are enraged by recent events in the capital markets, in the corporate sector, the public sector, and especially banking:  It’s all about RAGE – caused by the widespread failure or abandonment of too many leaders in terms of [their individual and collective] Responsibility, Accountability, Governance andEthics.  Simple:  People are enraged by the demonstrated lack of leadership in too many sectors of our society.  Trust has been broken – and once broken, trust can take forever to rebuild.

 

Which raises the question:  Is it the inherent nature of our capitalist system to drive financial success to the point of self-destruction?  This is a question a growing number of folks are asking (and asked in 1929, 1987 etc.).  One important tenet of democratic capitalism is the belief (hope?) that markets and players can self-regulate – and do the right thing (for investors, stakeholders, employees, customers, etc.).  An important part of the major securities industry reforms of the 1930s was the designation in the 1933 Securities Act by statute and regulations [the] for oversight of elements of the financial services industry by industry organizations – by self regulating bodies embedded within those industries, like stock brokerage…

 

Thus in the 1930s the New York Stock Exchange became not only a place and mechanism to facilitate the buying and selling of equities, but also by congressional designation became a very important “Self-Regulating Organization” – a SRO. (Similar mechanisms were established for municipal bond trading and other activities.)  The NYSE established myriad rules for listed corporations and brokerage firm members.

 

Today with the NYSE a public company (how’s that for major change?), the successor regulator is “FINRA” — the Financial Industry Regulatory Authority.  (Its self-description is: FINRA is the largest independent regulator for all securities firms doing business in the United States. We oversee nearly 5,000 brokerage firms, 175,000 branch offices and 680,000 registered securities representatives. Our chief role is to protect investors by maintaining the fairness of the U.S. capital markets.” 

 

How well were your investments “protected” and “fairly treated” by those firms and individuals directly under the jurisdiction of this independent regulator?  Investors are asking: Where was FINRA while those independent brokerage firms with thousands of offices were peddling all-too-risky products to individual and institutional investors …who trusted them?  What happened to fair treatment in the securities marketplace?

 

FINRA is under the direction of Mary Schapiro, an experienced industry hand, who once ran the federal government’s oversight agency for commodities trading (the Commodities Futures Trading Commission / CFTC, appointed in 1994 by President Bill Clinton). She was also acting head of the SEC, and served as NADASQ Chair after leaving government.  What FINRA’s view of itself?  To quote:

 

“FINRA has approximately 3,000 employees and operates from Washington, DC, and New York City, with 15 District Offices around the country.

“The creation of FINRA is the most significant modernization of the self-regulatory regime in decades,” said Mary L. Schapiro, Chief Executive Officer of FINRA. “With investor protection and market integrity as our overarching objectives, FINRA is an investor-focused and more streamlined regulator that is better suited to the complexity and competitiveness of today’s global capital markets.”

 

Reading this, and looking at the carnage of the US and world securities industries – in the capital markets – we are mindful of the weakness of the argument of relying too heavily on the ability of industry to self-regulate.  Perhaps the pull of greed is too much to overcome (evidently the case in sub prime risk taking).

 

It’s becoming very apparent to the American public that self-regulation [by business interests] that (a) business self-regulation can experience quite spectacular failures, such as the 2008 market meltdown, and (2) it is clear that government regulation and oversight is absolutely necessary.  The critical questions then center on “what kind of regulations” and “where is the common sense balance of such regulations?”

 

These critical questions are on the table for the new Senate and House of Representatives and the new Obama-Biden Administration as they take office:  What kind of regulations are [now] needed to provide investors and market participants (and all of us) with the necessary oversight to maintain a fair, open, transparent, and trustworthy capital marketplace, for all types of investments and all investors?

 

How do we create a regulatory framework that encouragesinnovation, creativity, intelligent risk taking, and reasonable rewardwhile providing reliable risk management processes and policies for those who put up the capital and take the risk – the investors, central players in democratic capitalism.

 

This will be challenging tasks for legislators, regulators, industry participants and for every one of us as stakeholders in a democracy based on capitalist principles.

 

Watch the catchy logos and catchy headlines of the broadcasters as they focus on the regulatory discussions once the new congress is convened, and Day Two challenges dawn for the Obama-Biden Administration.

One thought on “AS WE SURVEY THE CARNAGE IN THE CAPITAL MARKETS, THE 2009 BURNING QUESTION WILL BE: WHAT REGULATIONS, AND OVERSIGHT ARE REALLY NEEDED GOING FORWARD?

  1. I’m really enjoying the design and layout of your blog. It’s a very easy on the eyes which makes it much more enjoyable for me to come here and visit more often. Did you hire out a developer to create your theme? Outstanding work!

Leave a Reply

Your email address will not be published. Required fields are marked *