Tuesday, June 16, 2009

Lack of Regulation Didn't Cause the Crisis and More Rules Won't Prevent the Next One

On Monday, Tim Geithner and Larry Summers penned an op-ed piece in the Washington Post entitled A New Financial Foundation. On Wednesday, President Obama is expected to put his full weight behind this vision of a new regulatory framework for Wall Street.
Before this discussion goes any further, Jeff Matthews of Ram Partners, wants you (and presumably policymakers) to remember this: "The epicenter of the financial crisis that almost brought the world to its knees was the regulated portion of the U.S. financial system -- in particular Fannie Mae and Freddie Mac, two of the most regulated entities ever created."

Furthermore, "every publicly traded bank that has gone out of business had financial statements signed by their CFOs and CEOs," the veteran money manager notes. Such assurances were prescribed by Sarbanes Oxley, the legislation that emerged in the aftermath of the corporate scandals at Enron, WorldCom and others earlier this decade.

As discussed in the accompanying video, every bubble in history has been followed by regulatory attempts to prevent its repeat, and yet bubbles continue to be a regular occurrence in market-based capitalism.

That's not to say the latest attempts at re-regulating Wall Street will prove equally inept, "but I'll believe it when I see it," Matthews says.

Still, the money manager and blogger "hopes for the best" and gives the administration credit for trying. He even has some positive things to say about one element of the plan: A requirement that dealers of asset-backed securities, such as mortgage-backed securities, "retain a financial interest in its performance," as Geithner and Summers put it. In other words, make Wall Street eat its own cooking, which really would be a change of pace.

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