LectureHop: A New (dis)Order?: The Promise and Pitfalls of Financial Market Reform
Written by Bwog Staff
Last night the University played host to yet another speculative overview of our recent financial woes – bringing Joseph Stiglitz, Gary Gensler, and Arthur Levitt into the spotlight once more. As the men mused about our reactions to financial crisis and what’s to come, Bwog’s Financial Regulation Bureau Chief Grant D’Avino was there reporting.
Domestically and internationally, calls for reform have resounded in the wake of worldwide financial crisis. The repercussions of the crisis are still being felt and yet to be completely understood. While banks, governments, regulators, and human nature have each taken a turn as the supposed cause of the crisis, Monday night’s panelists switched gears from blame to make clear that financial reform and regulation are the only way to prevent similar calamities in the future.
Gary Gensler, Chairman of the Commodity Futures Trading Commission, who would later be described by co-panelist and former Chairman of the Securities and Exchange Commission Arthur Levitt as the “finest chairman of the most underfunded, under-supported agency in the history of America,” was the first to speak. He opened with a bit of useful historical context, noting that much maligned financial derivatives have existed in one form or another since the Civil War as instruments used to hedge risk. However, he stressed that the derivatives at the heart of the recent crisis, called over-the-counter derivatives, originated in the 1980’s. Gensler believes that well-regulated financial markets build confidence and credibility important to investors, maintaining a level playing field that is both fair and transparent.
He then described some of the reasons that these financial derivatives have remained largely unregulated. Principally, many claim that large financial institutions act responsibly and that regulation and protection create unnecessary hindrances. Gensler called this a “bad assumption,” and went on to ask, “How many of you want your 600 dollars back?” ($600 is the amount that each American tax payer contributed to the bailout of financial behemoth AIG, a company that acted in a decidedly irresponsible manner.) Gensler also pointed to the assumption that “markets know best” as a rationale to limit regulation. In stark opposition to that view, he maintained that unfettered markets do not necessarily assure efficiency, transparency, and fairness. Gensler concluded hopefully that regarding financial market reform, “I do think something will get to the President’s desk later this year.”
Levitt was then introduced by Nobel-laureate Joseph Stiglitz. Levitt chose to use Senate Banking Committee Chairman Chris Dodd’s recent regulatory proposal as the basis for his remarks. He spoke strongly in support of improved corporate governance and the increased ability of shareholders to have concerns addressed in corporations. Levitt said outright that “too big to fail” policies must end. He felt the implicit support of the federal government in guaranteeing high-risk investments is a moral hazard of the worst sort, and claimed that the “shotgun marriages” of large banks in the fallout of the financial crisis served to exacerbate the problem.
He called the lack of third party accountability on Wall Street a disgrace, and emphasized the necessity of allowing regulatory agencies to hold third parties, like consultants, accountants, and lawyers, accountable for aiding and abetting fraud, which Dodd’s bill does not. Regarding domestic reform, Levitt felt that the United States may be left with a “regulatory Tower of Babel” if more comprehensive proposals are not put in place. However, he noted that the Dodd bill is a good start in that at the very least, it recognizes the need for reform. He ended by stating the need for international cooperation to create a new globalized financial regulatory system. Without bold leadership from the United States, Levitt claimed, international reform would not take place. Chairman Gensler concurred with Levitt, stressing the imperative to capitalize on the “remarkable coincidence of thought…to bring strong reform” both domestically and internationally and make lasting changes to bring transparency and fairness to financial markets.
Photo via columbia.edu