Regulation of Financial Institutions
We continue our lateblogging of the Federalist Society’s 2009 National Lawyers Convention. The conversations at the conference are always interesting. As far as we’re concerned, this has to be one of the most painless ways to rack up CLE credits.
Here’s the next panel discussion that we attended:
Regulation of Financial Institutions
A quick and dirty write-up, after the jump.
Dean Paul Mahoney, UVA
The financial crisis was not caused by overly lax regulation, but by misguided monetary policy. The Fed continued to ease, even in 2002-2003, when historical models would have suggested tightening. This contributed to the housing boom.
Low short-term interest rates + Increasing asset prices = Increased borrowing to buy assets (borrow short to buy long).
When the Fed finally started to tighten, it did so very quickly, which chilled the housing market.
Possible explanations for the crisis:
1. Repeal of Glass-Steagall? Citing this as the cause of the crisis doesn’t explain why commercial banks got into trouble and why investment banks got into trouble. The i-banks that failed, like Bear and Lehman, had negligible commercial banking operations.
2. Excessive executive compensation? In the 1930s, there were complaints about compensating executives in cash. In the 1990s, there were complaints about compensating executives in stock. In the early 2000s, there were complaints about compensating executives in stock options. There will always be complaints about this whenever there’s a failure. It did not play an important role.
Upshot: Monetary policy is the best explanation. I don’t want to engage in “Fed bashing,” but I do think that departures from the monetary policy called for by historical models / Taylor rule should be very infrequent in the future.
Stephanie Breslow, Schulte Roth & Zabel
I focus on hedge funds, which have been weathering the crisis relatively well.
Currently the interests of principals and investors are well-aligned. The investors are sophisticated, high net-worth investors.
Hedge funds are market participants and are regulated as such (so they are subject to rules against market manipulation, insider trading, etc.).
One proposal on the table: a registration requirement for hedge fund managers. There isn’t a huge amount of opposition to this. But will oversight really make a difference here? To send a bunch of 26-year-olds in to investigated sophisticated funds?
Another proposal: to have derivatives traded on exchanges, to advance transparency.
Trade-off: derivatives are highly customized and may not lend themselves to exchange trading.
Another proposal: cracking down on securitization. But securitization can be a useful tool. And it’s yesterday’s problem - currently investors are very aware of their dangers.
Another proposal: cracking down on short selling. But sometimes valuable information / analysis about companies is generated by investors looking for companies to short.
Another proposal: net capital requirements. But funds don’t have depositors, so who is being protected? And do the qualified investors in funds really need protection?
In short, (1) there is already regulation in this industry and (2) some of the proposed regulation will not be helpful.
Annette Nazareth, Davis Polk & Wardwell
I have some concerns about the current system of financial regulation (pointing to a chart showing incredibly complex regulatory web).
As a former regulator, I recognize that there will be cases where the market can’t solve its own problems and regulation makes sense. E.g., monopoly power, requiring antitrust regulation; collective action issues.
But we have to think carefully about how to regulate in a way that reduces burdens.
Much of our regulatory framework, a Byzantine web of regulators, is a matter of historical accident. Can it be streamlined?
The current system leads to jurisdictional squabbles over which regulatory entity has authority, as well as regulatory arbitrage.
At the current time, it’s difficult to predict what direction the regulation will go in.
Paul Atkins, former SEC commissioner
At last year’s convention — which took place after the fall of Lehman and while the crisis was peaking, and around election time — there were predictions that the new administration would be very active on the regulatory front.
A year later, some things have changed an some haven’t. The Obama Administration has spent a lot of political capital on the stimulus, health care, and environmental issues. Don’t expect major financial regulatory legislation before the end of this year — too much else going on. But could next year bring major new regulation?
Some ill-advised “reforms” came out of prior crises. The Supreme Court will soon pass on the constitutionality of PCAOB, enacted in the wake of the last financial crisis as part of Sarbanes-Oxley.
Q-and-A
Q: Thoughts on the “too big to fail” doctrine?
A: Panelists seem generally critical of the doctrine.
Q: How did TARP morph from a program designed to take toxic assets off balance sheets into one making investments into specific banks, and was this wise?
A: Atkins - The real problem here was valuation. How do you value these assets?
Mahoney - What led to TARP was the perception of a liquidity crisis. But we didn’t have a liquidity crisis; we had a solvency crisis. So that’s what led to the transformation — it was better to recapitalize banks than to have TARP overpay for their toxic assets.
2009 National Lawyers Convention Schedule [Federalist Society for Law and Public Policy]
FedSoc LiveBlog: Showcase Panel III: Regulation of Financial Institutions featuring Judge Jones, Hon. Paul Atkins and Paul Mahoney
[Josh Blackman’s Blog]
Earlier: Free Speech: The Fairness Doctrine
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Comments
Hey, hey, hey, hey....
Smoke weed, everyday!
The Glass-Stegall comment is one of the dumbest things I have ever heard. No, Lehman and Bear did not have commercial banking operations, which forced them to LEVERAGE UP to compete with the deposits the commercial banks had as assets to fund their investment banking operations. With leverage comes (gasp) risk.
People need to learn basic economics before sitting on panels.
2 - He's the dean of UVA Law School! He has to be right!
Dean Mahoney makes a good point about monetary policy and the Taylor rule, which perhaps the most important monetary policy tool out there. I have had the priviledge of meeting John Taylor, and he is one of the brightest macroeconomists of our time.
Even if you are not an economics scholar, look at the graph on page two of:
http://www.stanford.edu/~johntayl/FCPR.pdf
Managing the nominal interest rate poorly was like drenching the house in gasoline, while repealing Glass-Stegall was just the lighting the match.
-Economist Secure
The President has spoken: Wall Street greed caused the collapse --> need moar regulation.
When things like this happen, it's important to blame the profit-seekers, not the government. Why? Because the government has good intentions. Trust me.
The Community Reinvestment Act was designed in part by ACORN to increase home ownership. What's wrong with that, you hate-mongers? Why can't non-whites own homes too? Of course, to boost home ownership by a few percentage points, we had to, um, loosen lending standards - you know, for the disadvantaged.
Government-mandated subprime lending + easy money from the Fed + increasing asset values = Utopia...until the greedy white guys screw it all up with their "derivatives" and MBSs.
Naturally, we had to teach Wall Street a lesson about leverage and risk...by bailing them out. Whew. Good thing we've got TARP to clean up their mess. Else we'd really be in trouble.
"Land of the greed, home of the slave."
MOAR REGULATION SECURE/MORAL HAZARD INSECURE
We need to bomb the Federalist Society back to the stoneage!
-DOJ Secure
best brief intro ever!
http://www.engadget.com/2009/11/16/verizon-responds-to-atandts-map-for-that-lawsuit-the-truth-hurt/
Why is it that every old woman lawyer that survives looks like a seriously dried up old twat waffle? Or, for that matter, every old man lawyer that survives looks like a desiccated shriveled mummy, only there to impose some form of curse?
This is a profession?
Yeah, hedge funds "have been weathering the crisis relatively well," except the massive number that have been crushed by redemptions and put out of business. Spoken like a true partner (other than BK) and deal lawyer.
I am in an unusual good mood. Perhaps it's as a result of an intoxicating evening at Rick's Cabaret. I only have less than two months before I move on to another journey and retire from this profession for good. I feel betrayed by the editors of this site. Why must you insist on posting this "My Job is Murder" series? It is a banal piece that is poorly written and beneath the intelligence of the average reader of this site. Why must the editors of this site insist on force feeding this dung down our throats? I am a tolerant man and over the years I have given multiple passes on indiscretions. Continuing to publish this story leaves me no choice but to believe that the editors of this site know more about the legal profession than I do. Fine. Continue publishing this story. Until you remove this distasteful series from this site, I will remain in exile from above the law. Perhaps that is the pun of this poorly written and executed piece--the murder of Partner Emeritus. Mr. Mystal, when you and the powers that be come to your senses, you know how to reach me.
You're getting weak in your old age, PE.
David, you were there alone, what's with the "we"? Elie was nowhere in sight.
Annette Nazareth? Lapdog of Chris Cox as he muzzled the SEC? Really? Is ANYONE dumb enough to listen to her? Or are they all texting away in more important conversations elsewhere...
The Federalist Society. Who the fuck cares about them at all.
#1: Win by default, since all the rest seem to care about what the out-of-touch morons at the FS are saying. Might as well watch a debate between Beck and Limp-o as to whether Sarah Palin is Great, or Really Really Great. Just as brain-dead and pointless.
Atkins and Nazareth were in a position, particularly, to prevent Lehman, AIG, Madoff, etc., etc., but did not have the balls to buck Cox. So, Fuck 'em.
PE "will remain in exile from above the law."
The first good news in months.
Is this the panel that featured Susanna Dokupil?
I hears the Partner done headed for the hills. Lookin' likes its all Backwoods from here...
I love it when the establishment weighs in on the real cause of our problems, and how it bears no resemblance to what is obvious. Nothing to do with unscrupulous a$$holes taking advantage of a horribly regulated system. Nope, it had to be the government. In fact, I bet it was a liberal!
Plain and simple, an absolute lack of shareholder power because of terrible proxy rules and boards that look out for management instead of shareholders, the endless artificial "buy" on the market from 401k contributions by idiots that should never be investing in the first place but do so for the "match" and the tax benefits, and executive compensation in the form of stock or stock options is the cause of all our problems. How do you pay the CEO of Countrywide based on annual "sales" of refis or new loans, when you don't find out if the refi or new loan made the bank money for 7 years? Shouldn't the bonus come after the sales cycle is complete? What other business pays its salesmen before they actually make a sale that nets the company a profit?
Interesting.
ditto
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