bullypulpit
03-23-2008, 01:21 PM
<center><a href=http://www.nytimes.com/2008/03/23/business/23regulate.html?_r=1&th=&oref=slogin&emc=th&pagewanted=print>In Washington, a Split Over Regulation of Wall Street</a></center>
<blockquote>WASHINGTON — As Congress and the Bush administration struggle to contain the housing and credit crises — and prevent more Wall Street firms from collapsing as Bear Stearns did — a split is forming over how to strengthen oversight of financial institutions after decades of deregulation.
The administration and Democratic lawmakers in Congress agree that the meltdown in credit markets exposed weaknesses in the nation’s tangled web of federal and state regulators, which failed to anticipate the effect of so many new players in the industry.
In Congress, Democrats are drafting bills that would create a powerful new regulator — or simply confer new powers on the Federal Reserve — to oversee practices across the entire array of commercial banks, Wall Street firms, hedge funds and nonbank financial companies.
The Treasury Department is rushing to complete its own blueprint for overhauling what is now an alphabet soup of federal and state regulators that often compete against each other and protect their particular slices of the industry as if they were constituents.
But the two sides strongly disagree about whether, after decades of a freewheeling encouragement of exotic new services and new players like hedge funds, the pendulum should swing back to tighter control.</blockquote>
Really, what's to debate? As I have argued before, unregulated free markets require a rational society, which we lack. The same argument could be made for unregulated capital markets.
Over the years, as more and more exotic financial instruments have been created, further and further from the initial risk, and more and more obscure, federal regulation has been lax or non-existent. There has been no transparency in these financial transactions...No oversight. The end result is what we see in today's financial markets. We have hundreds of billions of dollars of commercial paper, once considered absolutely secure, now worth pennies on the dollar. The security for these instruments was property...mortgages to be exact, which was why they were considered relatively safe. However, most of these mortgages were issued to high risk borrowers...those with high loan-to-value ratios, insufficient income to meet their mortgage payments or any number of other issues.
As the economy worsened and more and more of these homeowners lost jobs or whatever other reason, their loans went into default, and foreclosures began to rise. This helped flood an already shaky real estate market with properties selling below their appraised value, let alone their original market value.
We saw what happened to a leader in the marketing of these bundled mortgage instruments, <a href=http://www.businessweek.com/bwdaily/dnflash/content/jun2007/db20070612_748264.htm>Bear-Stearns</a>. Their stock was bought by J.P. Morgan-Chase for $2.00 per share, down from a 2007 high of $172.61.
The ability of capital to move is crucial to the health of any economy. That liquidity cannot go unscrutinized, however. Capital markets and hedge funds may now require governmental regulation similar to that banks were faced with after the stock market crash of 1929. Such regulation will help markets regain the trust of investors and, perhaps, avoid an economic downturn that will make the Great Depression look like a Sunday picnic in comparison.
<blockquote>WASHINGTON — As Congress and the Bush administration struggle to contain the housing and credit crises — and prevent more Wall Street firms from collapsing as Bear Stearns did — a split is forming over how to strengthen oversight of financial institutions after decades of deregulation.
The administration and Democratic lawmakers in Congress agree that the meltdown in credit markets exposed weaknesses in the nation’s tangled web of federal and state regulators, which failed to anticipate the effect of so many new players in the industry.
In Congress, Democrats are drafting bills that would create a powerful new regulator — or simply confer new powers on the Federal Reserve — to oversee practices across the entire array of commercial banks, Wall Street firms, hedge funds and nonbank financial companies.
The Treasury Department is rushing to complete its own blueprint for overhauling what is now an alphabet soup of federal and state regulators that often compete against each other and protect their particular slices of the industry as if they were constituents.
But the two sides strongly disagree about whether, after decades of a freewheeling encouragement of exotic new services and new players like hedge funds, the pendulum should swing back to tighter control.</blockquote>
Really, what's to debate? As I have argued before, unregulated free markets require a rational society, which we lack. The same argument could be made for unregulated capital markets.
Over the years, as more and more exotic financial instruments have been created, further and further from the initial risk, and more and more obscure, federal regulation has been lax or non-existent. There has been no transparency in these financial transactions...No oversight. The end result is what we see in today's financial markets. We have hundreds of billions of dollars of commercial paper, once considered absolutely secure, now worth pennies on the dollar. The security for these instruments was property...mortgages to be exact, which was why they were considered relatively safe. However, most of these mortgages were issued to high risk borrowers...those with high loan-to-value ratios, insufficient income to meet their mortgage payments or any number of other issues.
As the economy worsened and more and more of these homeowners lost jobs or whatever other reason, their loans went into default, and foreclosures began to rise. This helped flood an already shaky real estate market with properties selling below their appraised value, let alone their original market value.
We saw what happened to a leader in the marketing of these bundled mortgage instruments, <a href=http://www.businessweek.com/bwdaily/dnflash/content/jun2007/db20070612_748264.htm>Bear-Stearns</a>. Their stock was bought by J.P. Morgan-Chase for $2.00 per share, down from a 2007 high of $172.61.
The ability of capital to move is crucial to the health of any economy. That liquidity cannot go unscrutinized, however. Capital markets and hedge funds may now require governmental regulation similar to that banks were faced with after the stock market crash of 1929. Such regulation will help markets regain the trust of investors and, perhaps, avoid an economic downturn that will make the Great Depression look like a Sunday picnic in comparison.