The Future of Financial
Regulation:
ALSB Panel Evaluating
Research and Curricular Impacts of Proposed Reforms of the U.S. Financial
Services Regulatory Regime
Web Portal devoted to archiving materials supporting an ALSB Panel exploring the research and instructional implications influenced by the aftermath of the subprime mortgage crisis, reconsideration of post-Enron reforms, and the proposed regulatory re-structuring of the fragmented U.S. financial services regulation regimes.
Unique URL = http://ist.psu.edu/FutureFinancialReform
Held on: Friday, August 15, 9:00–10:15 am (Sess#E1), Barcelona Room, Westin Long Beach
Panelists:
John W. Bagby, Penn State, moderator; Constance Bagley, Yale; Kathleen Lacey, Cal. State Univ-Long Beach; Robert Prentice, Univ. Texas-Austin; Peter Shedd, Univ. Georgia; Michael Solt, Dean- Cal. State Univ-Long Beach
Purpose:
This panel explored the research and instructional implications of recent financial market problems, including the underlying causes and some of the proposed solutions. Dialog among the panelists and the audience provided a useful research agenda for scholars in the legal environment of business, accounting, financial economics and business strategy. The interaction provided insights into the development of curricular opportunities that maintain the relevance and progressive nature of coursework at progressive business programs.
Abstract:
In recent years, the financial services industries have fragmented well beyond the big three sectors and their service providers: (1) investment banking, (2) commercial banking and (3) insurance. Traditional regulatory patterns persist to create regulatory coordination challenges exacerbated by various financial sector difficulties, including: bank runs, sub-prime mortgage crises, mortgage-backed securitization, international accounting standardization laxity, laissez-faire regulatory approaches (e.g., SEC, CFTC), significant regulatory loopholes spawning derivatives markets with unknown externalities and imposing arguably excessive financial system risk. A confluence of several matters appears to propel these related topics into the public policy realm of financial services. Among these influences are Treasury Secretary Paulson’s proposals to (nearly) eliminate the SEC, SEC Chairman Cox’s alleged handling of various matters (Bear-Sterns crisis, mortgage-backed securities impact on financial markets, conversion to European accounting standards, Sarbanes-Oxley reforms), the CFTC’s laissez-faire relaxed role in regulating the merger of commodities, derivatives and securities markets that further the unification of commercial and investment banking into so-called “universal banking” under Gramm/Leach/Bliley thereby eviscerating the separation of financial sectors in the New Deal legislation such as the Glass-Steagall Act of 1933.
This panel explored the research and instructional implications from the aftermath of the subprime mortgage crisis, the reconsideration of post-Enron reforms and the constant pressure for internationalization of financial services as focused through a discussion of the proposed regulatory re-structuring of the fragmented U.S. financial services regulation regimes. Regulatory turbulence provides opportunities for curricular reform and that analysis of this evolving situation can provide the impetus to set a new research agenda for the near to medium term that reinvigorates all the constituent elements discussed here. Interdisciplinary approaches are suggested to harness expertise in various areas such as financial economics, banking, securities/commodities regulations, corporate governance, regulatory reorganizations, legislative history/intent, risk analysis, regulatory competition and regulatory capture. These matters impact ALSB and business school instruction and research in various fundamental ways. For example, this topic arguably impacts the law of corporations and business organizations, securities law, administrative law, commodities regulations, federal functional regulators, regulatory process and reform, the role of disclosure in market efficiency, market manipulation controls, government agency reorganizations, banking law, among other interesting topics. Research and instruction improving the understanding of the interplay among these seemingly diverse subjects holds promise to improve the risk management of financial engineering and competition among national and electronic financial markets.
“The main problem with the modern financial system based on widespread use of derivatives and securitization is that while financial specialists understand how individual assets function, even they have limited understanding of the aggregate risks created by the system. That is, insufficient appreciation of how the whole incredibly complex financial system operates when exposed to various types of stress.” Gary S. Becker *
“Today’s economic turmoil, it seems, is an
implicit indictment of the arcane field of financial engineering — a
blend of mathematics, statistics and computing. Its practitioners devised not
only the exotic, mortgage-backed securities that proved so troublesome, but
also the mathematical models of risk that suggested these securities were
safe… The models, according to finance experts and economists,
did fail to keep pace with the explosive growth in complex securities, the
resulting intricate web of risk and the dimensions of the danger… But the
larger failure, they say, was human — in how the risk models were
applied, understood and managed… “The danger is that the
modeling becomes too mechanical.” [quoting Prof.
Raghuram G. Rajan, Univ.
Chicago & former IMF chief economist] Steve Lohr
**
Structural Conditions Implicate Public Policy for Financial Markets:
John Steele Gordon, A Short Banking History of the United States: Why our system is prone to panics. WSJ October 10, 2008 at A17
Levitt, Arthur, You Can't Control Animal Spirits, Wall.St.J. Aug. 5, 2008 at A19.
Jickling, Mark, Averting Financial Crisis, CRS No. RL34412 (Government and Finance Division) Congressional Research Service, March 21, 2008.
Assessing Risks of Financial Engineering:
Crovitz, L. Gordon, The Father of Portfolio Theory on the Crisis, WSJ, 11.3.08 @ A17 (discussing Harry Markowitz portfolio theory, ’90 Nobel Laureate who “says valuation is the critical step”)
* Becker, Gary S. (economist, Univ. of Chicago, 1992 Nobel Laureate), WSJ op-ed, Oct. 7, 2008 at p.A27, titled: We're Not Headed for a Depression
** Lohr, Steve, In Modeling Risk, the Human Factor Was Left Out, 11.5.08 @ B1
Re-Regulation Resources:
Scannell, Kara & Sudeep Reddy, Greenspan Admits Errors to Hostile House Panel, WSJ 10.24 08
Levitt, Arthur, How to Restore Confidence in Our Markets, WSJ 10.22.08
Labaton, Stephen, The Reckoning Agency’s ’04 Rule Let Banks Pile Up New Debt, October 3, 2008 NYT (arguing big 5 investment bank self-regulation central cause of financial crisis).
Reilly, David, Pendulum Swings Back to Regulation, WSJ 10.20.08 at C10
Norris, Floyd, High & Low Finance: After the Deal, the Focus Will Shift to Regulation, NYT September 29, 2008 @C1.
Mollenkamp, Carrick & Mark Whitehouse, Old-School Banks Emerge Atop New World of Finance, WSJ 9.16.08 @ A1 & A10.
Davis, Bob, Damian Paletta & Rebecca Smith, Unraveling Reagan: Amid Turmoil, U.S. Turns Away From Decades of Deregulation, Wall. St. J. July 25, 2008 @ A1.
Opposition to Re-Regulation:
Lipton, Eric & Stephen Labaton, The
Reckoning Deregulator Looks Back, Unswayed, NYT-November
17, 2008 (former TX Senator Phil Gramm financial market deregulation legacy)
Baxter, Brian, Securities
Class Action System Threatening Capital Markets, Panel Says, Law.com
July 25, 2008.
Report, Securities
Class Action Litigation: The problem, its impact, and the path to reform,
U.S. Chamber of Commerce, Institute for Legal Reform (ILR) July 2008.
Financial Management
of the Bailout under EESA authority:
H.R. 1424, Emergency Economic Stabilization Act of 2008, 110th Cong., 2d Sess. (EESA)
Analyses of EESA ’08 by: Wash.Post; RMS McGladrey
Treasury Department's
Capital Purchase Program (CPP) of the Troubled Asset Relief Program (TARP) :
EESA Initiative HomePage
Description
of TARP
Notice To Financial Institutions, Interested In Providing
Asset Management Services For A Portfolio of Equity Securities, Debt
Obligations, and Warrants Issued By Financial Institutions,
U.S. Department of the Treasury, Nov.10, 2008 alt.delivery
@: http://www.ustreas.gov/initiatives/eesa/docs/notice_custodian-services.pdf
PLI Interview with Andrew L.
Sandler, Consumer protection takes a
prominent role in EESA, Nov.2008
Remediation Resources:
Treasury’s Financial Bailout - Original Proposal to Congress, WSJ BlogSpot 9-20-08 version; Calculated Risk’s Blog 9-19-08 version; Bailout Proposal’s Section 8 (Secretary of Treasury’s Decisions to remain unreviewable; Committed to agency discretion)
Mistretta v. U.S., 488 U.S. 361 (1989) (U.S. Sentencing Commission Guidelines, legislative abdication prohibited under separation of powers; reviewability of agency discretion required).
Coyle, Marcia, Bailout proposal grants sweeping powers to Paulson, but are they legal? September 29, 2008, Nat.L.J.
Scannell, Kara, SEC's Cox Backs Merger of Agency With CFTC, WSJ, 10.24.08
Scannell, Kara, Scope of Regulatory Revamp Is Likely to Widen Derivatives Market Could Get Oversight As Fed Expands Role, WSJ Sept.16, 2008.
Labaton, Stephen, New Regulator in Rescue Plan Spurs Debate, NYT July 21, 2008 (reporting Treasury Secretary Paulson’s proposal to consolidate FNMA and FHLMC oversight into a new agency, Federal Housing Finance Agency (FHFA) from the Office of Federal Housing Enterprise Oversight).
Paletta, Damian & Kara Scannell,
Deal May Expand Fed's Reach, Wall St. J. July 8,
2008 @ C3 (arguing SEC-FRB agreement expands the Fed’s power over brokerages
through more stringent capital and liquidity standards).
Future of Financial Services: Industrial Organization Analyses:
The Department Of The Treasury Blueprint For A Modernized Financial Regulatory Structure (March 2008) (capstone to President's Working Group on Financial Markets (PWGFM) architecture for functional rather than traditional sectoral regulation of the financial services industries)
Auction Basics: Background for Assessing Proposed Treasury Purchases of Mortgage-Backed Securities CRS Report for Congress, October 14, 2008 CRS#RL34707.
Scannell, Kara, Deborah Solomon & Sudeep Reddy, Fed, SEC Near Accord To Redraw Wall Street Regulation: Shared Information, Closer Cooperation Fill Oversight Gaps, WSJ 6.23.08 @ A3.
Reddy, Sudeep, Overhaul of Financial Regulation Gains Momentum: Bernanke, Paulson Discuss Oversight, Managing Crises, Wall St. J. July 11, 2008 @ A3.
Suspected Causes of 2008 Financial Collapse:
SEC Emergency
WSJ 6.28.08 (graphic & timeline)
Young, Michael, Willkie Farr & Gallagher,
assesses the impact of accounting rules
on the market meltdown and examines the sentiment that FAS 157 “broke down”
and whether our litigation system is ready to handle the fallout from the
credit crisis, Newsletter, Practising Law Institute,
Oct. 2008. [Mark to Market, Fair Value Accounting, Mark to Model (illiquid
derivatives)]
Scannell, Kara & Susanne Craig, SEC
Chief Under Fire as Fed Seeks Bigger Wall Street Role Cox Draws Criticism for
Low-Key Leadership During Bear Crisis, WSJ 6.23.08 @ A1
Davis,
Ann, Commodities Regulator Under Fire: CFTC Scrutinized As Congress
Looks Into Oil-Price Jump, Wall St. J.July 7, 2008 @ C1 (CFTC controversy in alleged crude oil
market manipulation investigation).
Reinhart, Vincent, Securitization
and the Mortgage Mess, July 18, 2008 @ A13 (arguing liquidity benefits
of mortgage securitization for home ownership diminished by lending practices).
Cooper, Anderson, 10 Most Wanted Culprits of the Collapse, AC360º CNN.com.
1. YOU … that is … all consumers share some responsibility, there is plenty of blame to go around, many redundant controls defeated & too few controls left to prevent catastrophe
2. Franklin Raines, former Fannie Mae CEO
3. James Cayne, former CEO, Bear Sterns, now division of J.P.Morgan.
4. Angelo Mozilo, founder: Countrywide Financial
5. Beazer Homes, USA
6. Alan Greenspan, former Federal Reserve Chairman (Reagan appointed, Senate confirmed 8.11.87, replacing Paul Volker, served unprecedented 5 terms, reappointed by both Bushes & Clinton, replaced by Ben Bernanke: 1.31.06).
7. Phil Gramm, TX Democratic Congressman (1978–1983), TX Republican Congressman (1983–1985), TX Republican Senator (1985–2002), senior economic adviser to John McCain's presidential campaign until 6.18.08; spouse: Wendy Lee Gramm, free market economist, former CFTC Chairman (1988 to 1993), resigned from CFTC to assume seat on Enron’s Board, including Enron’s Audit Comm., currently chairman: Regulatory Studies Program, Mercatus Center, George Mason University.
8. Christopher Cox, MBA & JD Harvard (ed. Harv.L.Rev.), SEC Chairman (8.2.05 to present), former CA Congressman (48th Dist. 1.25.89 to 8.2.05).
9. Richard Fuld, Chairman/CEO-Lehman Bros, NYU-Stern MBA (’73).
Crovitz, Don’t Sell Hedge Funds Short, WSJ, 10..08.
10. Joseph Cassano, head, financial product division (credit default swaps) AIG.
Discussion Points in Financial Regulatory Reform:
Securities Market Regulators-jurisdiction, history, regulatory
scheme, efficiency/effectiveness, controversies
Securities & Exchange
Commission (SEC)
State (Blue Sky) Securities Commissions
The U.S. Banking Regulators-jurisdiction,
history, regulatory scheme, efficiency/effectiveness, controversies
Department of the Treasury (Treas.)
Office of the Comptroller
of the Currency (OCC)
Office of Thrift Supervision
(OTS)
Federal Deposit Insurance
Corporation (FDIC)
Federal Reserve Board (FRB
or the Fed)
National Credit Union
Administration (NCUA)
Commodities Markets Regulators-jurisdiction,
history, regulatory scheme, efficiency/effectiveness, controversies
Commodities Futures
Trading Commission (CFTC) (CFTC’s regulatory history)
Federal Agencies potentially subject to reorganization
include the Federal Functional Regulators defined in
31 U.S.C. §103.120 [67 FR 21113, Apr. 29, 2002] authorized under 31 U.S.C.§5312(a)(2) & (c)(1) invoked in anti-moneylaundering legislation as well as Gramm/Leach/Bliley:
2) Federal functional regulator
means:
(i) The Board of Governors of the Federal Reserve System;
(ii) The
Office of the Comptroller of the Currency;
(iii) The
Board of Directors of the Federal Deposit Insurance Corporation;
(iv) The Office of Thrift Supervision;
(v) The
National Credit Union Administration;
(vi) The Securities and Exchange Commission; or
(vii) The
Commodity Futures Trading Commission.
FHLMC Charter (Freddie Mac), 12 U.S.C.
§ 1451 Note. (FreddieMac.com posting )
Revised: 11.17.08