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MAKING CENTS OUT OF THE NEWS
Blog #16
(October 30th, 2008)
RE-ARMING REGULATION – DUH!
By Tom McAllister, CFP™
When someone makes a big production out of saying something that goes without saying, “Duh!” may be the only appropriate response. In recent testimony before a congressional committee, former Federal Reserve Chairman Alan Greenspan made one of those “Duh!” statements. Greenspan acknowledged that U.S. financial institutions hadn’t protected shareholders and investments against what he called the “once-in-a-lifetime credit tsunami” we’ve been experiencing. He added that his free-market ideology, which shuns regulation of financial markets on the premise markets tend to self-correct has flaws (again, “Duh!”).
Greenspan suggested some specific regulatory changes are in order. First, he said, firms that bundle loans into securities packages for sale to investors should be required to keep part of those securities for themselves. “That would give the companies an incentive to ensure the assets are properly priced for their risks (“Duh! Duh!”). Greenspan added that, until late 2005, the Fed didn’t even know how large the subprime mortgage market had grown!
Second, recommends Greenspan, we need rules to address fraud in the settlement of trades. Financial companies, to his “shocked disbelief”, failed to provide adequate surveillance over their trading counterparts (“Duh! Duh! Duh!”).
The former Fed Chair concluded his remarks with the statement that “Steps to restore transparency and responsibility in the marketplace will go a long way towards restoring stability and confidence.”
After more than forty-six years observing financial markets and financial investors, and advising people as they build wealth and strive to preserve that wealth, I couldn’t agree more with Greenspan about regulation of the markets. Clearly, the old system is broken. Clearly a complete overhaul of U.S. financial regulation is in order. But a complete overhaul will take years, not months or days. Much depends on congressional action (and Congress suffers from its own forms of dysfunction). The SEC, as is the case with every large governmental bureaucracy, takes years to make even those routine changes proposed by the Financial Industry Regulatory Authority (FINRA). This is just the way our system works, and, I fear, a new administration is more likely to slow things down than to speed them up.
The temporary fixes that have been put into place, including suspending short sales on some financial stocks and reinstating the uptick rules
(see
“Rules Gone Wrong”
).
need to be reviewed, changed as necessary, and made permanent.
The first step in resolving any problem is to recognize there is one. I believe we recognize the problems now. Changing course, re-arming our regulators – these major shifts will simply take time. As is true in so much of life, for investors, patience may be our most productive attitude. (Those who know me well recognize that patience is a virtue I’ve been pursuing with far-less-than-perfect success my entire adult life!)
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