Tuesday, June 16, 2009

Lack of Regulation Didn't Cause the Crisis and More Rules Won't Prevent the Next One: Tech Ticker, Yahoo! Finance

Definitely not the best video ever (Ex. SOX was not designed to prevent these type of problems), but it does get the point across that regulation for regulation sake is not a good idea, that people will find ways around regulations, and that hedge funds did not cause the problems, banks (which were already heavily regulated) caused the problems.

(Watch the video).

Lack of Regulation Didn't Cause the Crisis and More Rules Won't Prevent the Next One: Tech Ticker, Yahoo! Finance:
"Jeff Matthews...wants you...to remember this: 'The epicenter of the financial crisis that almost brought the world to its knees was the regulated portion of the U.S. financial system -- in particular Fannie Mae and Freddie Mac, two of the most regulated entities ever created.'"
Thanks to MT for the link!

1 comment:

Anonymous said...

Not so certain about this. The SEC's CSE rules are partially to blame for the failure of the brokers. Of the five brokers that originally were part of the CSE program in 2004, one is in bankruptcy(LEH), two have been forced into mergers due to funding runs (BSC and MER) and one faced a post-LEH near death experience (MS).

The CSE rules implemented by the SEC in 2004 were Basel II bank rules applied with no adjustment to the unique characteristics of brokerage industry. There were no liquidity limitations on trading activities. There were no leverage limits. The rules had wide acceptance of hybrid capital sources. There were no "double leverage" limits on intercompany capital structures.

Worse yet these rules made the brokers look very strongly capitalized. So the old traditional rating agency rules that the brokers had previously lived under during the period 1985-2004; no double leverage, positive cash capital, leverage <18:1, limitations on preferred and hybrid capital and limitations on private equity investments; were thrown out since the SEC provided a new approach to capital adequacy which made every firm very VERY good.

And an industry that was being told by its principal regulator that it was strongly capitalized very correctly responded by increasing leverage, increasing double leverage, issuing weak forms of equity, short funding its balance sheet and reducing its liquidity by increasing less liquid assets and principal investments and private equity.

And the most damning fact about the CSE is that, the SEC chose to regulate the six largest firms in the US securities industry on a global basis with a staff of twenty five professionals in its Market Reg group.

It may not have caused the crisis but the SEC certainly aided and abetted the crisis...