Regulatory change is not on next year’s agends, says Greg Newton.
It seems somehow quaint to revisit the halcyon days of mid-2006
when Henry Paulson went to Washington. Freshly shorn of about
$700 million-worth of Goldman Sachs, the newly unconflicted
secretary of the US Treasury stomped into power promising to
rip up the threat to Americas financial
competitiveness posed by an ever-expanding rulebook
in which multiple regulators impose rule upon rule upon
rule, while rivals revelled in the glow of
We pause here for the global financial catastrophe, and
obeisance to the Scottish poet Robert Burns. In his poem To a
Mouse, he presciently addressed issues such as market
volatility (O, what a panics in thy
breastie!), residential mortgage securitizations
(Thy wee-bit housie, too, in ruin! Its sill
was the wins are strewin!) and
delivered the verdict even on officially sanctioned
market-manipulation see short-selling bans, among others
(The best laid schemes o Mice an Men,
Gang aft agley).
So while Paulson will leave Washington with his dignity
intact however well contained his successes, that
wee, sleekit, cowrin, timrous beastie tag
hardly fits his road to a doubtless sinecure-embellished
retirement will be sadly bereft of Mission Accomplished
As with so many of the smoking grenades that are the Bush
administrations legacy, the can of worms that is the task
of restructuring the US regulatory complex has been kicked just
far enough along the road to become just another folder in
president-elect Obamas in-tray.
That is likely good news for the US exchange-traded futures
business. The futures industry mostly in the form of its
various clearing house operations is perceived as being
part of the solution to the over-the-counter derivatives market
But, best of all, the futures markets have a very prominent
seat at the table, with the appointment of one-time Chicago
Mercantile Exchange director Rahm Emanuel as the White House
chief of staff. Timothy Geithner, the president of the Federal
Reserve Bank of New York and presumptive Paulson successor, has
been a crusader for over-the-counter market transparency for
more than three years, even if he had, until recently, achieved
little more generating a stream of platitude-laden press
releases. (430 and still counting.)
The most important change in the regulatory conversation
since Paulson first went to Washington has been the abandonment
of calls for so-called principles-based regulation,
which does rather assume that the regulated have principles
other than maximizing their annual bonuses, in favour of
something called objective-based regulation.
The phrase was first used by Paulson in a July appearance
before the House Committee on Financial Services to discuss his
Blueprint for a Modernized Financial Regulatory Structure,
which was published in March 2008.
More recently, it was bandied about by Walt Lukken, acting
chairman of the Commodity Futures Trading Commission, who
recently added his voice to the chorus demanding that the
outdated regulatory framework be scrapped.
He called for a new structure comprising a systemic risk
regulator, which would police the entire financial system to
spot black swan risks before they break out of
their eggs (and good luck with that); a market integrity
regulator to oversee the safety and soundness of key financial
institutions, including exchanges; and an investor protection
regulator to handle investor protection and business
As Lukken conceded, his concept has much in common with the
earlier Paulson blueprint. But the challenges of dispersing the
different functions of the CFTC, as well as the SEC, and
the various banking regulators including the
Federal Reserve Board, the Federal Deposit Insurance Corp and
several lesser-known players, not to mention the state-level
bureaucracies among the three new regulators will force
a complete rewrite and modernization of the laws and
regulations governing the financial markets, including the
securities and futures laws, said Lukken.
In other words, regardless of how well conceived the design
of, and how urgent the need for, the proposed regulatory
restructuring, it is unlikely to happen in 2009. Legislation
must be written and proposed, hearings must be held, views must
be considered and, most critically of all, the existing
agencies, and the lobbyists who have captured them, must battle
for their future influence and prestige.
See you in 2010 maybe. In the meantime, carry on as
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