Wednesday, June 16, 2010

Crisis, Drama then Reform

In the 1980s, insurance company Commercial Union had a very catchy tagline: "We won't make a drama out of a crisis." This phrase could be turned around for the ongoing financial markets disaster, because much drama has been made from this crisis. And out of drama comes reform.
Change comes when big drivers - i.e. crises - force the industry to address its issues. The Enron debacle gave us the Sarbanes Oxley Act, global terrorism and 9/11 spawned Know Your Customer and anti-money laundering initiatives. Now the meltdown of 2008 is about to be rewarded with comprehensive financial regulatory reform. And BP's massive oil spill in the US Gulf is going to be the game-changer for oil drilling regulation (maybe even climate change).
As with most painful events, once the drama fades the will to punish the wrongdoers often weakens. In the run-up to the two financial regulation bills - one from the House and one from the Senate - resolve appeared to be wilting. Unrelenting pressure from an army of lobbyists for the financial services industry seemed to be making progress.
Fierce lobbying seemed to stiffen the resolve of politicians instead. Now as the bills go to a committee to find middle ground, much of what is irking Wall Street may come to pass. The Wall Street Journal reported on Tuesday that many lobbyists are now being turned away, with many being told their bank's views are already well known (imagine that!).
The Volcker Rule, once considered the most over-reaching solution possible by financial institutions, now looks certain to be included. The banks shrugged and turned their drama queen act toward Senator Blanch Lincoln's more draconian derivatives legislation. Although this one is losing momentum, with some softening indicated, it is still likely to be part of the overall package. Proposed regulation of ratings agencies (who practically minted the term 'conflict of interest') seems to be falling off the radar, however.
Whatever regulation gets through will have to be finessed and managed by the SEC and CFTC in the future. This is a task they were not up to previously. But again, perhaps lessons are being learned. According to the Washington Post, the SEC is hiring experts with specialized quantitative skills or have worked on Wall Street, thus will have a better insight of the  markets they regulate.
But as regulators learn, financial institutions learn faster. They gird their loins by hiring better lawyers or even SEC executives. The secretive high frequency trading company Getco hired Elizabeth King from the SEC, she was a key associate in charge of crafting rules for the equity and option markets. Last year Goldman Sachs hired Arthur Levitt Jr., the former chairman of the SEC, to advise the bank on public policy issues. (Although this year Goldman Sachs had to hire legal gun Gregory Craig, President Obama's former legal counsel, to help fight a civil suit brought by the SEC.)
Maybe now that the last financial crisis is on its slow, bumpy way to normalcy and the drama is fading, the regulators can get on with their work and prevent the next crisis. We can only hope that the regulators will have the wherewithal to hire the right experts, buy the right monitoring technology and the power to demand the transparency needed to make sure they know what is going on. Next stop - oil drilling regulation.

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