Financial market regulation is a mess

[CHIMO]

On Wednesday, the Senate agriculture committee passed legislation to finally regulate and bring transparency to derivatives trades and, in particular, the credit default and currency swaps. These have been held up as examples of financial market excess, opacity and economically harmful practices in everything from the Greek debt crisis to the recent SEC charges against Goldman Sachs. But if you're wondering why the Senate committee on agriculture, nutrition and forestry (ANF) has any jurisdiction over the legislation designed to reform and re-regulate the financial markets, you've successfully identified one of the key problems with financial market regulation that the reform bill likely won't resolve: the dilution of regulatory authority over the financial markets.

The ANF committee had jurisdiction over derivatives because of its historical mandate to oversee the commodities futures trading commission, since futures trading was initially established for farmers' use. Paul Blumenthal of the Sunshine Foundation has suggested that the committee's continued jurisdiction over the financial markets has more to do with its members – and its chair's – ability to extract campaign donations from more moneyed sources than those left in the agricultural sector – and that is, at a minimum, a rather lucrative side benefit of the committee's continued jurisdiction over futures trading.

But one of the main problems identified with some of the players and transactions that precipitated the crisis was that no one agency was at the helm, and agencies didn't share information about the organisations and individuals under their jurisdiction (or under investigation) in a timely or helpful way. From the New York Fed (under the leadership of current treasury secretary, Tim Geithner) telling AIG to limit its disclosures to the SEC about its transfer of bailout payments to Goldman Sachs to internal SEC squabbles that allowed the Madoff Ponzi scheme to continue, the financial implosion stories of the last few years are filled with examples of companies that either deliberately used or (if we're being generous) inadvertently benefited from the diffuse nature of financial market regulation and bureaucratic turf wars.

What does the financial regulation currently underway plan to do about those problems? Almost nothing. Those agencies with discrete regulatory functions will, by and large, keep those functions even when there is overlap with other agencies. Unlike with the formation of the department of homeland security – a mess itself, as any observer knows – there has been no serious contemplation of how to resolve overlapping authorities, clarify each organisation's role by bringing a host of functions under one roof. The Fed wouldn't even concede that the overall health of the economy and the protection of the consumers that make up the economy from predatory or illegal financial transactions might be the same thing, but it demanded that it be given authority over the once-independent Consumer Financial Protection Agency to ensure that nothing that protects consumers hurts financial institutions' ability to make money from ripping off consumers.
http://www.guardian.co.uk/commentisfree/cifamerica/2010/apr/22/financial-market-regulation-senate

[notesdev]

1. A mess?

Looks like they have it set up exactly as they like it, big guys do what they like and have a nice thick web of regulation that only applies to their smaller competitors.

[RM33]

2. New regulations don't help.

Another problem is that government regulators tend to be C- students while Wall Streets then to be the A+ students. Top college grads can get top paying jobs. The government can't match the salaries that Wall Street firms can afford to pay. So they can only afford to hire the college grads rejected by Wall Street firms. The C- student.

So what is the result? Financial whiz kids stay one step ahead of government regulators by creating new exotic products that regulators don't understand. They can out think the government. So by the time the government catches up to what Wall Street is doing, it is to late.

A better solution is to bring back the great divide. Separate investment from banking. The job of a bank is to warehouse money and make boring loans. Let the investment firms speculate. If they fail they will destroy themselves without talking the banking system with them. By isolating investment from the rest of the financial industry we protect the system.

The said truth is more rules will not work because the financial whiz kids will just find a way around the rules.