Published: Thursday, December 18, 2008
IN OUR VIEW
So, regulation really does have a role to play
Considering the morass of mischief that seized our financial systems this year, maybe we shouldn't be surprised that Wall Street big-wig Bernard Madoff was allegedly able to perpetrate a $50 billion Ponzi scheme. The effective regulation of financial markets, it seems, has become too complicated for mere mortals.
If so, it's time to uncomplicate it -- in a major way.
The recent history of deregulation is stained by schemes that only the smartest operators in the room could understand, with a few getting rich and a lot getting fleeced. (See Enron under energy deregulation.)
Recently, we've seen the scourge of "credit default swaps," contracts that were sold essentially as insurance against defaults on mortgage loans, but which didn't operate by the rules that apply to normal insurance companies -- bothersome stuff like reserve requirements and periodic checks by examiners to make sure the money is really there to cover potential claims. When it turned out that large bundles of covered securities were full of bad mortgages, the government had to step in with hundreds of billions of taxpayer dollars to prevent a complete financial-system collapse.
The thinking that helped get us into this mess was that the free market would essentially regulate itself. Congressional leaders now promise an end to such naivete, which raises worries of over-regulation that will create red tape for its own sake and stifle innovation. Clearly, reasonable rules with effective enforcement should be the goal.
But that must be accompanied by a common-sense recognition that those who enforce the rules must first be able to understand what they're regulating. Schemes that bury accountability under tangled layers of confusion shouldn't be allowed.
Regulators must also take their role seriously. Securities and Exchange Commission Chairman Christopher Cox this week blistered his own staff attorneys for failing to act on allegations of Madoff's wrongdoing going back nearly a decade. Rather than seeking an investigation that could have forced Madoff to surrender key information, Cox said, they relied on information Madoff and his staff handed them voluntarily. Why even show up for work?
Regulation shouldn't be overdone, but we've learned, painfully, the price for ignoring it. Congress and the incoming Obama administration must act on that lesson.
If so, it's time to uncomplicate it -- in a major way.
The recent history of deregulation is stained by schemes that only the smartest operators in the room could understand, with a few getting rich and a lot getting fleeced. (See Enron under energy deregulation.)
Recently, we've seen the scourge of "credit default swaps," contracts that were sold essentially as insurance against defaults on mortgage loans, but which didn't operate by the rules that apply to normal insurance companies -- bothersome stuff like reserve requirements and periodic checks by examiners to make sure the money is really there to cover potential claims. When it turned out that large bundles of covered securities were full of bad mortgages, the government had to step in with hundreds of billions of taxpayer dollars to prevent a complete financial-system collapse.
The thinking that helped get us into this mess was that the free market would essentially regulate itself. Congressional leaders now promise an end to such naivete, which raises worries of over-regulation that will create red tape for its own sake and stifle innovation. Clearly, reasonable rules with effective enforcement should be the goal.
But that must be accompanied by a common-sense recognition that those who enforce the rules must first be able to understand what they're regulating. Schemes that bury accountability under tangled layers of confusion shouldn't be allowed.
Regulators must also take their role seriously. Securities and Exchange Commission Chairman Christopher Cox this week blistered his own staff attorneys for failing to act on allegations of Madoff's wrongdoing going back nearly a decade. Rather than seeking an investigation that could have forced Madoff to surrender key information, Cox said, they relied on information Madoff and his staff handed them voluntarily. Why even show up for work?
Regulation shouldn't be overdone, but we've learned, painfully, the price for ignoring it. Congress and the incoming Obama administration must act on that lesson.
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