The country has wasted its chance to meaningfully change the way it regulates financial institutions, a former top Securities and Exchange Commission official said this morning during a panel discussion at the Federalist Society’s annual conference.
"The opportunity to reconsider the structure of financial regulation has been lost," said Annette Nazareth, who served as an SEC commissioner between August 2005 and January 2008 and is now a partner with Davis Polk & Wardwell.
While the panel's broad topic was the future financial regulation in the wake of the 2008 Wall Street meltdown, much of the discussion inevitably turned to possible problems with adding new rules and restrictions to the marketplace. The four speakers were generally dismissive of the reform measures now being proposed in Congress. And most of the panelists seemed skeptical that light regulation had been a problem at all in the financial crisis.
Paul Mahoney, Dean of the University of Virginia School of Law, argued that issues like executive compensation, the repeal of laws separating investment and commercial banks, and failures to protect consumers had little to do with the events which brought the financial system to the edge of collapse. Rather, he said, the Federal Reserve’s poor monetary policy, which kept interest rates artificially low, was the main culprit.
Paul Atkins, another former SEC commissioner and member of the Congressional Oversight Panel, told the audience that “hasty” regulatory measures during the Bush Administration, such the Sarbanes-Oxley Act, had distracted firms and regulators from more pressing problems at exactly the wrong time. He said the United States still needed to be concerned with making its financial markets appealing to investors.
“Unfortunately, I think the administration’s mantra is stability uber alles,” he said.
And while Stephanie Breslow, a partner with Schulte, Roth & Zabel, spoke mostly about issues concerning hedge funds, she too took time to point out what she saw as problems with adding extra regulation, such as forcing hedge fund managers to register themselves. She recounted the story of a government auditor who was astounded to find out her client was selling stocks his fund didn’t own. The name of that mysterious practice: short selling.
"The registration process means at some point some 26-year-olds show up in your office and try to figure out what you’re doing," Breslow said. "And no offense to 26-year-olds, but there’s only so much they’re going to do."
Nazareth, however, took a slightly different track. With a massive diagram titled “Today’s Ugly System” projecting on each side of the Mayflower Hotel’s Grand Ballroom, she argued that the current “byzantine” regulatory framework was simply outdated, rooted as it was in the financial landscape of the 1930’s. She said that rather than add on new regulators, as a new bill proposed by Sen. Chris Dodd (D-Conn.) would do, Congress should have been focusing on consolidating the system.
Nazareth personally advocated creating two main regulators, one to manage the soundness and safety of financial institutions, and another to police business practices. She said the patchwork of regulators now in place had led to a “race to the bottom.”
She said that unfortunately, those sorts of systemic changes were no longer a part of the public discussion.
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