Another Perspective on Financial "Reform"

Harvey Pitt, the one-time SEC chairman, wrote an editorial in Monday's Wall Street Journal discussing how the ability to learn, or not learn, from history, informs the deeply-flawed Dodd bill.

Thought Pitt was never my favorite SEC chief, his recent article reminds us of some inconvenient facts.

For example, he notes that the S&L crisis of the late 1980s didn't feature any one or few large institutions. Never the less, it required Bill Siedman to create the RTC and took many years and billions of dollars to process and ultimately dispose of foreclosed properties.

Another point Pitt makes is that, once again, Congress seeks to add to layers of existing regulatory authority. This has been the trend since, well, anyone can recall. It seems no agency is ever destroyed. At worst, it morphs into something else. Rather like the principle of conservation of energy.

When is the last time you remember an entire federal agency and its workers being simply eliminated?

No, instead we'll get more oversight boards and agencies with more civil servants in lifetime jobs. Does this sound like the crew that will catch the next explicit, deliberate financial excess perpetrated by groups of very bright financial executives with masters degrees in finance and associated quantitative disciplines?

Congress' own FCIC hasn't even finished its job yet, and both Congress and the administration are pushing for immediate passage of a 1,400 page bill.

Where is the sense in that?

Finally, Pitt sagely observes that, almost certainly in any case, and certainly in this case, whatever legislation is rushed through Congress and signed into law will "assure that we will experience anew the law of unintended consequences."

To me, this last is perhaps the most troubling element of the current rush to over- and re-regulated the financial sector.

For once, could someone just assemble a practically-sized group of reasonably-objective experts, sift through the last 50 years of financial disasters, and consider what type of regulatory bodies and rules would have effectively and efficiently minimized said crisis?

Certainly, one aspect involves credit and leverage standards. The S&L's came to ruin from mismatching durations of liabilities and assets. So, for that matter, did Bear Stearns and Lehman. And, very nearly, Goldman Sachs and Morgan Stanley.

On the exchange front, regulatory authorities have allowed, for some time, the NYSE and the NASDAQ to run under vastly different rules concerning circuit-breakers at the level of individual equities. Promises or expectations of liquidity vanish when they are most wanted, triggering sudden elevator-rides down in equity prices.

We know this happens. Do we want to prevent it, or simply make everyone aware of its possibility? Because, right now, we do neither.

Harvey Pitt did a good job exposing several important truths which currently-proposed regulations do not fix.

I regret to conclude that, as usual, we'll end up with more, more expensive, cumbersome and unwieldy regulatory authorities and processes, but no greater protection from the financial excesses which we deem unacceptable.