Tuesday, November 11, 2008

Senator Charles Schumers's 6 Principles of Change from theTARP Summit

I attended the Securities Industry and Financial Markets Association (SIFMA) Troubled Asset Relief Program (TARP) Summit in New York yesterday. SIFMA expected 350 people to attend, but over the weekend the registration swelled to over 600 people. The day was broken up into several sessions each with a plethora of information about the current state of the TARP, the future of the TARP and other uses for the TARP. In the key note address Senator Charles Schumer spoke.

Key Note Address - Charles Schumer, US Senator - New York

Senator Schumer took the first part of his speech to blame the laissez faire policies of the Bush administration for the current economic turmoil. He implied that the lack of regulation was the reason the mortgage markets, housing markets, and Wall Street became distorted . He then went on to outline his 6 principles of change:

1. Focus on Systematic Risk and Financial Stability - In the early stage of the economic crisis the most important thing for the government to focus on is systematic risk and financial market stability. Much like an emergency room doctor, first the patient must be stabilized and then the illness can be treated.

2. Unify and Simplify the Regulatory Structure - No surprise here, as one of the themes of conference was that an antiquated and often contradictory regulatory system exacerbated the current crisis.

Senator Schumer suggested that the new regulatory structure be modeled after the UK where one regulator oversees virtually all investment activities. He implied that the new single regulatory body would have the power to tell financial institutions when to cut back on risk and that if this regulatory body was in place perhaps Bear Stearns could have been saved.

While having an updated regulatory system is essential, Senator Schumer's assumption that a government agency may be more adept than investors at evaluating risk requires that the government understand the risk better - a colossal and flawed assumption.

3. We Need More Information on Complex and Opaque Financial Instruments - Again, not a shock given the current situation. This is a laudable goal as long as it can be accomplished without revealing proprietary and competitive information.

4. Recognize that the Global Financial System Needs Global Regulation - Senator Schumer's point was that if the US regulates the financial industry and activity moves to London or elsewhere then there really has been no progress or regulation. This is a complicated but essential goal in the new globalized world order.

5. Increasing Transparency Must be a Central Goal - Here Senator Schumer suggested that major players (read hedge funds, banks and insurance companies) must be required to disclose positions just like mutual funds.

Surprises have been fuel to fire over the last year. Now that the curtain has been pulled back everyone wants and deserves to understand how to avoid being deceived in the future.

6. Laissez Faire View that No Regulation is Good Must End - This brought him back to the beginning of the speech where he blamed the current administration for the economic collapse. He did make the point that over-regulation was not the answer either. He warned against regulating away innovation and the entrepreneurial spirit of America.

In general Senator Schumer's speech suggested what we already knew; the US and the world are in for a new era of increased financial regulation and transparency. It was encouraging that the Senator understood the genius of America is the ability to adapt, change, innovate and ultimately flourish. The US was built on flexibility and ingenuity and that is exactly what will move the country forward, it is essential to keep that spirit alive in any new regulatory structure.

Disclosures: none

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