Mayor Michael Bloomberg welcomed the Securities Industry and Financial Markets Association's (SIFMA) annual meeting to New York last Tuesday, speaking at the conference's opening presentation.
He started off with a topic that became a heavy focus of the meeting: the need for a regulatory overhaul.
"We need simpler regulatory structures able to work effectively and efficiently across a wide range of financial institutions, and able to anticipate and adapt to rapid changes in the markets," Bloomberg said.
He outlined three principles for a new regulatory regime to be worked out by the new presidential administration and Congress: "consistency, transparency, and thinking and acting globally," which he went on to say are core beliefs of U.S. Treasury Secretary Henry Paulson. Paulson had been scheduled to speak later that morning at the gathering, but was unable to participate.
The need for greater consistency is a result of the regulatory disparities in financial institutions, Bloomberg said, citing the fact that although insurance companies are regulated by the state, companies like American International Group (AIG) have behaved more similarly to an investment bank (which are regulated by the Securities and Exchange Commission). He added that there is even less of a difference between an investment bank and a hedge fund; however, hedge funds are almost completely unregulated, he said.
Bloomberg also cited credit default swaps as examples of regulatory imbalance. Though these instruments behave similarly to insurance contracts, they are not named as such because that would invite regulation, Bloomberg said. "[CDS] have gone from insurance contracts to something you would see in Vegas," he said, citing the fact that they are now used as a way to bet on the market.
Maintaining the Order
A common agreement among the majority of speakers at the meeting was the need for a 'market stability regulator' that would have access to information about financial institutions, including banks, broker-dealers, insurance companies, hedge funds, and private equity funds, and would act as a central stabilizing force. The Federal Reserve has recently been suggested for this role.
The financial system needs a stability regulator that has access to information on institutions that is systemically reported and coordinated with other regulators to avoid regulatory burden and duplicate oversight, said Blythe Masters, head of global commodities at JPMorgan Chase and chairman of SIFMA.
She also cited the need for a central clearing organization over state regulation as a way to reduce systemic risk.
Masters brought attention to the fact that she has been called "the woman who built financial weapons of mass destruction," because of her history in the industry. But she cautioned that there is an important distinction between disfunctionality in the product and in the underlying collateral - citing the problems with the subprime mortgage collateral used in these pools. "There is also a difference between the tools and their users," she said.
A following panel proposed the idea of a business conduct regulator that would supervise business operations across all financial institutions. This would create a 'Twin Peaks' regulatory system that would have two separate focuses, one on safety and soundness, and a second on conduct-of-business regulation.
A streamlined approach to the regulation of financial institutions might also include minimizing systemic risk to the financial system through a systemic regulator.
The International Monetary Fund (IMF) in Europe - which is made up of 185 countries, with representation determined by relative economic weight - has been considered for this job, T. Timothy Ryan Jr., president and chief executive officer of SIFMA, said during one of the sessions.
A Whole New World
Transparency will also be imperative in regulatory reform, Bloomberg said. "The great enemy of liquidity is uncertainty. When investors can't clearly see and assess the risks and rewards of financial instruments, they shun them."
Many of the heads of the institutions holding complicated assets didn't understand their risks, Bloomberg said. He noted that although Lehman Brothers overextended itself, the government should not have let the firm go out of business - a traumatic turn of events for the economy.
To much agreement, Bloomberg said that there is also a need to take a global perspective on the financial markets, calling attention to the fact although regulations are written and enforced with a solely domestic focus, "the panics that countries around the world have experienced, and the freezing up of global credit markets, tell a far different story." "Countries," he continued, "are increasingly inter-dependent on each other for goods and services... [We need] to start thinking about how to ensure that the accounting and financial regulatory standards in all these nations are consistent across borders and also that they are consistently enforced."
Given the widespread impact of the financial crisis, the market needs to look at the financial markets on a broader scale. "Global challenges call for global solutions," said John Lipsky, first deputy managing director at the IMF.
Regulation and supervisions have traditionally focused on instruments and institutions, and have not taken cycles of macro-prudential factors into account.
But confidence in the industry and the financial markets as a whole remained strong at the meeting, despite the sense of an urgent need for regulatory remodeling.
"We have the opportunity to look at the entire regulatory regime and make some profound changes," Mary Schapiro, chief executive officer at The Financial Industry Regulatory Authority (FINRA) said. "We have a chance to do it correctly now, and we should take the chance."
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