With the subprime crisis and credit crunch still hurting US economic growth and damaging financial markets confidence, there are finally some meaningful ideas from the US Government on revamping regulation of the country’s financial markets.
News of the proposed changes comes as Prime Minister Rudd revealed yesterday that Australian brokers will be able to sell Australian shares more easily in the US.
Given that the likes of Goldman Sachs, Citigroup, Lehman Bros, Morgan Stanley, JP Morgan and Merrill Lynch already dominate our broking industry here (along with European giants, UBS, Credit Suisse and Deutsche Bank), you’d have to wonder what Mr. Rudd’s announcement was really about.
The essential part of the announcement was that from the end of this year both countries will recognise each other’s securities regulation regimes. (You’d have to wonder why this wasn’t done earlier. Nothing has changed in either country for some years).
It will be a trial (so it’s not the dramatic breakthrough it seemed yesterday), but it is nevertheless a start.
That’s why the changes proposed in the US (and to be announced tonight, our time, by the US Treasury) bear some understanding. They may not happen but they will be strongly debated.
Given that the lessen regulation of Wall Street, they are probably doomed to fail in the current climate of unease and distaste about the role investment banks and others have played in the current set of problems.
The series of recommendations will radically reshape the regulation of the American financial services industry, giving broad new powers to the Federal Reserve to tackle systemic risk (as we have seen in recent weeks).
The move will come as there’s growing impetus in the Congress for an overhaul of US financial regulation after the subprime mortgage scandal, the credit crisis and the ‘rescue’ of investment bank, Bear Stearns.
Newsagency reports say the US Treasury had been working on its proposals since early last year, in an effort to bolster US capital markets amid growing competition from overseas.
But that competitive market drive has been overtaken by a desire to confront the issues raised by the current series of scandals and crises.
With the US in full-on election mode, there’s been a rising interest in the issue among Congressional democrats eager to score points against the Republican Bush Administration for lax oversight and poor handling of the issue, especially the subprime mortgage crisis which is hurting thousands of US voters every week.
The Financial Times and Bloomberg both say that a main feature of Treasury’s plan, which will take several years to implement, would give the Fed greater power to regulate financial firms such as investment banks and hedge funds, when their actions could pose a threat to the system. But that will not mean permanent regulation by the Fed of investment banks such as Goldman Sachs and Merrill Lynch.
A second and possibly just as vital feature of the plan reportedly involves a reduction in the role of the Securities and Exchange Commission.
The SEC would be merged with the Commodity Futures Trading Commission and would take a more hands-off approach in its oversight of exchanges in favour of the CFTC’s “principles-based” self-regulation, according to the proposal.
That would bring the basis of regulation of securities markets more into line with those ideas in Britain and Australia where it is a set of principles that drive regulation of the markets, rather than black letter law, as the US has at the moments with the SEC.
A third part of the plan (and one that will be bitterly opposed by some in Congress and some in Government and industry) is the elimination of regulatory overlap by the consolidation of the various regulators that oversee commercial banks and thrifts.
This would see the Office of Thrift Supervision and the Office of the Comptroller of the Currency merge into one “prudential financial regulator”.
There would also be a federal regulator for the insurance industry created, which would replace oversight by each of the 50 US states, and the creation of a Mortgage Origination Commission – to try and put a system of controls in place to prevent the reappearance of a subprime or some other type of mortgage based boom that slides through the regulatory cracks.
The recommendations call for the formation of a "Prudential Financial Regulator” to oversee financial institutions that have an explicit government guarantee such as deposit insurance.
The US Treasury calls for a "Business Conduct Regulator” to monitor disclosures, business practices, chartering and licensing. It also suggests a "Corporate Finance Regulator” with "responsibilities for general issues related to corporate oversight in public securities markets".
Australia has APRA, the Australian Prudential Regulation Authority, which oversees all deposit taking and insurance groups (life, super and general).
ASIC oversees disclosure, corporate behaviour and has oversight of the financial markets (with involvement of the ASX, which will have to be ended). ASIC licences people.
So in many respects the US is heading down our route of regulation.
But don’t expect any real change because of the ability of the states and congressional lobbyists and others to frustrate it.
It doesn’t tackle the blurred roles of credit rating agencies which was a prime cause of the explosive growth of CDOs and other derivatives which are now imploding as the same agencies reduce the ratings (Triple A for securities based on subprime mortgages!) and force write-downs and losses on investment banks and other investors and promoters.
That could be almost guaranteed to see the whole idea fade a
