Monday, March 29, 2010
New FinancialRegulations: Transparency & Accountability
Financial regulation is all the buzz in Washington as the Health Care Reform legislation has been passed and signed. But, there are so many facets of financial regulation that need to be addressed, and there are hundreds of bank lobbyists running around Washington trying to influence new legislation and get the new and necessary legislation watered down as much as possible. The question is: will they succeed?
Today, I want to briefly discuss the source of one of the biggest problems as it relates to the mortgage market. The bubble in residential mortgages was inflated and kept going because of the process of securitization of mortgages. This process of securitization permitted financial institutions, banks and mortgage brokers, to convert mortgages into bonds that could be rated by the credit rating agencies and then sold around the world. The problem does not rest with the securitization of mortgages, but rather the fact that the underwriters of these mortgaged-backed bonds pay a fee to the credit rating agencies for the credit rating. This built-in conflict of interest has not been addressed, nor has the problem of the underwriters shopping a rating been curtailed. The present credit rating system is a failure, and until it is corrected there will be little demand for mortgage-backed bonds and thus a recovery to the housing market.
But, this is only one of many issues surrounding the way business is done on Wall Street and how banks, financial advisers, brokers and fund managers treat investors both individual and institutional. We are a long way from a strictly cash economy Dorothy, and yet we are all very much still in Kansas. Without stronger regulation of the banking system from the Federal Reserve Bank, the Treasury Department and the Office of the Comptroller of the Currency, we will all continue to suffer from the present recession. In the age of electronic banking, and a keystroke can move funds around the world in a matter of seconds, stronger financial regulation is imperative. Our domestic economy, GDP - Gross Domestic Product, will not resurrect itself without more transparency and accountability.