Panel II

Financial Regulation in the US: What Changes are Needed?

Reforms in financial-regulation markets are critical for preventing future fiscal crises, ensuring market stability and protecting national and shareholder interests, according to a panel convened to celebrate the 25th Anniversary of the Mossavar-Rahmani Center for Business & Government.  The panel, Financial Regulation in the US: What Changes are Needed? featured discussants from the public and private sectors analyzing current market conditions.  

Robert Glauber, a faculty member at the Kennedy School and chair of the panel, opened the discussion by expressing concern over the high price of regulation in a “fragmented system of regulatory bodies in US.”

John Walsh, speaking on behalf of Comptroller of the Currency (and Kennedy School Alumnus) John Dugan, advocated for sound risk management by adopting the “supervision-first and enforcement if necessary” principle. He noted the Office of Comptroller of Currency (OCC) has found that its own distinct style of direct prudential supervision to be most effective in managing financial market risks.

Walsh identified key areas where changes are needed - highlighting banks’ weak underwriting standards used to maintain a high lending volume as one place for improvement.  Walsh argued banks transfer their risks to the markets at a cost of “some investors (e.g. hedge funds) who are willing to take such risks” because of the asymmetry of information.  By moving from an originate-and-hold model to an “originate-and-sell-to-secondary-markets” model of mortgages, Walsh argued banks have become more comfortable with a weakened set of standards.

Thomas Russo, Vice Chairman of Lehman Brothers and the firm’s chief legal officer, advocated for reexamine regulatory issues.  Criticizing U.S. competitiveness and an overly litigious society, Russo argued “If we have the option, we pick doing business outside the country” harming our own long-term interests.  Instead, Russo called for a proactive regime, praising the Federal Reserve system and the U.S. Treasury for ridding the market “of temporary imbalances.”

Abe Friedman, Director of Barclay’s Global Investors Corporate Governance and Proxy Voting focused on the basic fundamental rights of shareholders, which he believes, “at present are not guaranteed in the capital markets.”   By expanding shareholder rights, he argued, “We could minimize the needs to regulate the markets if we could ensure the fundamental rights of shareholders.”

Friedman outlined three rights necessary for shareholders to properly police their holdings: (1) Voting rights - including the power to decide on Directors, (2) Property rights, and (3) The right to amend a firm’s constitution.  With these rights, shareholders can better monitor their holdings, decreasing the need for stringent enforcement. Friedman thinks conferring these rights to shareholders is certainly possible, given that two-thirds of the S&P 500 have adopted majority voting systems in their by-laws, and would serve as an effective form of self-regulation.

- Devpriya Misra
MPP 1, Student Rapportuer