Legal panel analyzes US regulatory failures

Feb 12, 2009

Reforms require future global coordination

In the midst of what one participant described as ‘a catastrophic moment in US financial history’, top lawyers, financial advisers and governance critics gathered yesterday in New York for a panel on ‘reinvigorating oversight of the financial system’. Panelists agreed disasters at numerous institutions are sure to bring about a substantial increase in regulation and debated what should - and will - take shape.

Damon Silvers, associate counsel for the AFL-CIO and member of the Congressional Oversight Panel on the Troubled Assets Relief Program (TARP), said a huge problem has been the failure to anticipate so many institutions moving into the ‘too big to fail’ category. Capital and insurance requirements should have increased, but didn’t, he said.

Investors were also left vulnerable by executive compensation packages that encouraged risk taking, lack of shareholder rights such as access to the proxy and paltry resources at the SEC, noted Silvers and others on the panel, sponsored by Columbia Law School and the American Constitution Society for Law and Policy.

Even before it was tasked with developing the stimulus and bank bailout plans, the Treasury Department had been contemplating its Blueprint for a Modernized Financial Regulatory Structure. Along with being dated, the US system is complicated by having federal, state and industry regulators. The blueprint suggested moving the US toward a kind of ‘Twin Peaks’ approach, as practiced in Australia and the Netherlands, which separates authority between two regulators, one overseeing safety and soundness, the other overseeing conduct of business.

That may not be a cure, however. ‘I have a hard time getting enthused about the structural reform issue,’ said Donald Langevoort, a Georgetown law professor. ‘On paper, of course, we should have something like a Twin Peaks model.’

Langevoort said it was unclear, for example, which side should regulate short sales, clearing and settlement, or even disclosure. ‘Without some kind of czar, I worry that there will be as many fights and systemic breakdowns as before,’ he added.

The US can’t act alone. ‘We now have global economy with global capital flows that go around regulators,’ explained Lee Meyerson, a partner at Simpson Thacher & Bartlett, who was retained by the Treasury to help develop a template for the TARP bailout. ‘We can’t have limits on US banks that don’t apply elsewhere. The world is flat, and money sloshes around with no regard to borders.’

By Anna Snider