Re-regulation Redux

Bear Stearns barely had been pronounced dead before the powers that be all started clucking about re-regulating the entire financial services business. Seems like only yesterday the industry was still being deregulated.


Obviously, the circumstances surrounding Bear Stearns' bankruptcy were extraordinary, exposing gaping holes in the patchwork system of regulation and self-regulation that always appears to be one step behind the realities of the marketplace. But the fact that the Fed had to be called in to prevent an overleveraged banking system and an unregulated swaps market from triggering a collapse of dominoes and a potential meltdown certainly justifies a re-examination of the current structure of agencies, authorities, bank boards and other bureaucracies.

There aren't any easy answers, and the solution can often be worse than the problem. Moreover, a figure like Treasury Secretary Henry Paulson probably would not have relinquished the CEO slot at Goldman Sachs just to take his current job in the weak second half of a presidential second term unless he could put his name on something significant.

It's obvious the financial markets have completely outgrown the regulatory framework established 70 years ago, so some changes are necessary. Still, skeptics can't help but question whether a system reengineered to prevent crises like the Bear Stearns meltdown will do any better at preventing some different disaster.

A cacophony of protests has sprung up from virtually every sector of the financial services business, including independent financial advisors, credit unions and savings and loan institutions. With the Securities and Exchange Commission's inability to deal with Bear Stearns' problems exposed, that agency now seems to be fighting for its regulatory life. However, we're only half way through the first chapter, so it's futile to guess how this book will end. It's way too early for hysteria.

On a related matter, I've been a little surprised in recent weeks talking to advisors and discovering how gloomy many are in their economic outlook. And that's coming from an editor, who by training is conditioned to look at the glass as half empty and who believes we are in a recession. My suspicions were confirmed when I read Andy Gluck's column this month on page 41.

There's no reason to think there will be a rip-roaring recovery later this year and, for all I know, the next great bull market in equities could be nearly a decade away. But the capacity of the U.S. economy to withstand the financial system's self-annihilating behavior, as exemplified by hedge funds imploding and investment banks' self-destructing, has been impressive. It is their propensity to self-destruct that is worrisome.

This month I had the good fortune to interview two BlackRock executives, Scott Amero and Peter Fisher, who probably enjoyed as good a view of the credit bubble bursting as anyone else. They think we've passed the maximum stress point. My guess is they're right.

Evan Simonoff, Editor-in-chief
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