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March 17th, 2009
04:49 PM ET

Reform the architecture of regulation

Henry Paulson
For The Financial Times

In the midst of the market turmoil, the pressing priority for US and global policymakers is to repair the financial system and restore the economy. Just as important, however, will be addressing the serious flaws exposed by this crisis. This process of reflection and reform will be critical to restoring confidence and enabling market-based capitalism to rebuild our economies. We must recognise the real possibility that because the crisis is not behind us, there may be lessons to learn and problems to address that are not now obvious. Yet many lessons are obvious and I take confidence from the commitment of world leaders – in the US, Europe, China and elsewhere – to pursue comprehensive regulatory reform and co-ordinate internationally.

First, this will be a big, multi-year undertaking. The crisis has exposed serious flaws in many aspects of our financial system. There will be proposals for more effective regulations in areas ranging from over-the-counter derivatives and short selling, to the practices of financial institutions, investors, mortgage originators and credit rating agencies. We will need to reflect on the long-held premise that sophisticated investors have the wherewithal to look out for themselves and require minimal, if any, supervision. In these areas and others, regulations must be crafted to foster market stability while maintaining the fundamental tenet of capitalism: if investors are to reap the rewards of taking risks they must also bear the negative results of their risk-taking.

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Filed under: Economy • Global 360°
soundoff (7 Responses)
  1. Michael "C" Lorton, Virginia

    You know Henry--impressive article-–and I have read many of the type--if we spent more time doing what we say instead of saying what we are going to do--you would have cause and effect of results-–we never follow through-–we never complete anything--and we are always in a turmoil-–JUST DO IT!--Nike did.

    March 18, 2009 at 8:42 am |
  2. J.V.Hodgson

    Paulson is absolutely correct. I have blogged before on this but we have to and need a regulatory framework that sticks with basic economics.
    1) If you do not own and have paid for it 100% you cannot sell it = "trading" =no short selling.
    2) you wanna be a "dealer", fine, put up 100% not just a margin amount ( this is unfair because if you are a hedge fund it's x% ) for poor me it is higher and more strict.
    3) Ban overnight trading outside market hours you can "trade" only during the hours of market open and close times globally.
    The above apply to all commodities, stocks, shares, bonds, and FX currency trades.
    Basic economics the reward for capital is interest, labour is wages or salary etc.
    The current crisis occured because those fundamentals ( ridiculous bonus deals included) were forgotten.
    CLO's, CDS's and other "derivatives" so called "insured" did not have adequate risk insurance premium charges levied by insurers making very risky investments look as though they were AAA rated so regulate these people as well they have to assess the underlying assets AND does the Insurance premium cover the risk? QED apparent Hedge fund returns reduce and have to have more realistic returns because of risk/cost.
    National banks like the Fed Bank of England Eoro bank have to re-act to asset bubbles on the macro and Micro economic level before they get out of hand.
    Who in gods name believed $147 a barrel of oil was a "Trade" it was "dealing and speculation" not driven by any economic fundamentals..... even if it is a "Cartel" which is supposed to be illegal anyway!!
    Regards,
    Hodgson.

    March 18, 2009 at 4:38 am |
  3. Michele Gomis

    Addendum to the above: The entire subject of standards and rules (to be complied with, and requisite audits) is a whole other subject, one my ideas do not encompass, merely allude to.

    If a revamp of statutes, laws, and legal codifications, as well as performance metrics, is to be constructed (sure!...right away....) I devoutly hope they would not be perverted into another tax code, degenerating into a mass of MORE incomprehensibility.

    I would expect and hope the new rules would be congruent with the new financial terrain in my little utopia. Simple. Accessible, and reflective of the pressing need for comprehension.

    (By the way...whatever happened to the Sarbanes-Oxley Act and its financial reporting requirements in all this hub-bub?)

    March 17, 2009 at 11:57 pm |
  4. Annie Kate

    One thing I would like to see modified is in the credit card industry – they make available to people too much credit at times. I try to keep my available credit line down so I don't get in trouble with debt to them, but as soon as I call them and ask them to take the latest increase in my credit limit off, they put on another one. At one point my main credit card that I use had a credit limit of over 50K, even though I had called and asked repeatedly for it to be capped at 12K. Its just too easy to get in trouble with a credit limit like that. Its almost like the credit card company is pushing you down the path to debt and ruin and the inability to even pay them – and that makes no sense at all.

    March 17, 2009 at 11:32 pm |
  5. Michele Gomis

    I agree, fundamentally, wtih this essay. As a "civilian" not privy to the esoterica of the financial world might I suggest my own triad?

    SIMPLIFY it
    It is difficlut to regulate and manage something that is unweildy and not amenable to clear and cogent understanding.

    Make it ACCESSIBLE for review
    Clearly define and charter that group which will have ready access to any data requested for required oversight and control. And give that group authority to enforce compliance.

    Make it RESPONSIBLE
    When excess are discovered, there should be accountabillity, responsiveness, and substantive penalty for unacceptable deviations and substandard disclosure, performance, and service.

    Taken together these things, I think, would substantially improve the service level of the financial world. Greed will not go away, but tight scrutiiny and stern oversight, both continuous and periodically intensified at unpredictable intervals, heavy penalties, and performance standards that MUST be complied with would simplify the lives of those who rely on the financial world for survival. They would know that the information they recieve would be true, accurate, timely, and reliable. (What a concept!)

    March 17, 2009 at 11:29 pm |
  6. Zach Wesley

    I am from kansas the backbone of America everyday i watch the news and listen to people about the bad economy. After all this bailouts I find out AIG is wanting to give bonuses to executives--WHY they got us in this recession so why do we reward them. I make enough money to get byeand have a little money to play with. And bye that i mean maybe 2-300 dollars a month. Why do people need millions on dollars in there accounts. IN my opinion when D.C gave the bailout money to them, All Contractrual Agreements were void giving bonuses to executives. If the america worker would just take over then everything would be ok. Most Executives sit in an office, take 2-3 day business trips to some island for a business retreat. Man i hope they dont break a nail ,strain there back, or JUST GET DIRTY like the people that are working in there business making it running for nothing. I have more opinions but i am to mad to type them right now . I do hope that my opinion is said on national TV I dont have anything to hide.

    March 17, 2009 at 10:31 pm |
  7. iloveyouwp

    the america big economy, dear obama emergency planing.

    March 17, 2009 at 5:26 pm |

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