Tuesday, February 16, 2010

Regulation, Reform, and Gekko- 02/16/09

Someone reminded me that I once said that greed is good, now it seems its legal
--Gordon Gekko

This year the SEC will collect $1.3B in fees related to transaction fees paid by exchanges and securities corporations when securities are sold. The other fees are collected when companies register new stocks and bonds. However, the Securities and Exchange Commission will only be allowed to spend the $960 million approved by the U.S. Congress. This raises an important question. Should the SEC be a self-sustaining firm that sets its own budget independent of Congress?

Since Mary Schapiro has taken reigns of the SEC the organization has aimed for sweeping reform of the U.S. Financial institution. These reforms include regulating derivatives, limits on commodity contracts, and discovering more Ponzi schemes. However, the argument persists that with a fixed budget from the House of Representatives the SEC will not have enough money to reinvest in operations. Specifically, reinvestment in technology could help speed up regulatory processes, expand oversight, and prevent error. Yet, the government has dragged its feet on this matter. The Securities and Exchange Commission projects income of $1.5B in 2010, though only about $1B will be in their budget. This is counterproductive in my eyes. The Obama Administration has promised sweeping reforms in financial regulation, but we are still stuck in the 20th century.

The solution must be global in order to ensure regulatory change and correction. As the Greek debt situation unfolds, new details will be discovered (i.e. swaps classified as loans or not). The regulatory culture must provide real transparency through an interconnected information processing system that connects the dots from bank loans to securities to sovereign debt to credit ratings to risk control. This may be too much to ask to soon, but this type of infrastructure needs to be put into place in order to sustain confidence and assurance in the global financial system. Hence, regulation needs to be a team effort not just focused on banking risk but also systemic risk.

Patrick M. Ambrus
Managing Partner
Analyze Capital LLC

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