Wall Street Needs New Regulations

Image: Sam Weber

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In the aftermath of the stock market crash of 1987, reformers moved to remake America’s regulatory structure. Some experts proposed tinkering with the oversight agencies, merging the Securities and Exchange Commission with the Commodity Futures Trading Commission, for instance. Others recommended regulating derivatives, which were in their infancy. George Soros, not yet the bête noire of right-wingers, took to the editorial page of the Wall Street Journal to warn that nobody was thinking big enough: “The longer markets function without supervision explicitly aimed at maintaining stability, the greater the danger of an accident like October 19, 1987.”

Anyone remember the landmark 1987 Securities Act? It never materialized. And did anything happen in 1998, after Long-Term Capital Management nearly went under and a similar dance took place? Many of the same players strutted on the same stage, and Soros again predicted that without sweeping international regulatory reform, we risked “the breakdown of the gigantic circulatory system which goes under the name of global capitalism.” Again, no ’98 Securities Act—perhaps not surprising, given that what followed was a market recovery that we now know was a massive equity bubble. (View a graphic showing how investment vehicles escaped current regulatory measures.)

In our current financial mess, hardly a day goes by without another hearing on the failures of the U.S. regulatory ­system or speech on regulatory affairs. In November, Henry Waxman, chairman of the House Committee on Oversight and Government Reform, hauled five of the most influential hedge fund managers before the committee and extracted pronouncements from each of them—some less full-throated than others—that the markets, including hedge funds, needed more regulation. Once again, there was George Soros, as right as ever, leading the Regulatory Light Brigade.

This time, the calamity in the markets is more devastating than any of the previous crises since the Great Depression. Luckily, it’s looking like history won’t repeat itself. One of the enduring legacies of this economic collapse will be that the government finally had to embark on a wholesale financial rethinking. Right now, finding a way to end the crisis and reinvigorate the economy is the most pressing issue. But in a few months, after the Obama administration settles in—assuming we aren’t all eating cat food under a bridge—we are going to have the debate we need about how to rebuild the regulatory system.

The pressure to put off this debate will be enormous. The financial industry is bound to resist. But Wall Street is at its weakest point in decades; the new administration has to strike while the public temper is at its hottest.

“Investors have lost confidence in everything: the regulators, the system, the oversight of Congress, the fairness of our markets,” says Arthur Levitt, a former S.E.C. chairman. “How do you restore that?”

One hopeful sign is that President Obama has given the matter significant thought. In a campaign speech in March, he talked about regulating the derivatives markets and raising the capital standards for banks. If that speech becomes the template for reform, it’s a promising start. It’s also promising that Gary Gensler was named co-head of Obama’s search team for a new S.E.C. leader. Gensler has been a prescient critic of excesses at Fannie Mae and Freddie Mac (which were not remotely the cause of the crisis but were inarguably pockets of systemic risk).

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