Friday, December 11, 2009

Reining in Wall Street

The New York Times reports on the latest attempts to further regulate the financial sector:
The legislation, which combines nine separate proposals, is viewed by Democrats as a comprehensive response to the financial crisis last year. It seeks to place new controls and transparency on derivatives, the complex financial transactions that were blamed as a main cause of the economic collapse. It would allow consumers to sue credit rating agencies for flawed evaluations of financial products.

The measure also would give shareholders an advisory vote on executive compensation and allow regulators to intervene in cases of inappropriate pay packages. It would put extensive new scrutiny on companies deemed to be large enough or interconnected enough to put the entire economy at risk in an effort to reduce the chances that, in a future crisis, they would be judged “too big to fail.” It bolsters the ranks of federal regulatory agencies.
There is so much to laugh at here. Allowing regulators to intervene in cases of inappropriate pay packages? Who decides what is inappropriate? (Especially funny/disgusting in light of this news) What constitutes too big to fail? Is this based on the number of lobbyists in the company's employ? Why new controls on derivatives? Does Congress know better the potential risks than the companies themselves?

My favorite, however, is allowing people to sue credit rating agencies -- nice payoff to the lawyers. What is a flawed evaluation? One that later turns out to be wrong? Is being wrong going to be a sue-able offense? Given that the SEC approved the CRAs which handed out flawed ratings, can I also sue the SEC for their flawed approval? Isn't the better move simply to stop regulating such agencies and allow competition to flourish, thus driving out of business those firms which issue flawed evaluations?

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