Subprime Crisis: Better-Not More-Regulation Needed

Mar 11, 2008

The subprime crisis and credit crunch have rejuvenated a public dialogue about the regulation of the U.S. capital markets.

By capital markets, I’m talking about the vast array of financial products and services—debt and equities securities, mutual funds, commodities and derivative products, credit and banking products, and insurance—upon which businesses, investors, and consumers depend. All of these are essential for financing new ideas, innovations, and jobs, as well as new homes, retirement, and college tuition.

More lawsuits and additional regulatory or legislative Band-Aid fixes are not solutions for the challenges facing our financial markets. Rather, it’s time for thoughtful and comprehensive capital markets regulatory reform. We need better regulation, not more regulation.

In the past couple of years, no fewer than four independent, blue ribbon commissions tasked with studying the competitiveness of the U.S. capital markets—including the U.S. Chamber bipartisan Commission on the Regulation of the U.S. Capital Markets in the 21st Century—have concluded that, while not completely broken, the U.S. capital markets regulatory and enforcement environment needs repairing.

First, we must make our regulatory system more coherent, contemporary, and compatible with the rest of the world. Our system, largely unchanged since it was created during the Great Depression, has failed to respond to increasingly competitive markets overseas and more complex investment instruments. Overlapping authority among federal and state regulatory bodies creates confusion and, sometimes, a contradictory patchwork of rules. Complicating things further is the fact that U.S. accounting and auditing standards are not in line with increasingly global integrated standards.

Second, we need fair, even-handed enforcement that upholds due process rights. A rules-based, "gotcha," enforcement-only mentality discourages capital formation. While we need to be as tough as nails on those that break the rules, fairness in enforcing the law is important for encouraging businesses to take risks to grow. Agencies should develop their roles as partners or mentors, offering companies clear and concise guidance and compliance tools.

Finally, we must challenge the self-serving tactics of trial lawyers, labor pension funds, and corporate governance rating agencies that, through lawsuits and politically motivated proxies, attack companies and drive down shareholder value.

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