What is the most likely event to emanate from all the downslides in the financial market? Yes, the plethora of new laws and regulations. We saw Sarbanes-Oxeley in response to Enron and World Com. We had the Patriot Act after 9/11.
So, what do you expect from the subprime crisis - new laws, of course! The first salvo seems to be fired off by the US House Committee on Financial Services - see here http://www.house.gov/apps/list/press/financialsvcs_dem/press0320082.shtml
Congressman Barney Frank has called out for a 'systemic risk regulator' to obviate malpractices seen recently. He has also called out for reforming the regulatory system (yet again!), reassess capital, margin and reserve requirements, monitor auction/mortgage securities.
Will regulatory zeal curb the rising Tsunami of red ink splattering across various areas of the financial world? The Insurance industry has already sounded the alarm hooter. AIG announced its worst ever 4Q results last week and called it 'a bigger event than Katrina'. Other insurance companies are no better. Total write downs and credit losses have touched $ 38 B. The New York Times observed last week that the term CDOs appeared in the newspaper only thrice before 2005; but almost every week since the summer of 2007! Our lives are permanently scarred by sub prime.
So, you think that strict laws following bailouts will keep financial institutions wary of transgression? I am not so sure! Like for Y2K, Sar Box, Basel II, the IT consultants and solution providers will be off to the races.
From my perspective, I think the regulators should impose the 'common man's understanding' yardstick to all the investment banks. All products and offerings should be approved by a certain percentage of investors, bank customers that they have understood the products! This way, at least we will be saved from scratching our heads on CDOs, SDVs, hedges, etc and wondering how these complicated items take us down into the recessionary dumps. At the least, if we are going downhill, we should know why.
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