Subprime Crisis Reveals Larger Problems in Government Regulation

America is in the midst of a significant financial crisis. A meltdown in the subprime mortgage sector and the resulting credit crunch are threatening to drag down our economy.

We applaud the aggressive steps taken by the Federal Reserve Bank, Congress and the Bush administration to prevent a serious setback to our financial markets, improve liquidity and restore confidence.

The thoughtful and comprehensive plan to modernize and streamline the financial regulatory structure put forth by Treasury Secretary Henry Paulson will move the debate forward. While there will be a vigorous and constructive discussion about the details, there is growing consensus on the need for reform.

There is also a growing consensus that our capital markets are burdened by a set of deeper challenges. In the past couple of years, several independent, bipartisan commissions — including the U.S. Chamber of Commerce’s bipartisan Commission on the Regulation of the U.S. Capital Markets in the 21st Century — have concluded that the U.S. capital markets are losing their competitive edge, mainly because of an increasingly complex and archaic regulatory system.

A report authored by former New York Mayor Michael Bloomberg, an Independent, and New York Sen. Charles Schumer, a Democrat, says, “If we do nothing, we will remain a leading regional financial center, but we will no longer be the financial capital of the world.”

The following four reforms must be implemented for the United States to retain its position as having the fairest, most efficient and innovative capital markets in the world.

First, we must simplify and bring our regulatory structure up to date. Our 70-year-old system is one regulation layered over another, creating a duplicative and incoherent maze of rules. Public insurance companies, for example, struggle to cope with the regulatory powers and objectives of 50 state insurance commissioners who have authority over insurance products, distribution mechanisms and reserve deposit requirements. Meanwhile, overseas markets — from London to Dubai to Zurich, and from Singapore to Shanghai — are reducing taxes, streamlining regulations and taking advantage of advances in technology to aggressively compete for a greater share of the world’s financial pie. Although the U.S. capital markets are still the deepest in the world, those in the Euro zone are growing twice as fast.

A modernized, competitive regulatory system would result from consolidating financial services regulatory agencies with similar or overlapping responsibility; rationalizing boundaries between and among federal and state financial regulators and establishing a formal coordinating mechanism; and establishing a more principles-based approach to regulation rather than a rigid, rules-based one.

Second, we need to rethink our approach to enforcement. People who intentionally skirt the rules should certainly be punished. By the same token, agencies should help companies make sense of the confusing patchwork of regulations. Fairness in enforcing the law is important for encouraging businesses to take risks to grow. Businesses must feel comfortable taking risks if the United States is to get out of this crisis.

Third, we must migrate to integrated global accounting principles and auditing standards. With larger amounts of capital crisscrossing the globe at faster speeds, the United States cannot afford to follow a rulebook different from that of its trading and investment partners. U.S. companies and foreign companies listed on U.S. stock exchanges should be able to use the preferred International Financial Reporting Standards (IFRS) instead of Generally Accepted Accounting Principles (GAAP).

Finally, for the good of all investors, we must challenge a small percentage of them — primarily labor pension funds, corporate governance rating agencies and the trial bar — that drive down shareholder value through lawsuits and proxies for the purpose of advancing their narrow political agendas.

For more than 70 years, the U.S. capital markets have been the envy of the world, bringing unmatched prosperity to our nation and to others. Our capital markets provide the financing for new ideas, innovations and jobs to take root and grow. American families now depend on capital markets more than ever to fund retirement, college tuition and a high quality of life.

However, a system that has worked so well for so long is beginning to show its age. The subprime crisis and credit crunch have revealed unnoticed or ignored structural defects. Unless the United States adopts a more coherent and flexible capital markets regulatory regime, the next financial crisis could be much longer and deeper than the current one.

Topics USA Legislation