Monday, June 1, 2009

What is the Right Amount of Regulation?

The looming fight over regulation is the beginning of a broader debate over the future of the financial industry. At the center of the argument: What is the right amount of regulation? Those who favor more regulation say it would offer early warning signals when companies take on too much risk and would help avert catastrophic surprises like the huge derivatives losses at AIG, which has so far received more than $170 billion in taxpayer commitments. Banks say too much regulation will stifle financial innovation and economic growth.

Debate about where derivatives will trade speaks to core concerns about the products: transparency and disclosure.

There are two distinct camps in this argument. One camp, which includes legislative leaders, is pushing for trading on an open exchange — much like stocks — where value and structure are visible and easily determined. Another camp, led by the banks, prefers that some of the products be traded in privately managed clearinghouses, with less disclosure.

Obama administration agrees that more regulation is needed. Proposal unveiled recently by Treasury Secretary Geithner won plaudits, according to the NY Times for trying to make derivatives trading less freewheeling and more accountable — a plan that hinges in part on using clearinghouses for the trades.

Critics in both the financial world and Congress say relying on clearinghouses would be problematic. There are 109 NY Times Reader Comments on this article
as of June 1. You can also enter comments at Compliance and Financial Oversight.

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