Financial Markets To Face Increased Regulations


New York, NY – Say what you will about the efficacy of government regulation over the past eight years, at least the markets understood how to work with various bodies like the FDIC, SEC or CFTC.  However, it is clear that under the new Obama administration, investment banks, mutual funds and hedge funds are heading into uncharted waters in their dealings with Washington.The subprime mortgage debacle, the resulting credit crisis, plunging global equity markets, and most recently, the Bernard Madoff scandal have all had a significant negative impact on investor trust in banks, brokerage firms, mutual funds, and hedge funds.

In the wake of these shocks, President Barack Obama has made it clear that he intends to develop a new plan for regulating the financial services industry.  In fact, some industry watchers think the SEC might not even exist as a standalone institution by the end of 2009.  Two of the big questions that remain are who will regulate the financial services industry and what will their primary objectives be?

The team at Integrity believes that the President, and his new blueprint to regulate the financial services industry, will be significantly more activist than previous administrations.  Based on various news articles, and discussions with industry sources, the following are a few of the topics and/or issues which are likely to be the target of regulations under the new administration:

  • Executive Compensation Capped. The President-elect’s proposal to cap the cash compensation cap of executives of distressed companies seeking government bailouts to $500,000 per year has been widely discussed. Not only would this cap not apply retroactively to the hundreds of firms that have already have received bailouts, but the cap will probably apply only to a few executives – not to traders, brokers and salespeople who routinely earn huge pay packages.
  • Creation of New Super Regulator. The creation of a super regulator through the merger of the SEC and the CFTC lost steam a few months ago. However, the Madoff scandal has raised the likelihood that some sort of merged regulator with greater financial oversight might actually be established.
  • Hedge Fund Registration / Regulation. More regulation of this opaque industry will take place under the new administration. It is unlikely that the names of investors or a public listing of all investments will take place. More likely, new regulations will focus on risks and reporting.
  • Credit Ratings Agencies. The Obama administration is likely to pass new rules to eliminate the conflicts of interest inherent in the business models of traditional ratings agencies such as Moody’s and Standard & Poor’s.
  • Mortgage Standards. The new administration is likely to propose new federal standards for mortgage brokers who market mortgage loans to consumers. It is also possible that the SEC will become more involved in supervising the underwriting standards of mortgage-backed securities.
  • Trading Credit Default Swaps. One of the reasons the Bush administration felt it had to back AIG was the huge role it played in the murky Credit Default Swaps (CDS) business. It is likely the CDS market will become more transparent as trading will occur on one of several exchanges which are now being created. This transparency would allow easier regulation.
  • Reduced Leverage. In 2004 the SEC allowed investment banks to increase their leverage ratios from modest 10 to 15 to 1 levels to a sky high levels (in excess of 30 to 1) prior to the recent credit crisis. The SEC is likely to reevaluate the decisions which enabled this massive increase in leverage.
  • Soft Dollars.  It is likely that the new administration will encourage more transparency over how much of a client’s commissions their money managers are spending on external research, including research provided by independent firms, broker-dealers, and sell-side investment banks.  This issue is not likely to get much attention over the near term.

The considerable uncertainty which currently exists regarding new financial services regulations the President-elect and his new team are likely to promote has led most in the industry to take a “wait and see” attitude until more clarity has been provided.  What is clear to the team at Integrity Research is that the various changes that will take place will inevitably lead to a huge transition for the industry.  The big question is who will be the winners and losers?

ResearchWatch readers are encouraged to post their ideas of other financial services issues or topics they think might be the target of increased regulation under the new Obama administration.


About Author

Leave A Reply