When Free Markets Fail: Saving the Market When It Can't Save Itself

Overview

The Great Recession of 2008–2009 grabbed everyone'sattention, with financial regulation reform becoming a popular, notto mention populist, issue. Much has been written on the causes ofthe crash, but now it's time to look forward and ask whether thelaws being written to regulate the market will prevent a new crashfrom happening. When Free Markets Fail unpacks the currentdebate over financial reform, from the economic meltdown torebuilding our financial markets' regulatory structure, in ajargon-free way for laymen ...

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Overview

The Great Recession of 2008–2009 grabbed everyone'sattention, with financial regulation reform becoming a popular, notto mention populist, issue. Much has been written on the causes ofthe crash, but now it's time to look forward and ask whether thelaws being written to regulate the market will prevent a new crashfrom happening. When Free Markets Fail unpacks the currentdebate over financial reform, from the economic meltdown torebuilding our financial markets' regulatory structure, in ajargon-free way for laymen and financial professionals alike.

Complinet New York Managing Editor Scott McCleskey explains thenuts and bolts of financial regulation—how it's made and howit works—to examine how the collapse happened and how we canavoid a future crisis. McCleskey, a leading authority on financialregulation, discusses a wide range of issues underlying the debateon reforming the financial markets. He sheds light on the structureof regulation and the roles of various agencies, includingdiscussion of the role of credit rating agencies and their centralrole in the markets.

McCleskey brings readers his real-world experience, ranging fromleading the global compliance department of a major financialinstitution and participating in the development of European Unionmarket regulations to conducting investigations into stock marketfraud. At the same time, he understands the theory and language ofregulation, with published works on regulatory theory as well asacademic work at Cambridge and other academic institutions. Havingspoken before Congress, the European Central Bank, and the LondonSchool of Economics among other settings, McCleskey is uniquelyqualified to get past the spin and ideology that distort the publicdebate and cut to the heart of issues that need not be complicated.He does this with straightforward discussions of various topics,including how systemic risk actually works and whether we shouldworry about regulation stifling innovation. He also makes acompelling argument for specific reforms, the originality of whichhas already led to wide discussion in the press. If you have a bankaccount, a car loan, a mortgage, or even a credit card, WhenFree Markets Fail provides clear enlightenment on how comingfinancial regulations will affect you.

The entire concept of financial regulation is up for grabs in away it has not been since the Depression and in a way that is notlikely to recur in our generation. When Free Markets Failshows why this matters to you in particular, whether you're afinancier, investor, or just a concerned citizen.

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Product Details

  • ISBN-13: 9780470603369
  • Publisher: Wiley
  • Publication date: 8/2/2010
  • Series: Wiley Corporate F&A Series
  • Edition number: 1
  • Pages: 198
  • Product dimensions: 6.10 (w) x 9.10 (h) x 0.90 (d)

Meet the Author

SCOTT McCLESKEY is a financial journalist and the New York Managing Editor for Complinet. Specializing in financial regulation and reform, he has two decades of industry experience including stints in New York, Washington, Brussels, and London. He has served as global chief compliance officer for a regulated firm, as director of public regulatory policy for a European securities exchange, and has worked closely with high-level regulatory officials throughout the world. His publications examine the financial markets with an eye to making complex regulatory issues understandable for everyone. His views have been published or quoted in the New York Times, BusinessWeek, and other major publications. He holds a master's degree in international relations from Cambridge and a master's degree in financial regulation and compliance management from London Guildhall University, as well as a bachelor's degree in government from the College of William & Mary.

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Table of Contents

Acknowledgments

About the Author

Preface: In Defense of Regulation (and of Free Markets)

In the Beginning, There Was Adam

The Shift from Philosophy to Math

Can Markets Regulate Themselves?

Regulation versus Justice

Conclusion

Introduction: Why Regulatory Reform Matters to You

The Structure of the Book

Chapter 1 Meltdown in the Markets: Systemic Risk 1

How Systemic Risk Works 2

The Case for Government Intervention 9

Why Hasn't the System Collapsed Before? 10

Conclusion 12

Chapter 2 Can an Institution Be Too Big to Fail? 15

Policy Options 17

Conclusion 22

Chapter 3 Moral Hazard 24

The Theory 25

The Reality 26

Punish the Leaders, Not the Organization 27

The Other Moral Hazard 28

Conclusion 30

Chapter 4 Toxic Assets 31

What Are Toxic Assets, and Why Are They Toxic? 32

Building Low-Risk Assets Out of High-Risk Ones 33

Credit Rating Agencies and Structured Finance Products 35

Credit Default Swaps 37

Conclusion 40

Chapter 5 Should Regulation Stifle Innovation? 41

Policy Implications 44

Conclusion 45

Chapter 6 Rewarding Success, Rewarding Failure: Incentives and Compensation 46

Big Brother is Paying You 47

Regulating the Level of Pay 47

Performance Goals and Risk 49

Methods of Aligning Reward with Risk 50

Who Matters? 53

The 2009 Federal Reserve Guidance 53

Was Adam Smith Right? 56

Chapter 7 Who Protects the Consumer? 57

Were Existing Regulations Effective? 59

Is a Separate Consumer Regulator the Right Answer? 61

What Powers Would the Agency Have? 65

A Word about Consumer Protection and Systemic Risk 67

Conclusion 68

Chapter 8 Transparency: Letting the Sun Shine In, or Sipping Water from a Firehose? 69

Transparency as Regulation 69

Degrees of Transparency 71

What to Consider When Transparency Is the Proposed Remedy 73

Chapter 9 Rebuilding the Regulatory Structure 75

Why So Many Regulatory Agencies? 76

The SEC and the Investment Banks 77

The Federal Reserve 78

Other Proposed Changes 79

Consumer Protection 80

Do We Need a Systemic Regulator? 80

To Concentrate or Not to Concentrate 81

Chapter 10 Rating the Raters: The Role of Credit Rating Agencies 83

NRSRO Status 84

How Ratings Are Made 89

What Really Keeps the Rating Agencies Up at Night (And It Is Not Your Mortgage) 92

The End of the NRSRO? 94

Conflicts in the Rating Agency Business Model 97

Are Rating Agencies Utilities? 97

Conclusion 98

Chapter 11 The Politics of Regulation 100

The Political Process 101

Chapter 12 Nice Law, Now Go Do It: Regulators and Compliance Officers 106

The SEC 107

Examinations and Inspections 108

Conduct of Examinations 110

FINRA 112

Compliance Departments 113

Conclusion 119

Chapter 13 Cost-Benefit Analysis 121

Basics of Cost-Benefit Analysis 122

The Benefits of Cost-Benefit Analysis 128

Government Use of Cost-Benefit Analysis 129

Cost-Benefit Analysis as a Negotiating Tactic 130

Conclusion 132

Chapter 14 It's a Small World, After All 133

Sunday Is the New Monday 133

Overseas Regulators 135

International Organizations 139

Conclusion 141

Chapter 15 Where Do We Go from Here? Conclusions, Observations, and Recommendations 142

Modern Markets Are Too Complex to Regulate Themselves 143

Planning for the Next Crisis 144

The Need for a Professionalized Regulatory Service 146

Creating a Federal Regulatory Service 148

Elevating the Compliance Profession 151

Decisions Are Made by Individuals, Not Organizations 152

Keep the Rating Agencies---But on a Short Leash 153

Put Down the Pitchforks 154

Conclusion 154

Chapter 16 Judging for Yourself 156

Conclusion 161

Appendix 1 Summaries of Regulatory Concepts and Issues 163

Moral Hazard, Too Big to Fail, Systemic Risk 163

Unlevel Playing Fields 165

Unintended Consequences 166

Self-Regulation 168

Regulatory Capture 169

Information Asymmetries 172

Conflicts of Interest 173

One Size Fits All 174

Appendix 2 Excerpt from Obama Administration's Reform Proposal, "Financial Regulatory Reform: A New Foundation" 177

Index 187

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