From the July 01, 2010 issue of Futures Magazine • Subscribe!

Financial regulation: What's the right answer?

One of the best lines I've heard recently was from Lee Partridge, who consults on the San Diego County Employees Retirement Association portfolio. During a Managed Funds Association conference speech, he told the audience he was convinced the world was run by bond traders because they are the ones who understand the risk, and they are the ones who cause all the problems. His presentation was on the heels of a speech given by former New Jersey Gov. Jon Corzine, who also was a U.S. senator and, yes, was chairman and senior partner of Goldman Sachs from 1994-1999, rising through the ranks after starting as an interest rate trader.

Corzine, now chairman and CEO of MF Global, speaking to a packed room at the meeting in Chicago, began with the obvious, stating the "foundation [of our financial system] was shaken to the core and its aftershocks are still apparent today," and this has had as much of an impact on Main Street as on Wall Street. However, despite high unemployment and "doom and gloom, I'm still optimistic" that the country will crawl out of its hole, he said. He believes the financial reform bill has issues, but also has many positive ideas. Although respectful, he disagreed with Paul Volcker's rule that recommends moving proprietary trading out of banks because, he says, it wasn't the prop traders who caused the problems and the ability to enforce it would be close to impossible. He was most worried about how whatever financial bill is passed would be implemented by the regulators, hoping the pendulum wouldn't swing too far in any one direction. He also noted that as a "committed capitalist," he believes in business solutions, stating the United States needs to invest in its sectors of strength: technology and alternative energy, and this will lead back to putting people to work.

Corzine's views are different than those of our interview spotlight this month, former Federal Deposit Insurance Corp. (FDIC) Chairman Bill Isaac, who was head of the bank insurer from 1981-1985, during the savings bank crises. (See "Was TARP necessary?" by Managing Editor Daniel P. Collins). In fact when asked about Isaac, Corzine bluntly disagreed with some of Isaac's views. In Isaac's new book, "Senseless Panic," he takes to task actions in the early days of the 2008 financial crisis, the previous and current administrations and the Troubled Asset Relief Program or TARP. A lawyer and banker by background, Isaac comes at this issue from a different viewpoint than Corzine, whose mathematical acumen vaulted him onto Wall Street.

Specifically, Isaac pulled no punches on how he would handle the new financial regulations. "I support the Volcker rule [but] would be tougher," he told Collins. "The Volcker rule doesn't allow proprietary trading [for banks] and puts a cap on how big you can be...I would take the Volcker rule and add more separation to it; the concentration of economic powers is very troubling." An additional problem, he says, is the inbreeding between Wall Street and government that leads to lax rules. In Isaac's book, he presents a phone log of calls then-New York Fed President Timothy Geithner (current Treasury Secretary) made in September 2008, which shows he spoke to the Wall Street firms more than his boss at the Fed. "It speaks for itself," he says.

Another view on this crisis is at futuresmag.com/webseminars, where I interview Peter D. Schiff, who called the Wall Street crash in his 2007 book, "Crash Proof 2.0." These varied views no doubt illustrate the monumental hurdles the United States has in regulating financial markets, especially the difficulties of getting it right.

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