Monday, October 27, 2008

From Financial Chaos to Financial Order

Transparency is a powerful antidote for what ails our capital markets.
Christopher Cox

In view of the globalization of our financial markets, shouldn’t we form an international body that, if not a regulatory group, at least a watchdog alert system which helps prevent transactions in one sector or country from negatively affecting other areas. As Tom Friedman noted in his New York Times October 19th column: “We’re all connected and nobody is in charge.” Is my proposal too wild a dream?

The British were invested to the tune of $1.8 billion – according to Friedman -- in Icelandic banks that went under, and which the Icelandic government finally seized control of. Among the investors were 120 British municipalities, as well as universities, hospitals and charities. Of course, this is most likely a footnote to the billions in mortgages which were bundled and sold up the global financial ladder, the root cause of this international credit crunch.

In the same New York Times issue and across the page, Christopher Cox, SEC Chairman, comments on the lack of regulations on credit default swaps, which are like insurance on assets that default, in this case, mortgage-related securities. $440 billion in AIG – issued credit default swaps, have been put at risk. Cox notes that the total market for these swaps -- $55 trillion, bigger than the GDP of all nations on earth – operated in the shadows, without public disclosure or any legal requirements for these contracts to be reported to the SEC. Therefore, says Cox, “So government regulators have no way of assessing how much risk is in the system” – and how others may be threatened.

If we know what is going on and report it accurately, then investors will have confidence in the markets, can assess risk and know where to put their money.

However, I do recognize that this will be no easy undertaking given the differences in regulations and market philosophies throughout the world. For example, while the U.S. capital markets are “rules-based,” markets in the UK are “principles-based.” In addition, there are varying accounting standards throughout the world that would have to be meshed in some way.

Cox argues for Congress to set up such a regulatory system. Let’s do that. But I say take it another step forward. Since internationally we are all each other’s clients (key global economies are already tied together), why not set up a transparency system that at least watchdogs the world, and assesses the possibility of establishing global regulations that will change worldwide chaos to worldwide order? As difficult as this may be, it is worth a try. The management of this intricate global economic system may also yield peace dividends.


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