Content Matters

Today's Sunday Times explores the topic of Wall Street regulation, with the typical groups lining up on either side.  Regulation of the financial markets tends to be a cyclical process. The deregulation proponents argue that regulation makes us less competitive and, over time, they either deregulate the existing markets or fail to update the regulatory requirements for new ones.  That is followed by a cycle where greed rules the day until some form of implosion (the current subprime mess, the S&L debacle of the 80s, etc) forces the government to step in.

While there are legitimate arguments that over-regulation can lead to inefficiencies, I think it's clear that transparency is best for all in the long run. And, without a reasonable level of regulation, we won't see transparency.  Today's NY Times quotes Barney Frank as saying he didn't realize how much freedom Wall Street firms had (as compared to banks) until he heard Chuck Prince of Citi explaining why he moved a bunch of investment vehicles off their balance sheets.

A recent study by Audit Analytics, profiled by Research Recap, noted that five years after Sarbanes Oxley was passed, financial restatements dropped sharply in 2007.  The past year had 1,237 restatements, down roughly a third from 2006.  Perhaps more importantly, the largest restatement of 2007 ($341 million by GE) would have faired no higher than fifth largest in either of the prior two years.  Businesses may still grumble about the cost of Sarbanes Oxley compliance, but it's evident that the regulations are working.

I'm not sure what the best approaches to regulating the financial markets are, but it's pretty clear that we need greater transparency and history shows us that's not likely to happen without a regulatory push by the government.