The challenges of "sweeping" financial regulation

The phrase "sweeping, new financial regulations" has become almost cliché as of late. But there's no denying that the Obama Administration intends to address the sorely outdated regulations that have left us in the current mess. The $1 trillion toxic asset plan was really just the beginning. The details of the plans have yet to trickle out. But the broad brushes have been widely reported. 

The plan will feature a new expanded role for the Federal Reserve, which will have oversight over corporations, hedge funds and other alternative investment providers. It will also move many kinds of derivatives to exchanges and clearinghouses, a move that is well underway. The plans will also set mortgage lending standards. And, in a move that has generated lots of debate, it will move to regulate pay at TARP companies and perhaps even prod boards to embrace pay-for-performance. 

All this certainly reflects the political climate, but new regulations, especially those of the sweeping variety, can be very tricky. We've noted often here on FierceSarbox that Sarbanes-Oxley led to a host of unintended consequences. That doesn't mean the law shouldn't have been passed. But there were some side effects. Without the details, it's hard to speculate. 

But let's look at one case: Short selling. We can argue all day long about the ill-effects of short-selling. And it now appears that naked short selling, as reported by Bloomberg, played a major role in the collapse of Lehman Brothers and Bear Stearns. It would be very fair for a specific remedy to be proposed. Will a return to the uptick rule really address this? Not likely. The International Organisation of Securities Commissions (IOSCO) has proposed new short selling rules, including one that would strictly enforce failed trades. Such a rule, in theory, would crack down on naked short sales. Others think that we can't know until the actual details are known. 

This has been debated since the onset of the financial crisis. And even though sweeping reform has yet to be handed down, firms have really suffered. The many rules changes and bans have really had IT and compliance departments scrambling. Hopefully, we'll get a definitive, well thought out rule soon. - Jim