A Crisis of Confidence: The Treasury Blueprint, And Its Unlikely Impact Upon The Securities & Exchange Commission

A Crisis of Confidence: The Treasury Blueprint, And Its Unlikely Impact Upon The Securities & Exchange Commission


The "Blueprint" released by Treasury Secretary Henry M. Paulson on March 31, 2008, would add to, subtract from, and condense and reconstitute the entities presently charged with regulating the securities, commodities, banking and insurance industries. The Plan is at times purposefully vague, and elsewhere deliberately harsh. J. Scott Colesanti, Special Professor at the Hofstra University School of Law, teaching securities regulation and broker-dealer regulation, analyzes this Plan and its likely impact.
 
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III. Analysis
 
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4. Lack of a remedy for the credit crunch. Most importantly, although briefly citing to [collateralized debt obligations] as an example of a product for which risk/exposure information remains unknown or scattered, the Plan does not offer details on ideal product disclosures. Further, the enhancements to federal liquidity provisioning for non-depository institutions advocated as a “Short Term Recommendation” focus on the Federal Reserve’s ability to access the financial information gathered by other agencies (e.g., the SEC) and the authority to “impose limitations and restriction on discount window borrowing.” Such an emphasis falls far short of revisionist thinking on preventing market risk and thus perhaps symbolizes the Plan’s lack of mass appeal.
 
Overall, the Plan doesn’t provide comfort that it would prevent the corporate mismanagement and/or counterparty mistrust sufficient to trigger another credit crisis. In that regard, the parties presently leading the charge for reform can be said to be the class action attorneys (who collectively have filed in excess of 70 civil lawsuits targeting builders, bankers, or brokers) and the SEC itself, which has in recent weeks sent letters to certain public companies suggesting enhanced disclosures concerning asset-backed securities.
 
Moreover, the Plan refuses to address the lack of internal, meaningful trading limitations in the worldwide market. Each decade seems to bring forth at least one tale of an individual exceeding his trading authority to the demise of his storied employer. In the 1990s, it was the cessation of Kidder Peabody, “the brokerage house that eventually had to close its doors because of false profits racked up by an unsupervised trader.” Several years later, the dangers of excessive speculation overseas were publicized by the rapid descent of Baring Bank, “one of the oldest banks in the world until the antics of Nick Leeson put it out of business.” Contemporaneous with the present crisis is the fate of Societe Generale, which is still investigating losses exceeding $7 billion alleged to be due to unauthorized trading by one employee. As anathema as the notion may be, ultimately domestic regulators will take note of the actions by foreign capitalist societies to intervene to halt risky trading, as has already been identified in Italy. Until that philosophical shift takes place, two areas would seem to warrant immediate attention. [footnotes omitted]