Financial Regulation: An Overview
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A problem we now face is that many financial products have managed to slip through the regulatory cracks, as a result of financial innovation and the inability of those regulatory bodies to move in an expedient and proactive way. Furthermore, there have been unscrupulous actors who have either skirted rules or been able to navigate the system to the detriment of the public.
So what are some of these products and issues that have come together to create the financial and regulatory mess that President Obama and Congress seek to fix? Here are a few glaring examples: 1. Swaps: I created and managed the equity swaps department at Merrill Lynch well over a decade ago. This product was in a regulatory no-man's land. We tried our best to stay within the regulations promulgated by the SEC, Fed and SROs (self-regulating organizations, another quasi-regulatory function, which are the exchanges such as the NYSE or Nasdaq). However, in the past few years, the explosion of credit derivatives, especially credit default swaps, created a huge amount of financial assets and liabilities that were off-balance-sheet, off exchanges and unregulated. Actions are now being taken to clear and monitor these products on a central exchange and clearinghouse. 2. Mortgages: Mortgages and loans are not considered securities. However, bundling and securitizing mortgages or loans creates securities. These are called asset-backed securities and go by many acronyms. The problem lies in the fact that there was little to no regulation surrounding the mortgages embedded in the asset-backed securities. While the securities industry has two levels of registration -- national and local -- mortgage brokers and lenders had little to no regulation, and neither did their products.- Loading Comments...
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