Market Regulation

1. Market Regulation Pickerington - Group Five Shawn; Aaron; Michael; Kevin

2. Market History • 1653 Dutch colonists construct a wooden stockade across lower Manhattan to protect the north side of their settlement against attacks by the British and Indians. By the turn of the 18th century, the British have taken over the colony and dismantled the barrier, turning it into a paved lane called Wall Street.

3. Market History • 1817 March 8: A group of New York brokers formally establish the New York Stock and Exchange Board, an organization that later will be renamed the New York Stock Exchange (N.Y.S.E.). • 1829 The stock market reaches a trading volume of 5,000 shares a day. • 1878 November 13: The N.Y.S.E. installs the first telephones on its trading floor.

4. Market History • 1882 November: Charles Dow and Edward Jones form Dow Jones & Company and design the first index to measure the activity of the N.Y.S.E. • 1886 December 15: The N.Y.S.E.'s trading volume reaches one million shares a day for the first time. • 1890 April 8: Junius S. Morgan, the head of the Morgan banking family, dies. His son, John Pierpont Morgan, will turn the family financial empire into one of the most powerful banking houses in the world.

5. Market History • 1896 May 26: Charles Dow reveals his industrial stock average in the first publication of his daily paper -- the Wall Street Journal. Dow Jones creates four averages to measure market performance, including the Dow Jones Industrial Average. • 1907 Bank Run after mkt drop JP Morgan helped out • 1913 February 28: The Pujo Committee, appointed by Congress to investigate practices of the banking and securities industry, issues a report which leads Congress to create the Federal Reserve System. The Fed is designed to stabilize the nation's banking structure.

6. 1929 Market History • September 3: After a surge of optimism, the bull market reaches its peak -- the Dow Jones Industrial Average closes at 381.17. A newspaper headline trumpets, "Public Demand for Stock Appears Insatiable." • September 5: Bearish economist Roger Babson gives a speech, saying, "Sooner or later, a crash is coming, and it may be terrific." He has been delivering this message for two years, but for the first time, investors listen. The market takes a severe dip, which will be called the "Babson Break." • Mid-September: The market fluctuates wildly up and down. • October 24: "Black Thursday." The economic bubble finally bursts. Stock prices fall sharply on a day of heavy liquidation. Ticker tape runs four hours later than normal at a volume of 12.9 million shares. President Hoover reassures Americans that U.S. business is sound. • October 28: "Black Monday." The stock market falls 22.6%, the highest one-day decline in U.S. history. The crash triggers similar declines in markets around the world. • October 29: "Black Tuesday." Panic sets in as investors all try to sell their stocks at once. Over 16 million shares of stock are sold, setting a record -- and the market records over $14 billion in paper losses. Stock tickers cannot keep up with the heavy trading volume. At the end of the day, the market is down 33 points, more than 12.8%.

7. Market History • 1932 July 8: The Dow Jones Industrial Average reaches its lowest point of the Great Depression, closing at 41.22, down 89% from its peak in 1929. • 1934 October 1: The Securities and Exchange Commission is created to regulate stocks, bonds and other commissions. Former Wall Street speculator Joseph P. Kennedy is appointed as its chairman.

8. 1933 Securities Act The 1933 Act has two basic objectives: • to require that investors receive significant (or “material”) information concerning securities being offered for public sale; and • to prohibit deceit, misrepresentations, and other fraud in the sale of securities to the public.

9. 1934 Securities Act History • Law governing the secondary securities trading market • Regulates Broker-Dealers • SEC created

10. President Clinton • 1997 Tax law changes • Repeal of Glass-Steagall, a 1933 law that effectively split investment banking and brokerages from commercial banks • 1998, Long-Term Capital Management's use of derivatives and leverage required a massive $3.6 billion hedge fund bailout - Inaction • Gramm-Leach-Bliley Financial Services Modernization Act of 1999 - - eliminated key barriers between bankers who are supposed to limit risks and investment bankers who were supposed to take them • TO NOTE: Back in 1933 the law effectively split J.P. Morgan the bank, from what would become Morgan Stanley, the brokerage. Both seem to have come through the disruption fairly well

11. Highlights from Sarbanes-Oxley • Public Company Accounting Oversight Board (PCAOB) • Auditor Independence • Corporate Responsibility (Corp Exec repson) • Enhanced Financial Disclosures • Analyst Conflicts of Interest • Commission Resources and Authority (restore investor confidence)

12. Solutions – Opinions Abound • Diversification: Experimentation with alternative regulatory approaches is more likely to produce solutions to new problems than standardizing rules on a single, but potentially flawed, model. • Systemic risk management: Regulation should focus on systemic risk management rather than incentives of market participants. • Responsiveness: It has long been noted that the history of financial markets is a history of financial market crises.

13. Resources • http://www.voxeu.org/index.php?q=node/2969 Katharina Pistor, Michael I. Sovern Professor of Law Columbia Law School • http://www.pbs.org/wgbh/amex/crash/timeline/timeline2.html • http://www.marketwatch.com/story/bill-clintons-legacy-is-our-financial-disaster • http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act

14. The Regulation Proposal Currently the specifics have not been decided, but it is expected that much of the reforms outlined by the Fed and the administration will occur within Congress.

15. Feds explanation of what went wrong • Systemic risk was very much built into the current financial system • Securitization and derivative instruments fueled the growth of the unregulated shadow banking system • Capital requirements did not discourage excess excessive risk-taking by management

16. What went wrong • According to Fed Gov. Daniel K. Tarullo “systemic risk arose not because the illiquidity or insolvency of one firm would directly bring down another but because of parallel hedging or funding strategies practiced by highly leveraged firms with substantial short-term liabilities that threatened large segments of the market.”

17. Fixing the problem • Current regulatory agencies should adjust their policies and practices in light of the lessons learned from the crisis • New legislative authorities will need to be designed to contain systemic risk • A specific single agency should closely monitor institutions that are too big to fail • Many new ideas and proposals need to be brought to the table all ideas are worthy of consideration to create a healthy debate on policy alternatives

18. What is the Fed currently doing? • The Fed is currently developing proposals that will help ensure that compensation systems take appropriate account of the riskiness of the firm’s activities as well as the firm’s financial performance • Fed is developing the supervisory approach for bank holding companies that will have a more global perspective. This approach will take into account the “risks, risk management policies, and other practices across multiple financial firms to identify common trends and firm-specific weaknesses.”1

19. Containing systemic risk • There are 5 parts to the Feds plan for containing systemic risk. These key components will require legislative action to be enacted. • 1. There should be consolidated supervision of all systemically important financial firms. This legislation will impact any financial firm viewed possibly be too big to fail.

20. Containing systemic risk cont. • 2.Create a legal framework designed specifically financial institutions on the brink of bankruptcy. This framework would be set up to ensure an orderly response to financial institutions that would pose substantial systemic risk to the nation during times of financial stress. The objective of this would be to establish a framework to avoid a future bailout or failure, dichotomy in the future.

21. Contain systemic risk • 3. There is to be a single agency set up with a clear authority to create special regulatory standards for capital, liquidity and risk management practices. The standards would be applied to all firms that have the possibility of creating systemic risk.

22. Containing systemic risk • 4. Monitoring the stability US financial system by multiple agencies and an ongoing effort to keep financial regulation in step with financial innovation. This interagency group may issue periodic reports to the Congress.

23. Containing systemic risk • 5. The Fed should have statutory authority over payment and settlement systems within the financial system. Disruption of payment and settlement systems from default or counterparty risk could create systemic liquidity and credit problems. The Fed needs the authority to better regulate the system’s to ensure a smooth and well functioning financial marketplace within the US.

24. Likely Legislation • Fed will regulate firms to big to fail • Originator of securitized instrument will have to retain a financial interest of 5% • Derivatives contracts will be regulated • A consumer protection agency will be set up to offer consumer protections on a wide range of consumer loans and products. • Legal framework for orderly financial firm “bankruptcy”

25. Resources • 1.Board of Governors of the Federal Reserve System Speech, Financial Regulation in the Wake of the Crisis, (Washington D.C.: June 8, 2009). • Geithner, Timothy and Summers Lawerence. “A New Financial Foundation” The Washington Post, 15 June 2009. • Kosterlitz, Julie. “The Financial Overhaul: Who Will Regulate?” National Journal 4 April 2009. • Sasseen,Jane. “Obama Pitches His Economic Plan” Business Week Online. 15 April 2009. • “New foundation, walls intact.” Economist 20 June 2009 Vol.392 Issue 8636 p77-78.