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It seems to me that any wholesale reform of financial regulation has to prevent regulatory arbitrage. Right now, IIUC, banks and mutual funds and hedge funds a
by sethg 17y ago
It seems to me that any wholesale reform of financial regulation has to prevent regulatory arbitrage. Right now, IIUC, banks and mutual funds and hedge funds and insurance companies and VC firms and non-bank mortgage companies are governed by different rules and supervised by different regulatory agencies, which allowed people with sketchy business plans to pick the corporate structure that gave them the most favorable regulations. (Thus, for example, non-bank mortgage companies were more lightly regulated than banks, and more deeply involved with subprime loans.)
We need to move towards a system with one common regulatory framework for everything (or at least, everything above a certain level of assets under management), so the people responsible for investing other people's money have an incentive to focus on choosing good investments rather than gaming the system.
Even if VC firms had nothing to do with the current financial meltdown, if they end up as the least regulated class of fund, then they will surely get drawn into the next meltdown.
- ggchappell 17y agoHmmm ... definitely a thought-provoking comment. Let me try to play devil's advocate. > Right now, IIUC, banks and mutual funds and hedge funds and insurance companies and VC firms and non-bank mortgage companies are governed by different rules and supervised by different regulatory agencies, ... Yes, but there is a good reason for this: these different types of organizations do different things. > ... which allowed people with sketchy business plans to pick the corporate structure that gave them the most favorable regulations. Is that a problem? For example, if I want to sell insurance, then regulations that nudge me toward forming an insurance company, can hardly be seen as a bad thing. > Even if VC firms had nothing to do with the current financial meltdown, if they end up as the least regulated class of fund, then they will surely get drawn into the next meltdown. I can't disagree with that, even in devil's-advocate mode. :-) In any case, thanks for making me think.
- sethg 17y agoYes, but there is a good reason for this: these different types of organizations do different things. Well... not always. For example, both banks and mortgage companies issue mortgages, but the banks are subject to more stringent regulations on how they do it. Some of the esoteric financial instruments that are involved in the meltdown looked and walked and quacked like insurance policies, but regulators didn't account them as insurance policies. I'm not a finance guy so I can't imagine what the details would look like, but I'd like to see rules along the lines of "if you borrow short and lend long, you are a bank and you are subject to these banking regulations, whether or not you have the word 'bank' in your company name".