Monday, June 8, 2009

The industry accepts its share of responsibility for its role in the economic crisis and its duty to be part of the recovery

TO BE NOTED: From the FT:

Wall Street is a willing partner in financial reform

By Tim Ryan

Published: June 8 2009 20:41 | Last updated: June 8 2009 20:41

Many Americans are angry and have lost basic trust in the financial services industry. The industry accepts its share of responsibility for its role in the economic crisis and its duty to be part of the recovery. We intend to partner with governments to overhaul the regulatory system to help prevent such a crisis again.

President Barack Obama will soon unveil a comprehensive regulatory reform plan. The Securities Industry and Financial Markets Association (Sifma) recognises the urgent need for such a plan and is strongly in support of reform. Financial market participants know the time for change and reform in financial services has come.

Financial products and services are interwoven into the daily fabric of economic life. While not every financial firm or employee contributed to the crisis, it is clear that too many acted improperly and some products were pushed to a level of unsustainable complexity. Given this reality, Sifma has already unveiled its support for a number of major policy reforms as we build a new foundation for our economy.

First, we have endorsed the creation of a single financial markets stability supervisor, a central authority with oversight in all markets and of all systemically important market participants – regardless of charter, function or unregulated status. This stability supervisor must be given sufficient resources to collect data across markets and the ability to use it to take swift corrective action to prevent systemic instability. Never again should the failure of one or a handful of firms be allowed to threaten the viability of our economic system.

Second, the industry strongly supports the administration’s proposal for a public-private partnership to absorb troubled assets. While both the economy and financial firms have retreated from the brink, it remains crucial that the government build the infrastructure for these programmes. We do not know what the future holds, but with a few stable weeks behind us, we cannot assume that the worst has passed. These necessary programmes should serve as a temporary safety net, until our economic future stands on more certain ground.

Third, it is clear the complexity of some financial instruments went too far, while some supervisory policies did not go far enough, making the crisis worse. Securitisation market participants seek a return to the basics and are making smart reforms to industry practices such as tightening underwriting practices and increasing transparency to protect investors. Markets themselves have also imposed some much-needed discipline, declaring the end of complex and confusing products such as collateralised debt obligations squared.

Fourth, we support many of the new policies to bring transparency to the derivatives market, while ensuring that derivatives continue to be widely available to serve their critical role of increasing credit availability to borrowers. When lenders can purchase protection against the credit risk of making a loan, they are more willing to provide and expand credit for businesses, enabling those businesses to grow and hire.

Sifma has supported the need for regulatory reform of derivatives, noting that our current system had as many gaps as safeguards. Some firms exploited these gaps for regulatory arbitrage. Tim Geithner, the Treasury secretary, has announced moves in the right direction: asking for fundamental measures to ensure the significant market participants are properly overseen, and suggesting how to deliver the transparency needed for proper oversight.

Finally, we firmly believe that there have been excesses on the compensation front, and the industry is working to ensure that compensation is tied to long-term, not short-term, performance. In our view, compensation should not encourage excessive risk-taking, but should promote business sustainability and be aligned with the best interests of shareholders, the financial system and the economy.

When it is relevant to the reforms, it is crucial we collaborate with the proper international regulatory authorities. In the coming weeks, Sifma will engage in more substantive discussions on these issues and the others that will emerge, because the industry is committed to being part of the solution. With industry and government working together, we can restore confidence and sustainable growth.

The writer is chief executive of Sifma

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