Over the past year there have been a number of US initiatives: the adoption of the Dodd-Frank Act, which regulates financial companies and activities related to banking and derivatives; international discussions related to Basel III banking capital requirements (raise Tier I capital from 4% to 9%); and special fees or taxes on banks (to which Canada has been vocally opposed). Of course, the US Financial Crisis Inquiry Commission (FCIC) has been in full political swing, interviewing and pointing fingers at a wide array of various market participants, especially some notorious former CEOs. Meanwhile, a number of books have also come out that are frankly scary to read but are nonetheless difficult to put down.
So what became of Mr. Lo’s vision of creating a Capital Markets Safety Board (CMSB)? Unfortunately, at this point the answer appears to be ‘nothing’. This topic was picked up in the Harvard Business Review in January 2010, with particular emphasis on what the FCIC can not address, why Professor Lo’s concept is so appealing, and why a CMSB must be implemented despite its cost:
Professor Lo suggests that like the NTSB, a CMSB could play a key role in restoring calm after an accident. At the very start of an investigation, the NTSB will send public affairs officers (PAOs) to accompany the investigative team. The PAOs will usually conduct two press conferences a day when on scene, releasing only factual, documented information, and arrange for the news media to gain admittance to the accident scene itself. They also set up help-lines for accident victim families. By ensuring regular, informed, and frequent communication with the public in this way, the NTSB can prevent the spread of scaremongering and speculation around an accident, and provide some level of reassurance, if not comfort, to accident victims and their families. Over the years, this approach has earned the NTSB the public’s trust and confidence.
Compare that approach to the sporadic and inconsistent messages communicated to the public regarding the financial crisis, which may well have exacerbated the failures in the stock and money markets during September and October 2008. Professor Lo acknowledges that the establishment of a CMSB will be expensive. Experts in forensic accounting, financial engineering, and securities law command big pay premiums on Wall Street. But as he has pointed out in his testimony to Congress, if regulators had appreciated the impact of a Lehman Brothers collapse — which a fully operational CMSB could have forecasted — the savings from this one incident would have funded the CMSB for half a century. Moreover, the benefits provided by a CMSB would accrue not only to the wealthy, but also to pension funds, mutual funds, and retail investors in the form of more stable financial markets, greater liquidity, reduced borrowing and lending costs as a result of decreased systemic risk exposures, and a wider variety of investment choices available to a larger segment of the population because of increased transparency, oversight, and ultimately, financial security.
So much for that one. While speculation on my part, it’s probably safe to assume that political finger pointing and multi-trillion dollar deficits are probably a bit distracting, standing in the way of establishing a ground-breaking body like the CMSB.
Peter Arnold leads the Canadian Investment Consulting Practice for Buck Consultants.
