REGULATION FOR THE AGESTRACING THE ARC OF FINANCIAL REGULATION

Moderator: Laura Posner - New Jersey Bureau of Securities

Panelists: James R. Barth - Auburn University

James D. Cox - Duke University School of Law

Eric Dinallo - Debevoise & Plimpton

HARVEY PITT, BLOOMBERG NEWS, SEPTEMBER 19, 2008

“Congress, by failing to modernize financial regulation when it deregulated the financial-services industry in the 1990s, left the SEC and other regulators without the tools to regulate new markets and securities as they arose. In

essence what we have is a 21st century financial system and a 19th century regulatory system.”

FINANCIAL CRISIS INQUIRY COMMISSION FINAL REPORT, JANUARY 2011, PP. XX - XXVII

“In the early part of the 20th century, we erected a series of protections…to provide a bulwark against the panics that had regularly plagued America’s banking system in the 20th

century. Yet, over the past 30-plus years, we permitted the growth of a shadow banking system…that rivaled the size of the traditional banking system. Key components of the

market…were hidden from view, without the protections we had constructed to prevent financial meltdowns. We had a 21st Century financial system with 19th-Century safeguards.

[Today’s] financial system . . . bears little resemblance to that of our parents’ generation. The financial markets have become increasingly globalized. Technology has transformed the efficiency, speed, and complexity of financial instruments and transactions. There is

broader access to and lower costs of financing than ever before. And the financial sector itself has become a much more dominant force in our economy.

When this Commission began its work 18-months ago, some imagined that the events of 2008 and their consequences would be well behind us by the time we issued this report. Yet

more than two years after the federal government intervened in an unprecedented manner in our financial markets…our financial system is, in many respects, still unchanged

from what existed on the eve of the crisis.”

HISTORY OF U.S. FINANCIAL CRISES: MORE FEDERAL REGULATORS WITH

MORE POWER

THE U.S. FINANCIAL REGULATORY STRUCTURE!

SINGLE SUPERVISORY AUTHORITY PREDOMINATES

MAJORITY OF COUNTRIES RELY ONCENTRAL BANK AS A SUPERVISOR

Botswana Guinea Sudan Morocco Nigeria Algeria Congo Madagascar

Burundi Lesotho Swaziland Benin Côte d'Ivoire Mali

Egypt Namibia Tunisia Burkina Faso Equatorial Guinea Niger

Gambia Rwanda Zimbabwe Cameroon Gabon Senegal

Ghana South Africa Central African Republic Guinea Bissau Togo

Chad Kenya

Argentina Guyana Trinidad and Tobago United States Bolivia Ecuador Nicaragua

Brazil Suriname Uruguay Canada El Salvador Paraguay

Chile Guatemala Peru

Colombia Honduras Venezuela

Costa Rica Mexico

Bhutan Kyrgyzstan Samoa China Thailand Australia Korea Lebanon

Cambodia Malaysia Saudi Arabia Taiwan, China Japan

Fiji New Zealand Singapore

Hong Kong, China Pakistan Sri Lanka

India Papua New Guinea Tajikistan

Israel Philippines Tonga

Jordan Qatar Turkmenistan

Kuwait Russia United Arab Emirates

Armenia Ireland Romania Albania Macedonia Austria France Poland

Azerbaijan Italy Serbia & Montenegro Czech Republic Slovakia Belgium Hungary Sweden

Belarus Lithuania Slovenia Germany Bosnia and Herzegovina Iceland Switzerland

Bulgaria Moldova Spain Denmark Latvia Turkey

Croatia Netherlands Ukraine Estonia Luxembourg United Kingdom

Greece Portugal Finland Norway

Aruba Macau, China Oman Anguilla Montserrat British Virgin Islands Isle of Man Malta

Bahrain Mauritius Seychelles Antigua and Barbuda Saint Kitts and Nevis Gibraltar Jersey Panama

Belize Commonwealth of Dominica Saint Lucia Guernsey Liechtenstein Puerto Rico

Cyprus Saint Vincent and The Grenadines

Grenada Vanuatu

Europe

(39 countries)

Americas

(21 countries)

Asia/Pacific

(31 countries)

Offshore Centers

(26 countries)

Central Bank only

( 68 countries)

Africa

(33 countries)

Central Bank Not a Supervisory Authority

(61 countries)

Central Bank Among Multiple Supervisors

(21 countries)

FINANCIAL CRISIS INQUIRY COMMISSION FINAL REPORT,

JANUARY 2011, PP. 112-113

“For years [prior to the Crisis], states tried to clamp down on the predatory mortgages proliferating in the subprime market. The national thrifts and banks and their federal regulators—the OTS and OCC, respectively—resisted the states’ efforts to regulate those national banks and thrifts. In 2003, as the market for riskier subprime and Alt-A loans grew, and as lenders piled on more risk with smaller down payments, reduced documentation requirements, interest-only loans, and payment-option loans, the OCC fired a salvo, propos[ing] strong preemption rules for national banks, nearly identical to earlier OTS rules that empowered nationally chartered thrifts to disregard state consumer laws. Once OCC and OTS preemption was in place, the two federal agencies were the only regulators with the power to prohibit abusive lending practices by national banks and thrifts and their direct subsidiaries.”

“Even as the Fed was doing little to protect consumers and our financial system from the effects of predatory lending, the OCC and OTS were actively engaged in a campaign to thwart state efforts to avert the coming crisis. . . . In the wake of the federal regulators’ push to curtail state authority, many of the largest mortgage-lenders shed their state licenses and sought shelter behind the shield of a national charter. And I think that it is no coincidence that the era of expanded federal preemption gave rise to the worst lending abuses in our nation’s history.”

LISA MADIGAN, FINANCIAL CRISIS INQUIRY COMMISSION FINAL

REPORT, JANUARY 2011, PP. 113