Sunday, February 15, 2009
Regulating the Financial Markets by Examinations, by Tamar Frankel, Boston University School of Law, was recently posted on SSRN. Here is the abstract:
This Essay proposes changing future government examinations of market intermediaries and focusing on bubbles and crashes as the main dangers to the financial system and the economy. Prior substantive regulation has an undesirable effect on innovations and freedom of the markets. Regulating after a crash (when the "horse has left the barn") is undesirable and ineffective. Therefore, the Essay proposes tighter and closer examinations somewhat different from the current ones: (1) Examine more frequently when market prices rise (not when the have fallen); (2) Examine entities that are too large to fail; those that are highly leveraged; those whose shares-prices rise steadily with little or no fluctuation; and entities that have obtained exemptions from regulation. (3) Examiners should search for violations of the law (and the spirit of the law), but not economic or financial rationalizations. (4) Examiners should be experts, highly paid and incentivized to remain in government employ. Expert information about the markets will hopefully reduce the impact of bubbles and inevitable crashes and the loss of investors trust that decimates the financial system.