The following first appeared in the National Post on November 23, 2010.
SYSTEMIC FALLACY
A national regulator wouldn’t have prevented the credit crisis
By Jeffrey MacIntosh
In its legal argument filed with the Quebec Court of Appeal, the federal government argues that securities regulation can and should address systemic (or economy-wide) risk — and that a national regulator would be better positioned to do this.
This hobgoblin is very much a latter-day addendum to the traditional apologia for securities regulation, which has always focused on investor protection and securities-market efficiency. What gave this new addition legs? Very simply, the credit crisis. The feds’ factum of legal argument states that “reducing systemic risk is an objective more informed by current experience.” Placing the blame for the economic downturn squarely on the shoulders of the securities regulators, the factum states that the crisis “illustrated a gap in regulatory oversight.” Moreover, “the dangers of systemic risk underscore the need for national, if not international regulation.” A national regulator, say the feds, would be better able to co-ordinate its activities with other federal institutions, such as the Bank of Canada and the Office of the Superintendent of Financial Institutions.
In fact, leading up to the credit crisis, securities regulators may well have failed in a number of respects, including failing to ensure the safety of asset (and especially mortgage) backed securities peddled by the investment banks and others; failing to ensure proper disclosure in relation to such securities; failing to police the activities of hedge funds adequately, particularly in relation to the sale of credit-default swaps; and failing to adequately regulate the rating agencies, which lent their imprimatur to the sale of hundreds of billions of dollars worth of ultimately worthless securities. As illustrated by the system-wide ripple effects that followed the collapse of investment banking giants Lehman Brothers and Bear Sterns, these failures played a material role in bringing about the crisis.