2009: After the Financial Crisis, Reform
This article is from our archives as part of the 100th issue special, celebrating twenty-five years of quarterly newsletters.
Policy matters. Natural Investments has participated in public policy conversations and attended meetings on the Hill in Washington, D.C., for years and will continue to serve as a voice for fair and just financial regulations.
It’s been over a year since the fall of Lehman Brothers sparked major tremors in the U.S. financial system that rippled around the planet. Though lawmakers called for reform, much of the financial services industry remains unchanged a year later. The wholesale restructuring advocated by the social investment industry, economists, and academics has thus far been met with strong opposition from the industry, and Congress’ lack of expertise left them unable to do anything other than infuse large banks with cash.
The needed structural changes in our system remain conceptual and haven’t even been fully debated. Yes, there were calls for bonuses to be recalled and executive pay to be restricted, particularly for those institutions that accepted the bailout money, but all that money was given without use restrictions, which is likely how the five largest banks generated $13 billion in profit in the second quarter. Executive pay has returned to pre-crash levels, and boosted by a six-month stock surge, the government has not seemed motivated to address the necessary reorganizing, decapitating, or re-regulating of banks to require prudent credit assessment and risk management procedures. Derivatives are still traded, banks don’t have to disclose what they’re doing, and there are no leverage restrictions that financial institutions and firms must maintain.
Going back to business as usual should not be tolerated. In July, the Obama administration released its road map, Financial Regulatory Reform: A New Foundation, which includes both general and specific frameworks to strengthen discipline, transparency, disclosure, accountability, and regulation in the financial system. In support of this effort, the Social Investment Forum, of which Natural Investments is a member, is formally advocating these needed reforms for the corporate/investment industries:
- Improved Corporate Governance: Allow board slates to be nominated by shareholders, separate the Chair and CEO board positions, and mandate shareholder votes on executive compensation.
- Disclosure on Environmental, Social and Governance (ESG) Factors: Require corporations to disclose ESG information to their shareholders and the public using the Global Reporting Initiative’s framework.
- Regulation and Oversight of all Investment Products: All investment vehicles, including hedge funds, should be required to register with and be overseen by the appropriate agency. The vast majority of over-the-counter derivatives should trade on an exchange to improve transparency of the market, increase liquidity, lower the costs to investors, and allow for the monitoring of systemic risk.
- Sufficient Resources for Regulators: Regulatory bodies, particularly the SEC, need the resources and political support to succeed at their jobs, and the appropriate oversight to assess their performance.
- Creation of a Systemic Risk Regulator: A systemic risk regulator must identify and reduce risks that could threaten the broader financial system, stopping institutions from creating systemic risk by growing beyond a manageable size or complexity, becoming too interconnected, or engaging in certain activities.
- Better Consumer Protection: A new agency should be created to improve disclosure and regulation of consumer credit products, as well as control predatory lending and the sale of inappropriate mortgages and lines of credit.
- Improve Rating Agencies: Standards for all ratings must be raised and their practices supervised by the federal government to avoid over-rating mortgage backed securities, collateralized debt obligations, and the like. Conflicts of interest, such as issuers paying the agencies for their ratings and agencies providing consulting services to the corporations they rate, must cease. Finally, rating agencies must not be allowed to be exempt from civil liability.
The SEC just created a Division of Risk, Strategy, and Financial Innovation to research and address market trends by combining economic, financial, and legal analysis. The move should address the harmful practices and impacts of derivatives, hedge funds, and corporate governance policies, and hopefully will improve regulatory activities regarding risk and leverage rules for investment firms. In addition, the social investment industry continues to press the SEC to restructure executive oversight and compensation, in order to better assess risks taken by decision-makers.
We also are supporting the SEC’s proposed requirement that gender and ethnic diversity of director nominees be disclosed, and that candidate’s board experience within the past five years and involvement in legal proceedings within the past ten years also be disclosed. In these unprecedented times, the social investment industry is seizing the opportunity to suggest regulatory reforms that we have long believed would protect the general public from exploitation and harm while supporting the integrity of the financial industry and the overall health of the economy.
We are encouraged that the Obama Administration is actively seeking our input and adopting many of our recommendations as its own.