Expert: Regulating Global Financial Firms Not Easy
ROBERT SIEGEL, host:
Kevin Jacques teaches finance at Baldwin-Wallace College in Berea, Ohio. He's a former Treasury Department economist, and he joins us now to help explain some of the issues at stake in this discussion of regulation. Welcome to the program, Professor Jacques.
Professor KEVIN JACQUES (Finance, Baldwin-Wallace College): Thank you very much.
SIEGEL: First, what does it mean to regulate a hedge fund, which the administration and Secretary Geithner say the federal government ought to do?
Prof. JACQUES: Well, basically, what happens in the United States economy and in our financial system is we have institutions like banks which are very heavily regulated. We have institutions like hedge funds, which are very, very lightly regulated. What this simply means with regard to hedge fund regulation is that we're looking at some government agency which will oversee the activities, the safety and the soundness of hedge funds - in essence, providing them regulation, more than we have seen in the past.
SIEGEL: Does that mean that hedge funds would file public quarterly reports and annual reports, describing what they're investing in?
Prof. JACQUES: Well, I would fully expect we will see more financial data provided by hedge funds regarding their activities and what they're doing. What's going to be particularly important in this case, given the current financial crisis, is we've seen hedge funds play a role in the crisis that we're currently in. So additional regulation on a hedge fund is likely to take the form of additional disclosure, particularly to any kind of regulatory agency that's going to be responsible for systemic risk in solving financial crisis.
SIEGEL: The columnist John Gapper writes in today's Financial Times about the difficulty of regulating institutions that operate across national boundaries, whether it was AIG or Lehman's. He writes of institutions that, quote, "not only have many foreign subsidiaries, they have woven a global web of financial contracts." Can a US agency really regulate what is now a global financial industry?
Prof. JACQUES: Well, the fact of the matter is if you have any internationally active financial institution, it is more difficult to regulate because it's operating in so many places around the world. Treasury Secretary Geithner recognizes that, Fed President Bernanke recognizes that. But the fact of the matter is if we're going to place increased regulation on financial institutions, then we have got to find a way to deal with those international issues.
SIEGEL: But can there be a level of cooperation that is capable, actually, of regulating funds that are investing in everything from, you know, condominiums in Southern California to property in Bulgaria?
Prof. JACQUES: Yeah. You do have an enormously difficult problem there, and the question will be one of details. Can we work out some kind of detailed regulatory system that's going to allow us to see what's going on cross border? And you also have potential political implications, recognizing that countries are, in fact, sovereign and may want to take their own best interests at heart. But having said that, regulators have been working internationally on an increased basis. They were doing it earlier this decade. They were doing it last decade, and simply, the enhanced regulation of hedge funds or any other financial service provider is simply going to have to be a continued, concentrated effort in that approach.
SIEGEL: There's talk of a single, highly centralized regulatory body that would regulate a huge financial institution like the future equivalent of AIG and banks. What are the benefits and the risks of such a single, strong regulator?
Prof. JACQUES: Well, the benefit is that we'll have one regulator who's looking at the very large, complex financial institutions and saying are they going to pose a systemic risk problem that could lead to kind of economic crisis we're seeing today? But the great difficulty is we're talking about very large, very complex financial institutions who may go into securities. They may go into derivatives. They may into banking. And they may have offices all around the world. That's going to be a very, very difficult job for that regulatory agency, to say does this pose a systemic risk? Very hard job to do.
SIEGEL: Well, Professor Jacques, Kevin Jacques of Baldwin-Wallace College in Berea, Ohio, thank you very much for talking with us.
Prof. JACQUES: Thank you for your time.
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