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The New York Times
Opinion
Toward New Rules for
Wall Street
EDITORIAL,
nytimes.com on the Web, March 30, 2008
In the weeks since the Federal
Reserve put up some $30 billion to grease the sale of Bear Stearns to JPMorgan
Chase, a national debate has begun over how best to regulate 21st-century
financial markets.
That’s as it should be. The deal shifted risk for some of Bear’s dodgier
securities onto the Fed’s books, and by extension, onto taxpayers. The Fed
also has begun to lend directly to Wall Street firms, which it does not
regulate, accepting as collateral securities that have largely been shunned by
everyone else. There is no doubt that new rules are needed to prevent
other Bear-like calamities and protect taxpayers in the process.
But early word from the Bush administration, which still has nine months to
influence the debate and even start the nation down one path or another, is not
altogether encouraging. On Monday, the administration is releasing a
blueprint for regulatory reform, much of which was developed before the Bear
mess, though it may still be important for further discussion. But in a
speech on Wednesday, Treasury Secretary Henry Paulson Jr. indicated that the
administration may not be headed where the nation most needs to go.
In his speech, Mr. Paulson distinguished between interventions directly paid for
by taxpayers and those that shift risk to the taxpayer, which may or may not
result in spending taxpayers’ money.
The latter, he implied, do not necessarily raise the need for far-reaching new
regulations to protect taxpayers. That’s splitting hairs. The Bear
deal put taxpayer dollars on the line to prevent the bankruptcy of a firm that
should have failed, given its irresponsible risk-taking and lax management.
The Fed could not allow it to fail. Bear had the ability — fostered by
lack of adequate regulation — to spark severe problems, and failures, throughout
the financial system. So clearly, there is now a significant public
interest in regulation to protect both taxpayers’ money and the system on which
the whole country depends.
Mr. Paulson has also stressed that Wall Street, at this time, has been granted
only temporary access to the Fed’s loans. Again, the implication is that
temporary actions by the Fed are no cause for permanent regulatory change.
But once government help has been extended, firms expect help in the future, and
take risks accordingly. New rules are needed to control those risks.
In fairness, Mr. Paulson’s speech on Wednesday may have come too soon to endorse
specific reforms. He, like everyone else, is waiting to see how the Bear
deal develops.
But after nearly eight years of a president who has been devoted to
deregulation, with disastrous consequences, it will not be easy to convince all
interested parties — including taxpayers — that this administration can lead the
way to a well-regulated future.
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