World’s Financial Sector Facing ‘Hornet’s Nest’ of Political Risk

By | April 24, 2009

Oh, for the days when a little irrational exuberance was the biggest problem facing the world’s bankers and financiers.

It is way beyond that now. With the financial world mired in a stubborn credit crisis and the U.S. economy in a deep recession, the former “masters of the universe” are staring at the business end of a regulatory shotgun.

U.S. and European policy-makers, promising tougher rules and supervision, have their sights on banks, hedge funds, mortgage firms, private equity, insurers and credit rating agencies.

The shadow banking system of exotic derivatives is being dragged into the sunlight, and limits on executive pay that seemed unthinkable a short time ago are now on the books.

“There’s a hornet’s nest of political risk now emanating from Washington,” said Ian Bremmer, president of Eurasia Group, a business research and consulting firm.

With this as a backdrop, Reuters will begin its Global Financial Regulation Summit Friday, starting with exclusive interviews of U.S. Federal Deposit Insurance Corp Chairman Sheila Bair and Senator Richard Shelby, the top Republican on the U.S. Senate Banking Committee.

In multiple cities through next week, guests will include UK Financial Services Authority Chief Executive Hector Sants, U.S. Securities and Exchange Commission Chairman Mary Schapiro and Japanese Financial Services Agency Commissioner Takafumi Sato.

U.S. House Financial Services Committee Chairman Barney Frank will participate, as will House Agriculture Committee Chairman Collin Peterson and Senator Charles Grassley.

Elizabeth Warren, chairman of the Congressional Oversight Panel for the U.S. Troubled Asset Relief Program, and New York Insurance Superintendent Eric Dinallo will also take part.

The wide-ranging guest list reflects the breadth of regulatory challenges facing bankers and financiers in London, New York, Tokyo and other money centers.

“There are at least 22 different programs or bills related to the financial sector generating attention in Washington,” said Concept Capital policy analyst Jaret Seiberg.

Frank’s committee approved a bill to crack down on the credit card industry Wednesday, while the same day in Strasbourg, France, the EU assembly approved new rules to reduce risk in the insurance sector. Much more of this is coming.

A NEW NEW DEAL?

The moment could be historic, according to Warren, a Harvard Law School professor, who sees parallels between the government’s handling of today’s crisis and President Franklin Roosevelt’s New Deal response to the Great Depression.

Bold ambitions for regulatory change were outlined earlier this month at the G-20 meeting of industrialized and emerging market nations in London, attended by President Barack Obama.

Even financial industry lobbyists concede reform is imminent, with clients’ long-term profit outlooks on the line.

“Clearly, it is time to make changes in the financial regulatory system,” said American Bankers Association President Edward Yingling, also a summit guest, at a recent congressional hearing.

Powerful groups like the ABA are already pushing back against some proposals, and a long fight is expected in the hallways and hearing rooms where lobbyists ply their trade.

Months of debate is not only inevitable, but needed, said Joel Seligman, president of the University of Rochester in New York and a noted expert on the history of securities law.

“I hope the process is not rushed. We’re trying to create a financial structure that will last for decades,” he said.

Signs of a more stately tempo are already evident in Washington after the newly arrived Obama administration set a frantic pace during the first quarter of 2009.

U.S. lawmakers will be distracted from the financial regulation agenda by other administration initiatives on health care and energy. One early proposal — to realign financial oversight agencies — is already fading from view, for instance.

But public fury over the financial crisis, as well as the costly bailout programs that have followed, look likely to keep the financial regulation issue on the boil.

“Decades of Wall Street excess unchecked by reasonable and prudent regulation have left our markets vulnerable to systemic shock,” said Consumer Federation of America Legislative Director Travis Plunkett. “Only a fundamental change in regulatory approach will turn this situation around.”

(Reporting by Kevin Drawbaugh; Editing by Tim Dobbyn)

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