March 31, 2008
Thanks, and My 2¢ on an International Aspect to Paulson's Plan
Posted by Joe Business

[Explanatory note: I normally blog on the Business Law Prof Blog with my colleague Dale Oesterle, and I log in to TypePad under the name "Joe Business" rather than "Paul Rose" (not by choice).  Hence the author name.  I'll try to get this remedied.] 

Many thanks to the Glom gang for inviting me to guest blog.   I am delighted to spend a couple weeks blogging with such a great group.  In terms of my nascent academic career, the folks at the Glom and I go way back.  Vic and Gordon provided helpful advice and assistance to me when I was trying to break into the academic market a few years ago, and the Conglomerate gave me an opportunity to get some helpful feedback from three excellent scholars--Mercer Bullard, Bill Henderson and Larry Ribstein--on the article I presented at the 2nd Annual Conglomerate Junior Scholars Workshop.  David and Christine also pitched in with some helpful comments. 

David and Gordon have done a great job analyzing many important issues with the Paulson proposal.  I just want to add my thoughts on another aspect to this effort that caught my eye.  While Paulson's proposal calls for a potentially radical restructuring of the financial system's regulatory framework on the federal level, Paulson has also been in discussions with UK regulators, as the Financial Times reports:

Gordon Brown, British prime minister, and President George W. Bush have agreed to step up co-operation over the crisis in financial markets, setting up a UK-US working group that will develop proposals to monitor and regulate the banking system. At the heart of the plans, agreed on Wednesday by Alistair Darling, UK finance minister, and Hank Paulson, US treasury secretary, is a body that will comprise senior treasury and regulatory figures from London and Washington. Mr Darling and Mr Paulson have also discussed a UK proposal for a system of "individually tailored" international supervision for leading banks and financial institutions with significant cross-border activity.

The primary goal of the working group is to "establish a common approach" to dealing with financial crises before the upcoming Spring meetings of the G7, IMF and World Bank.  After that, the working group will continue to meet together to consider, among other things, the role of ratings agencies and creating transparency in the valuation of complex instruments such as derivatives and other structured products.  Interestingly, UK and US officials were in discussions during the run-up to the Bear Stearns crisis, and have regularly shared information.  The creation of the working group would serve to formalize this process.

A skeptical view of the working group might suggest that while information-sharing is useful and likely to aid national regulators, finding and acting on common positions in dealing with financial crises could prove difficult.  Chancellor Darling would also like to set up international regulatory "colleges"--the "individually tailored" system extending beyond just the UK and US--to oversee multinational financial institutions, and finding agreement would be even more difficult in this context.  Another FT columnist underlines this point by pointing out the failure among British regulators in dealing with the crisis at Northern Rock:

[W]hen it comes to the detail, the chancellor is no closer to solving how to make these systems work under intense pressure.

Mr Darling knows, to the cost of his reputation, what happens when a “college” has to deal with a crisis: the UK Treasury, Financial Services Authority and Bank of England – the so-called tripartite authorities – are still recovering from their inability to staunch last year’s run on the British bank Northern Rock. How much more difficult it would be to sort out the bickering within a multipartite, multinational system of supervision.

For now, it will be a useful test case to see if the US and UK Treasuries can come to substantive agreement in time for the April 11th meetings of the G7. 

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