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Over the next year, regulation of the financial industry will most likely transform globally, said H. Rodgin Cohen, chairman of Sullivan & Cromwell LLP, and Gary Parr, deputy chairman of Lazard, at The Deal's M&A Outlook 2009 conference on Wednesday.
Parr said that the transformation of the regulatory system would probably not have occurred without a crisis and the change will
occur internationally. "Why
shouldn't regulation be connected to who has money?
It erases one of those dilemmas and erases the question of whether
there should be international
regulation," he said. "De facto regulation is the way regulation is done
in the EU. It is
done country by country, but that doesn't always work. The EU didn't
have the funding to bail out all of the financial institutions, and with
that
will come oversight back to the regulatory level."
Sullivan & Cromwell's Cohen agreed, saying that this was the time "to put to bed" a fragmented and principle-based regulatory system and switch to a singular regulator, even though the idea of starting from scratch is frightening. "I think regulatory arbitrage is going to do a 180. Countries with the best regulatory systems will prosper," he surmised. Cohen elaborated, saying that governments will have to step up to take on more of the risks causing economies to deteriorate. "It is the governments and not sovereign wealth funds. Financial institutions are trying to set up reserves against losses. Deleveraging has much bigger consequences. Trillions upon trillions of deleveraging has to take place. It has to come from somewhere, and $700 billion is not enough," he said. Parr added that if the government does not get involved, more deterioration is inevitable: "That is with the general economy declining; we get some preview into this. With some client we see a rapid deterioration with consumer credits, and the rapid losses into the fourth, first and second quarters." Both Cohen and Parr said that underwriting standards for the mortgage market and short selling will most likely be more regulated in the future. Cohen questioned if illegal activities and short selling were really to blame for the crisis or if it was a lack of regulation, "There is smoke, but it is not clear to me that there is fire. Maybe regulators have not done enough to regulate short selling and the mortgage market, but I think before they can conclude that the bear raids the short sellers contributed to the situation, they have to see how the system works. It has always been a mystery to me why there were laws on the long side and not on the short side. It never seemed to be on the table." Parr questioned whether illegal activities were to blame for the crisis. "Who knows? However, were there legal activities that we don't like. Probably. In the '30s, a new law came out to say you can't do this because it creates fear. I would wager there will be some new amount of regulations or rules that will come out of this crisis."- Maria Woehr See all M&A Outlook 2009 posts Categories Deal Video
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