Special Report on Regulatory Reform Page: 3
The following text was automatically extracted from the image on this page using optical character recognition software:
have the will to use that power, it channels savings and investment into productive economic
activity and helps prevent financial contagion. Like the management of any complex hazard,
financial regulation should not rely on a single magic bullet, but instead should employ an array of
related measures for managing various elements of risk. The advent of the automobile brought
enormous benefits but also considerable risks to drivers, passengers, and pedestrians. The solution
was not to prohibit driving, but rather to manage the risks through reasonable speed limits, better
road construction, safer sidewalks, required safety devices (seatbelts, airbags, children's car seats,
antilock breaks), mandatory automobile insurance, and so on. The same holds true in the financial
In recent years, however, the regulatory system not only failed to manage risk, it also failed to
require disclosure of risk through sufficient transparency. American financial markets are
profoundly dependent upon transparency. After all, the fundamental risk/reward corollary depends
on the ability of market participants to have confidence in their ability to accurately judge risk.
Markets have become opaque in multiple ways. Some markets, such as hedge funds and credit
default swaps, provide virtually no information. Even so, disclosure alone does not always provide
genuine transparency. Market participants must have useful, relevant information delivered in an
appropriate, timely manner. Recent market occurrences involving off-balance-sheet entities and
complex financial instruments reveal the lack of transparency resulting from the wrong information
disclosed at the wrong time and in the wrong manner. Mortgage documentation suffers from a
similar problem, with reams of paper thrust at borrowers at closing, far too late for any borrower to
make a well-informed decision. Just as markets and financial products evolve, so too must efforts to
provide understanding through genuine transparency.
To compound the problem associated with uncontained and opaque risks, the current regulatory
framework has failed to ensure fair dealings. Unfair dealing can be blatant, such as outright
deception or fraud, but unfairness can also be much more subtle, as when parties are unfairly
matched. Individuals have limited time and expertise to master complex financial dealings. If one
party to a transaction has significantly more resources, time, sophistication or experience, other
parties are at a fundamental disadvantage. The regulatory system should take appropriate steps to
level the playing field.
Unfair dealings affect not only the specific transaction participants, but extend across entire markets,
neighborhoods, socioeconomic groups, and whole industries. Even when only a limited number of
families in one neighborhood have been the direct victims of a predatory lender, the entire
neighborhood and even the larger community will suffer very real consequences from the resulting
foreclosures. As those consequences spread, the entire financial system can be affected as well.
More importantly, unfairness, or even the perception of unfairness, causes a loss of confidence in
the marketplace. It becomes all the more critical for regulators to ensure fairness through
meaningful disclosure, consumer protection measures, stronger enforcement, and other measures.
Fair dealings provide credibility to businesses and satisfaction to consumers.
In tailoring regulatory responses to these and other problems, the goal should always be to strike a
reasonable balance between the costs of regulation and its benefits. Just as speed limits are more
stringent on busy city streets than on open highways, financial regulation should be strictest where
Here’s what’s next.
This report can be searched. Note: Results may vary based on the legibility of text within the document.
Other items on this site that are directly related to the current report.
Congressional Oversight Panel (Website)
This website contains information about and reports from the Congressional Oversight panel whose job was to monitor the financial markets and the system set up to stabilize the U.S. economy.
Relationship to this item: (Is Part Of)
Tools / Downloads
Get a copy of this page or view the extracted text.
Citing and Sharing
Basic information for referencing this web page. We also provide extended guidance on usage rights, references, copying or embedding.
Reference the current page of this Report.
United States. Congressional Oversight Panel. Special Report on Regulatory Reform, report, January 2009; United States. (https://digital.library.unt.edu/ark:/67531/metadc1438930/m1/4/: accessed April 18, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.