PARTICIPANTS
Charles Schwab, George Shultz, John Taylor, John Cogan, Joe Grundfest, John Shoven, Michael Boskin, Darrell Duffie, Kenneth Scott, and John Ciorciari.
ISSUES DISCUSSED
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Origins and Implications of the Financial Turmoil. Schwab began with some brief remarks on the causes and consequences of the current problems in financial markets. The group examined a number of factors that appear to have contributed to the turmoil, including poor performance by rating agencies, insufficient regulatory oversight, and numerous instances of fraud and mismanagement. Participants also discussed the failure of some senior executives and policymakers to heed the warnings of risk management officials during a time of high profit margins.
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Current Market Problems. Schwab then addressed some current challenges in the markets. The group discussed the severity of the current crisis, noting the possibility that some firms may still be understating their losses and will soon take additional write-downs. Participants expressed particular concern about potential further losses in structured investment vehicles (SIVs). Participants noted that many buyers have lost confidence in counterparties and rating agencies and are wary of holding securities of unknown value, and Schwab argued that investor confidence would indeed be a key to the recovery. The group discussed ways to address the problem and considered the possibility of forming a new credit rating regime comprising representatives of the major securities purchasers. Participants then considered the challenges to creating such a structure, as firms may be reluctant to share information and assume certain of the risks involved in rating securities.
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Possible Policy Responses to Market Illiquidity. The third portion of Schwab’s remarks dealt with prospective policy options. He noted that the Fed has taken numerous steps to provide liquidity in the financial markets by lowering rates and setting up special new lending facilities. The group then discussed additional measures that could be taken if actions taken to date prove insufficient. Schwab suggested various ways that the government could promote enhanced liquidity in the financial markets. Participants discussed the idea of creating an entity modeled loosely on the Resolution Trust Corporation. Such an entity could be established for a limited time period to create a market for illiquid paper by placing bids in the market. The group considered the possible benefits of such a structure and some of the challenges, such as the need for public finances to capitalize the entity and the need to develop appropriate risk evaluation and pricing mechanisms. Participants also raised ideas on how private mechanisms could be created to generate a market for illiquid paper.
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Reviving the Housing Market. The discussion then turned to housing markets. Participants reviewed a number of existing programs, such as Treasury’s Hope Now initiative and the new housing legislation. They also considered possible market-based alternatives that would help mortgagees and mortgagors resolve financial difficulties.
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Reforming the Existing Regulatory Regime. In the final portion of the seminar, participants returned to the question of how best to reform the existing regulatory regime for financial markets. They considered substantive issues, such as mark-to-market requirements and accounting rules related to risk assessment. They also considered institutional issues, using international comparisons to analyze the relative advantages and disadvantages of singleagency and multi-agency regulatory models.
