Business and Policy Leader Events
NYU Stern Hosts Event on Restoring Financial Stability
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NYU Stern hosted an event for alumni and the media to discuss the ideas in the book, "Restoring Financial Stability: How to Repair a Failed System," co-edited by Professors Viral Acharya and Matthew Richardson.
The book is a compendium of 18 White Papers by 33 Stern faculty that take an objective look at the causes of the financial crisis and present solutions to repairing the system. Throughout the morning, panelists including Paul Volcker, Myron Scholes, Charles Plosser, Eric Dinallo, Stern faculty and others discussed the reasons for the current economic environment, and proposals for the role of government and regulation in reforming the financial sector.
Chairman of Economic Recovery Advisory Board and former Chairman of the Federal Reserve
"Maybe we ought to have a two-tiered financial system."
Volcker suggested a two-tier financial system: with a core part of the system, commercial banking, taking the role as a service institution that provides access to credit and savings mechanisms. Commercial banks would not take excessive risks in the market and would not be in the hedge fund business, since it would put their basic functions at risk. Conversely, the capital markets, which include hedge funds and equity funds, would conduct business relatively free of regulation. If they blow up, he said, they will not jeopardize the system.
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John Gapper
Associate Editor and Chief Business Commentator, Financial Times
"There is no such thing as perfect policy."
Citing inconsistency in the treatment of firms and implementation of policies in the current economic crisis, Gapper admitted that is it difficult to come up with an instantly perfect policy. In the long-term, he believes, there will be difficulties as a result of the things that are being done now to stem the crisis.
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Matthew Richardson
Charles Simon Professor of Applied Financial Economics and Sidney Homer Director, Salomon Center for Research in Financial Institutions and Markets, NYU Stern
"Creative destruction is needed to move forward."
To have a healthy economy, Richardson said, we need a healthy financial system. To have a healthy financial system, the system needs to be rid of toxic assets. However, institutions will not eliminate these bad assets since it may lead to the firm failing. Institutions will continue to use their capital and reduce their risks, perhaps in the form of loans. It is for this reason that Richardson recommends restructuring these institutions.
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Myron Scholes
Chairman of Platinum Grove Asset Management and 1997 Nobel Memorial Prize in Economics
"Two major functions of finance have failed and we need to restart them. We need a fresh start"
Scholes said the two functions of finance have failed: transacting in OTC markets, which is critical to market function, has virtually stopped; and the pricing signals that markets provide have ended as well. The solution, he claims, is to start over in the OTC markets for CDSs and other structured products.
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Four Main Principles Associated with Regulatory Reform
Viral Acharya
Professor of Finance, NYU Stern
"The crisis has shown that banks are very critical to provide intermediate credit to the economy."
Professor Acharya believes that risk sharing did not take place, leading to the demise of the financial sector. Banks, he says, did not transfer credit risk down the line; although there were securitization structures in place, risk was being passed around. He argues for one large regulator for Large Complex Financial Institutions.
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Seymour Milstein Professor of Finance, Corporate Governance and Ethics, NYU Stern
"We have a massive socialization of risk and massive privatization of return over the years."
Three years after enacting the Gramm-Leach-Bliley Act, major firms, including those such as WorldCom, were involved in historically large corporate scandals. This Act also created financial "godzillas"—companies that were too big to fail and too complex to regulate.
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Madelyn Antoncic (MPhil '81, PhD '83)
Managing Director and Senior Advisor, Lehman Brothers Holdings
There is a need "for consistent regulation."
Antoncic argued that inconsistent regulation, and inconsistently enforced regulation, promotes regulatory arbitrage, leading to competitive advantages and disadvantages resulting in non-economic decisions. She asserted that regulation should be fluid and have the ability to keep pace with changing business models. However, Antoncic added that just changing the regulating structure is not the silver bullet.
Get the Flash Player to see this player.
Charles Plosser
Chief Executive Officer, Federal Reserve Bank of Philadelphia
"Others have suggested that the Fed become the grand overseer of the stability of the entire financial system. Here, I think we should proceed with great care."
Plosser outlined three ideas to consider for reform: 1. Address the too-big-to-fail and too-interconnected-to-fail by instituting a mechanism that reduces the systemic costs of failure, 2. Develop ways to measure systemic risk and set higher regulatory bars on firms that have increasing levels of systemic risk, and 3. The Fed should play an important role in reducing systemic risk, but we shouldn't ask the Fed to take on roles that infringe upon its ability to achieve monetary policy objectives.
Get the Flash Player to see this player.
Eric Dinallo (LAW '90)
Superintendent of the New York State Insurance Department
"In my world, [CDSs} are like taking insurance on your neighbor's house and hoping, even participating, in it blowing up."
Dinallo says that optionality in choosing a firm's regulator is not a good thing-it creates regulatory arbitrage and punches holes in consistent firm regulation. Dinallo is not supportive of an "uber" risk regulator because there should be a healthy tension between agencies like the Fed and the SEC, which each have separate mandates.
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Responding to Crises and a Discussion of the Financial Sector "Bailout"
Thomas Philippon
Assistant Professor of Finance and Charles Schaefer Family Fellow, NYU Stern
"Crises will occur. The only question that really matters is how do you manage the crises and design an efficient bailout."
Philippon outlined three principles that are important in crisis management and bailout design. The government should: 1. Identify the market failures, 2. Choose the right tools, and 3. Follow clear principles. With centuries of market failure, Philippon asked, why don't we have solutions for the current crisis? It is because of the lack of capital in the financial sector and the lack of pricing of toxic assets, each of which requires a different type of intervention. TARP was never the right way to capitalize the banks, he explained-it was the right answer, but to the wrong question.
Get the Flash Player to see this player.
Panel I—Restoring Financial Stability
Paul VolckerChairman of Economic Recovery Advisory Board and former Chairman of the Federal Reserve
"Maybe we ought to have a two-tiered financial system."
Volcker suggested a two-tier financial system: with a core part of the system, commercial banking, taking the role as a service institution that provides access to credit and savings mechanisms. Commercial banks would not take excessive risks in the market and would not be in the hedge fund business, since it would put their basic functions at risk. Conversely, the capital markets, which include hedge funds and equity funds, would conduct business relatively free of regulation. If they blow up, he said, they will not jeopardize the system.
Get the Flash Player to see this player.
John Gapper
Associate Editor and Chief Business Commentator, Financial Times
"There is no such thing as perfect policy."
Citing inconsistency in the treatment of firms and implementation of policies in the current economic crisis, Gapper admitted that is it difficult to come up with an instantly perfect policy. In the long-term, he believes, there will be difficulties as a result of the things that are being done now to stem the crisis.
Get the Flash Player to see this player.
Matthew Richardson
Charles Simon Professor of Applied Financial Economics and Sidney Homer Director, Salomon Center for Research in Financial Institutions and Markets, NYU Stern
"Creative destruction is needed to move forward."
To have a healthy economy, Richardson said, we need a healthy financial system. To have a healthy financial system, the system needs to be rid of toxic assets. However, institutions will not eliminate these bad assets since it may lead to the firm failing. Institutions will continue to use their capital and reduce their risks, perhaps in the form of loans. It is for this reason that Richardson recommends restructuring these institutions.
Get the Flash Player to see this player.
Myron Scholes
Chairman of Platinum Grove Asset Management and 1997 Nobel Memorial Prize in Economics
"Two major functions of finance have failed and we need to restart them. We need a fresh start"
Scholes said the two functions of finance have failed: transacting in OTC markets, which is critical to market function, has virtually stopped; and the pricing signals that markets provide have ended as well. The solution, he claims, is to start over in the OTC markets for CDSs and other structured products.
Get the Flash Player to see this player.
Four Main Principles Associated with Regulatory Reform
Viral Acharya
Professor of Finance, NYU Stern
"The crisis has shown that banks are very critical to provide intermediate credit to the economy."
Professor Acharya believes that risk sharing did not take place, leading to the demise of the financial sector. Banks, he says, did not transfer credit risk down the line; although there were securitization structures in place, risk was being passed around. He argues for one large regulator for Large Complex Financial Institutions.
Get the Flash Player to see this player.
Panel II—The Future Role of Government within the Financial System
Ingo WalterSeymour Milstein Professor of Finance, Corporate Governance and Ethics, NYU Stern
"We have a massive socialization of risk and massive privatization of return over the years."
Three years after enacting the Gramm-Leach-Bliley Act, major firms, including those such as WorldCom, were involved in historically large corporate scandals. This Act also created financial "godzillas"—companies that were too big to fail and too complex to regulate.
Get the Flash Player to see this player.
Madelyn Antoncic (MPhil '81, PhD '83)
Managing Director and Senior Advisor, Lehman Brothers Holdings
There is a need "for consistent regulation."
Antoncic argued that inconsistent regulation, and inconsistently enforced regulation, promotes regulatory arbitrage, leading to competitive advantages and disadvantages resulting in non-economic decisions. She asserted that regulation should be fluid and have the ability to keep pace with changing business models. However, Antoncic added that just changing the regulating structure is not the silver bullet.
Get the Flash Player to see this player.
Charles Plosser
Chief Executive Officer, Federal Reserve Bank of Philadelphia
"Others have suggested that the Fed become the grand overseer of the stability of the entire financial system. Here, I think we should proceed with great care."
Plosser outlined three ideas to consider for reform: 1. Address the too-big-to-fail and too-interconnected-to-fail by instituting a mechanism that reduces the systemic costs of failure, 2. Develop ways to measure systemic risk and set higher regulatory bars on firms that have increasing levels of systemic risk, and 3. The Fed should play an important role in reducing systemic risk, but we shouldn't ask the Fed to take on roles that infringe upon its ability to achieve monetary policy objectives.
Get the Flash Player to see this player.
Eric Dinallo (LAW '90)
Superintendent of the New York State Insurance Department
"In my world, [CDSs} are like taking insurance on your neighbor's house and hoping, even participating, in it blowing up."
Dinallo says that optionality in choosing a firm's regulator is not a good thing-it creates regulatory arbitrage and punches holes in consistent firm regulation. Dinallo is not supportive of an "uber" risk regulator because there should be a healthy tension between agencies like the Fed and the SEC, which each have separate mandates.
Get the Flash Player to see this player.
Responding to Crises and a Discussion of the Financial Sector "Bailout"
Thomas Philippon
Assistant Professor of Finance and Charles Schaefer Family Fellow, NYU Stern
"Crises will occur. The only question that really matters is how do you manage the crises and design an efficient bailout."
Philippon outlined three principles that are important in crisis management and bailout design. The government should: 1. Identify the market failures, 2. Choose the right tools, and 3. Follow clear principles. With centuries of market failure, Philippon asked, why don't we have solutions for the current crisis? It is because of the lack of capital in the financial sector and the lack of pricing of toxic assets, each of which requires a different type of intervention. TARP was never the right way to capitalize the banks, he explained-it was the right answer, but to the wrong question.
Get the Flash Player to see this player.