More on Financial Regulation, Its Unintended Consequences, and the Geithner Plan


The media is full of negative reactions related to
the announcement of Treasury Secretary Geithner’s extensive regulatory reform plan for the oversight of the capital markets. I can't imagine that an announcement of this nature wasn’t widely
expected.  On November 28th,
2008 I posted a warning on this specific issue:

A Case
Study in the Unintended Consequences of Financial Market Regulation: The Death
of the Small Cap U.S. IPO?

"The first 100 days of the Obama administration
are widely expected to usher in a new era of U.S. capital markets regulation
designed to restore the public’s trust in the decimated institutions that
provide much of the liquidity infrastructure for the global capitalist
system.  It is imperative that improved financial oversight be achieved
swiftly through the enactment of effective regulation so that the markets can
re-equilibrate and resume their normal function.  Without these necessary
changes, global economic growth will continue to falter.
  At the
same time, we must recognize that regulations enacted in haste can have severe,
negative unintended consequences." 

Pui-Wing Tam of the Wall Street Journal interviewed me this past Friday
and asked how I felt about increased regulation of venture capitalists as part
of the Geithner plan.  Her article
is published in WSJ Blogs in the Digits Blog and is titled Views From VC-Land
on Regulation

My quote was given in the context of whether
becoming a
Registered Investment Advisor presents an undue burden for venture
capitalists, which, based on my previous professional experience as a
Registered Investment Advisor, I believe that it does not.  

More important is my first point, which
is that we have experienced a massive failure of oversight in this country. 


Both the Government and the private
sector agree that we clearly have a regulatory process problem and that it must
be resolved.  We should not forget
that convicted felons such as Bernie Madoff were not only Registered Investment
Advisors, they actually passed inspections by the Securities Exchange
Commission.  The colossal systemic
failure of this country’s regulatory oversight of the capital markets has been
exposed by the SEC’s own inspector general, David Kotz, in an extensive report on the
SEC’s failure to enforce a whole body of regulation governing the now largely
defunct investment banks

A series of unintended consequences stemming
from over a decade of misguided federal securities regulations is also at the
root of the structural problems that currently prevent liquidity from coming
back to the public equity markets for emerging growth companies, and this has
been exposed succinctly in the white paper
“Why are IPOs in the ICU”.

I think it is unrealistic for investment
managers in any sector to anticipate less regulatory oversight in the US going
forward—but it is incumbent upon Secretary Geithner, President Obama, and the
Congress to recognize the proclivity of regulation to fail to accomplish its
intended goals.  We are already
living with those consequences right now.




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