BLOG 3: Where do we go from here?
Possible Answer: More regulation of the banking industry and investment industry and more financial oversight (SOX) in businesses.
What Measures Have Been Taken Since the Subprime Loan Financial Crisis to Assure This Will Not Happen Again?
One measure that has been taken since the subprime loan financial crisis is the Basel 3 agreements to avoid future financial crises. These are regulations that permit banks to take risks but increase the capital requirements. Basel 3 seeks to limit the ability of banks to leverage capital. The idea is that larger capital provides a larger cash cushion for future losses (Watkins, 2011, p.370). It is doubtful that these requirements alone would be enough to avoid further losses though. Basel 3 may not be enough regulation but regulations like the upcoming FINRA regulations could be too much regulation. FINRA is the Financial Industry Regulatory Authority. In December 2013, FINRA proposed an electronic system that could regularly look into the brokerage accounts of investment firms and see customers’ investment portfolios. The electronic system is called “Cards” and the idea is that it would give FINRA the ability to find out more quickly which firms are placing investors at higher risk. FINRA is possibly an invasion of investor’s privacy. Also it causes too big of a security risk to have a record of each person’s investments across multiple stocks and assets all in one data file and stored in one place. Cards could possibly go to the Securities and Exchange Commission for final approval by next year (Zweig, 2014).
Another measure needed is to increase Sarbanes-Oxley Act (SOX) regulations in businesses. SOX is aimed at curtailing corporate fraud and increasing oversight of corporate boards of directors. SOX requires companies to have a written Code of Ethics which has to be approved by the SEC. These measures are good but too much government regulation can be bad. So where do we go from here? Where we go from here has to be somewhere in-between Bush and Clinton’s laissez-fair policies and the overflowing of government programs we currently have under the Obama administration. Somehow we have to find common ground and that common ground needs to be in the middle. Thiel (2012) says we must have a stronger focus on ethical leadership in the future. “Corporate finance misconduct amidst the recent world financial crisis, such as the predatory subprime lending practices of Ameriquest, Goldman Sachs and IndyMacBank have left few wondering whether ethics leadership should be of greater focus moving forward (Muolo and Padilla, 2010; Palleta & Enrich, 2008).”
Muolo, P., & Padilla, M. (2010). Chain of blame: How Wall Street caused the mortgage and credit crisis. Hoboken, NJ: Wiley.
Paletta, D., & Enrich D. (2008, July 12). Crisis deepens and big bank fails.The Wall Street Journal. Retrieved November 7, 2011 from http://online.wsj.com/article/SB121581435073947103.html
Thiel, C., Bagdasarov, Z., Harkrider, L., Johnson, J., & Mumford, M. (2012). Leader ethical decision-making in organizations: Strategies for sensemaking. Journal Of Business Ethics, 107(1), 49-64. doi:10.1007/s10551-012-1299-1
Watkins, J. P. (2011). Banking ethics and the goldman Rule. Journal Of Economic Issues (M.E.Sharpe Inc.), 45(2), 363-372. doi:10.2753/JEI0021-3624450213
Zweig, J. (2014). Get ready for regulators to peer into your portfolio. The Wall Street Journal. May 3-4, 2014.