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Congress and the market regulators

Carol Perry
Special to the Nevada Appeal

So you opened your brokerage account statement and after picking yourself off the floor, you wonder how could it be this bad. You diversified. You rotated. You did all the things that Suze Orman told you to do and still your account is down 50 percent. What went wrong with your financial planning strategy?

Was it your advisor? He or she should have seen this coming and gotten you out. Was it the overpaid CEO’s on Wall Street that you hear about in the news every night? Perhaps the dog did it.

After all, how could you be down so much when the crash of 1929 and following Great Depression had provided market regulations to prevent such a meltdown. You probably thought there were rules preventing bad, greedy people from destroying your portfolio in this day and age. Well, there were. Note, past tense.

As the blame game rolls into high gear in Washington, no one can agree. What they can agree on is that a whole new regulatory framework must be created.

But what happened to the old one? After the collapse of the U.S. stock market in 1929, many new laws and regulations were put into place in order to protect the investing public. During the 1930s, the nation saw sweeping reform. Restoration of confidence was imperative so Congress created the Securities and Exchange Commission in 1934. This new agency was to promote stability by interpreting newly created federal securities laws, issues new rules, oversee securities firms. brokers, advisors, and ratings agencies. The stock market had grown too large for no regulation so rules were set in place to protect investors.

Forward to 1999. Senate bill S2697, co-sponsored by senators Lugar and Gramm ,was awaiting action from the banking committee. In the House, Rep Ewing had sponsored a similar bill reporting out of three committees.

All versions of proposed legislation would exclude over-the-counter derivatives from government regulation and reduce the level of surveillance on futures exchanges.

The proponents of deregulation built their case on the flawed idea that financial markets are so large, they are not subject to manipulation and the OTC markets were for sophisticated investors only.

In 2004, the Securities and Exchange Commission allowed a rule change that further eroded restraints and oversight on investment banks use of leverage. The SEC allowed five banks (three have collapsed) to more than double the leverage they were allowed to keep on their balance sheets and removed discounts that had been applied to the assets that they were required to keep to protect them from default.

In 2007, the SEC eliminated the uptick rule used to regulate short selling in financial markets. Smart lobbying by hedge funds further tweaked the uptick rule with naked short selling. This allowed traders to short a stock without borrowing it first from a broker dealer. This variation was like throwing gasoline on a fire and only after seeing wild swings in stock prices did the SEC suspend naked short selling.

In September of this year, after seeing the demise of Lehman Brothers, Merrill Lynch and AIG (without a bailout) the SEC put a halt to the manipulative short selling but many market watchers contend that despite the SEC changes, this practice continues.

So here we are today and you are holding your statement with shock and awe. Many things have changed since the creation of regulation on traded markets back in the 1930s, but there is little doubt that the very regulations that were put into place to protect the investor from manipulation and fraud have slowly eroded.

The lack of oversight by the agencies created to protect the investor themselves are directly involved in the market chaos seen today on your statement.

So when you are asking your advisor about how to protect your assets in this crazy current environment, perhaps you should be asking your congressional representative instead. After all the history behind regulated capitalism, it appears little has been learned.

– The opinion expressed is that of Carol Perry and may not reflect that of AWA Wealth Management or LPL.

Carol Perry has been a Northern Nevada resident since 1983.