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Panel II of a Hearing of the House Agriculture Committee - The Role of Credit Derivatives in the U.S. Economy

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Location: Washington, DC

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REP. MARSHALL: Thank you, Mr. Chairman. Mr. Corrigan, your description of the agonizing process that you all go through in order to reach some sort of an agreement for progress -- that contemplates some progress where security is concerned is understandable and disconcerting at the same time. It almost sounds as if you need a big brother at the table to encourage you along: Even though there are some dissenters here, sounds good; we're going to go ahead and do it for the sake of the broader society that is affected by these financial markets. Well, the big brother at the table are the regulators. There's nobody else in the room, obviously, and it would be nice if we could avoid regulatory arbitrage with everybody running to the one that is least likely to be the big brother who does encourage people to move along and is -- run to the one that is most likely to sort of leave the parties to the process that they've been using all along.

Gentlemen, what kind of changes should we be making legislatively to the regulatory scheme that governs this whole process, this whole area, the over-the-counter market? You know the Financial Stability Forum was created right after long-term capital and supposedly had the best and brightest around the world anticipating what the next problem was going to be -- missed this one altogether, and in April, frankly, issued recommendations, you know, as it started to see the dominos falling, and then missed September altogether. There needs to be a lot of self-reflection here, it seems to me. The industry has done society a huge disservice by not being able to move forward as rapidly as it should.

So what kind of changes do we need to make with authorities, with regulation, et cetera? Mr. Corrigan, I might as well start with you.

MR. CORRIGAN: I could spend the afternoon in that one. Let me try to reduce it to the basics as best I can. First of all, I think the issues that this committee has focused on even today in terms of keeping the momentum to get to CCP and the related regulatory oversight in place, along the lines of the committee's work on some of my suggestions, is clearly a step that has to be taken. So that's easy -- not easy to do but it's easy to agree on.

Now, on the broader question of what can we do in the regulatory sphere, or for that matter in the private sphere, to better anticipate -- earlier the suggestion was made in terms of early warning systems -- that is really tough to do. I mean, I've been at this for 42 years and our collective capacity to anticipate the timing and triggers of the next financial dislocation, shock, crisis -- whatever you want to call it -- unfortunately is quite limited because we're dealing with a very specific form of human nature.

So I think that as we reflect on the events of the past 16 months, the first thing we've got to do is agree on a couple of broad principles that I think are going to have to shape the regulatory structure and focus of the future. The first of those principles is to recognize that there is a difference between prudential supervision which is aimed at financial stability as a public policy goal on the one hand and market practice, which is equally important but it is aimed at things like insider trading, front-running, market manipulation.

The first thing we've got to figure out is how do we square the circle at a philosophical level between those two public policy goals, because we cannot, in my judgment, go on with a system like we have in the United States where there are, you know, 15 or so federal agencies in the same sandbox and 50 state regulators in that same sandbox. We've got to simplify it, and our chances to find our way to better insights, early warning or whatever, I think will be much greater to the extent we can simplify.

But the principle of simplification has, in my judgment, another meaning, and that is because the world of contemporary finance is so complex -- and we can't put that genie back in the bottle -- I think we also have to learn to get ourselves and our thought processes, you know, out of the trenches and up on the mountain a bit so we can see what's in front of us as well as what's in back of us.

So there's a big cultural change I think that we as a nation face in terms of trying to do a much better job in this sphere than obviously we have done in the recent past. And I apologize for being somewhat long-winded, but as you can see, this strikes a bit of a passionate chord with me.

REP. MARSHALL: It's a huge question for the country. My time has expired. I don't know, Mr. Chairman, you might want to have answers from some of the others on what sort of regulatory changes they would like to see. Your call, sir.

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