From Main Street to Wall Street: Restoring Confidence in the U.S. Capital Markets, Remarks
Center for Capital Markets Competitiveness Third Annual Summit
Remarks for
THOMAS J. DONOHUE
President and CEO, U.S. Chamber of Commerce
Washington, D.C.
March 11, 2009
As prepared for delivery.
Introduction
Thank you very much, Rick, and good morning ladies and gentlemen.
The U.S. Chamber and its Center for Capital Markets Competitiveness are excited to be convening such a distinguished group of speakers and participants. We have a great program for you today.
In a very short time, the CCMC has established itself as a major player in ensuring the long-term viability and health of our capital markets.
I'd like to thank Rick Murray, David Hirschmann, and Amanda Engstrom for their tremendous leadership and hard work in this effort.
There's no question that our capital markets are facing an extremely difficult test.
The balance sheets of many of our major financial institutions are at-risk, credit is largely frozen, people who have cash are sitting on it, and economic growth and employment are headed in the wrong direction.
Trust in the private sector and in capital markets has been badly eroded. We are in dangerous and unchartered waters.
We did not invite you here today to point fingers, assess blame, or score political points.
We've invited you here to help us find solutions, build consensus, restore confidence, and chart a path to a brighter economic future.
If this crisis has taught Americans one thing, it's how tightly connected Main Street is to Wall Street.
Without functioning financial markets, small businesses can't access the capital they need to grow and expand, consumers can't purchase big ticket items and grow investments to pay for college and retirement, and the economy grinds to a halt.
Therefore, restoring and strengthening our capital markets must be job number one. They hold the key to economic recovery.
Consensus on Reform Is Possible
With so much at stake, trillions of dollars on the line, and public anger at a fever pitch, reaching consensus on fixing our capital markets will not be easy. But, it is possible.
One thing is for certain—we can't afford not to.
Today the Chamber is releasing a Declaration of Principles for reform of our financial regulations. It is signed by a bipartisan group of leaders from government, the private sector, and academia.
It's proof positive that stakeholders from both political parties, different industries, and varied viewpoints can come together behind common sense principles to advance the common good.
A copy of that Declaration is at each of your places. I encourage you to read it closely.
Instead of going through that document point-by-point, let me spend a few minutes outlining the major steps the Chamber thinks government and business must take—and not take—to reform and strengthen our capital markets and get the economy moving again.
The Role of the Government
When it comes to financial reform, our goal is clear: Protect investors and consumers, while also ensuring that our markets successfully supply businesses and entrepreneurs with the capital they must have to grow, innovate, and create jobs.
One of the key questions we must address is this: What is the appropriate role of government in our capital markets?
I think we can all agree that government should work to ensure the overall stability of the system, but not run it completely.
When markets functions very poorly—as they are now—the government is the only entity capable of filling the void and keeping the economy afloat.
That's why the Chamber has supported actions by both the Bush and Obama administrations to prevent an overall collapse of the system.
We have supported TARP, the economic stimulus package, aid for key industries, and the extraordinary measures taken by the Federal Reserve.
In fact, this support has raised more than one eyebrow among our members. But, we had to do it. Not to act would have been irresponsible.
Unlike many political pundits in town, we think that TARP was successful—because we still have a banking system!
Whether we like it or not, government must do what's necessary to prevent a total collapse of our financial sector.
But let me be clear: Once the economy improves, we will be just as vigorous in working to return government to its traditional role.
And the time to start planning for that is now. We need an exit strategy to get government out as quickly and cleanly as possible when the markets sufficiently recover.
Without an exit strategy, we run the unacceptable risk of reforming our system in a way that makes our markets permanently reliant on government.
Managing Risk
Another area we need to think about carefully is managing risk.
Mismanagement of risk—by some in the private sector, by government, by regulators, by the credit rating agencies, and by some consumers—is at the heart of the present crisis.
Establishing mechanisms to identify and manage systemic risks is essential. It should be a top priority for Congress and the administration.
Forbidding excessive leveraging and stiffening capital requirements for firms capable of destabilizing the whole system are no-brainers.
But who should have responsibility for this task, and how would it work?
We could do it through the creation of a new regulator or by giving that responsibility to an existing regulator, such as the Federal Reserve Board. Or, perhaps through a formalization of the authority and powers of the President's Working Group on Capital Markets.
This needs to be done thoughtfully and carefully. Regulators need better information and effective coordination. This systemic risk responsibility should not replace or duplicate functional regulation.
We need to avoid the moral hazard of labeling firms as "too big to fail" and implying a federal backstop for large financial services firms.
But the bottom line is that the government can—and should—play a useful role in identifying systemic threats to the system.
However, it must not try to function as the risk management officer for every company in the country.
That is not the proper role of government—and we all know they wouldn't be very good at it!
We cannot afford to stifle legitimate risk taking—it is the engine that drives our economic growth, fuels personal opportunity and advancement, and makes us the most dynamic and prosperous country on earth.
Smothering legitimate risk taking under an avalanche of needless and restrictive regulations is a recipe for disaster and long-term economic decline.
The same is of innovation—and I'm not talking about so-called innovations like complex and opaque financial instruments, but the innovations that have made managing money and investing easier and more profitable for average citizens.
Reforming Regulatory Structures
That leads me to my next topic We need to take this opportunity to bring clarity and predictability to the regulatory structures governing our markets, and to make certain they facilitate the global movement of capital.
The U.S. regulatory structure was built in a piecemeal fashion after a series of financial crises.
The resulting patchwork quilt of regulation has resulted in duplication and contradictions, excessive costs, and regulatory gaps big enough to drive a truck through.
We need to streamline and modernize the regulatory process, eliminate duplication and overlap among agencies and jurisdictions, fill in the regulatory "dead zones," and ensure fairness in enforcement.
In addition, we need to make certain that our regulations, standards, and oversight mechanisms are coordinated and compatible with those of the world's other major economies.
Inhibiting the global flow of capital into and out of the United States would pose a serious economic threat to America, undermine our global competitiveness, and erode our standard of living.
Capital goes to where it is welcome, safe, and has a decent chance to generate a good return. We want the United States to be that place.
That means we need effective, transparent, and predictable regulation to help make our markets the most attractive in the world and easy to deal with, not scare capital away with incompatible regulations and standards and an abusive legal system.
Accounting and Auditing
There are steps we can take to help us identify bad situations before they become worse and help us blunt the impact of financial crises.
One thing we should do immediately is review the practice of mark-to-market—or "fair value"—accounting.
Mark-to-market did not cause the current crisis, but it is needlessly exacerbating it.
Even Federal Reserve Chairman Ben Bernanke has called for a review of the accounting rules that govern how companies value assets, arguing they should not amplify the natural ups and downs in market cycles.
Unfortunately, the debate on this subject over the past few months has been dominated by the extremes, to no one's benefit.
Some have defended trying to find values for assets the no one knows how to value. On the other hand, some have called for completely ending fair value accounting.
We have proposed sensible steps that would provide greater clarity and transparency.
Yet regulators and auditors insist banks and other financial firms knock down the book value of this paper. That means the bank or financial institution has to commit precious capital to cover the unrealized losses.
The result? Less capital available to loan and a reluctance to make new loans for fear of having to write their book value down.
The Public Company Accounting Oversight Board could help by issuing guidance for auditors allowing companies to use their own judgment in how to account for assets that are currently untradeable.
The Financial Accounting and Standards Board—or FASB—could help by not looking for more ways to dig us deeper into the hole. It should stop shopping for more ways to apply mark-to-market.
FASB needs to act now to implement solutions to fix the unintended consequences to mark-to-market accounting.
Since last fall, the Chamber and others have proposed common sense solutions, but FASB has only recently said that they may try to fix these problems over the next 6-9 months.
Every day they wait, losses mount, businesses close, and jobs are lost. Sticking to the status quo in this crisis is intolerable.
We should also be very concerned about the viability of the auditing profession. It faces twin risks: the potential of further concentration among public company auditors and exposure to extreme catastrophic litigation.
Policymakers should consider safe harbors for certain defined auditing practices and limitations on liability in certain circumstances.
Beyond that, we need a complete and thorough analysis of how auditing standards are set. Too often they are the product of "Ivory Tower" thinking, divorced from the practical realities of the business world.
Auditors do a good job and we never know of their successes.
The past few months have uncovered some of the largest fraud schemes ever produced. While all fraud can never be completely avoided, the need for early detection is apparent.
The PCAOB needs to establish the Fraud Detection Center as recommended in last year's Treasury Advisory Committee on the Auditing Profession.
This center will assist in early warning and the development of industry best practices.
Both accounting and auditing provide the lifeblood of the markets—reliable information and transparency.
The more we have of both, the better—for our system, investors, and regulators.
Conclusion
And finally, it's absolutely essential we do not allow the American people to draw the wrong conclusion from this crisis that capitalism doesn't work, free enterprise is too risky, and Wall Street is the enemy.
Capitalism only delivers what it does best—economic growth—when government establishes appropriate rules of the road.
That means we have the difficult task of striking the right balance between appropriately regulating the market and allowing the freedom to take a legitimate risk, innovate, and grow.
Count me among the optimists This crisis will pass; we will preserve, reform, and strengthen our capital markets; and we will do what Americans have always done, what makes us great—take risks, innovate, adapt, and charge forward.
President Obama got it exactly right when he said in his inaugural address:
"It has been the risk-takers, the doers, the makers of things ... who have carried us up the long rugged path towards prosperity and freedom."
America must never veer from that path.
Free enterprise entails some risks. No amount of regulation and oversight can protect every investor from every loss—nor should it.
By creating a financial system and regulatory structure that encourage legitimate risk taking and put growth first, we can reinvigorate both Main Street and Wall Street.
We thank you for being here and we look forward to engaging you on these important issues.
Thank you very much.