One on One with William Donaldson, Chairman Donaldson Enterprises
Wednesday, July 15, 2009
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SUSIE GHARIB: Harsh criticism today of President Obama's plan to make the Federal Reserve the super regulator of the U.S. financial system. An institutional investors group led by two former heads of the Securities and Exchange Commission says that won't work. They say the central bank should not get the job of preventing systemic risk in the financial system. That task is the centerpiece of the president's plan to restructure how banks and other firms are regulated to prevent another financial collapse.
Arthur Levitt and William Donaldson's criticism of the Fed was blunt. Their report compiled by the Investors' Working Group said quote, the Fed's credibility has been tarnished by the easy credit policies it pursued and the lax regulatory oversight that let institutions ratchet higher their balance sheet leverage and amass huge concentrations of risky complex securitized products. Instead, they are recommending the creation of an independent oversight board to monitor risk management. That so-called systemic risk oversight board would be appointed by the president and approved by Congress with no affiliation to government agencies. The task force is also recommending that hedge funds and private equity firms be required to register with the SEC and be subject to oversight. Over the counter derivatives, like credit default swaps, would trade on regulated exchanges and be subject to strict government regulation. And Congress should create a new agency to regulate consumer financial products, including mortgages. I sat down with William Donaldson earlier today and asked him why he's opposed to the Fed taking on the job of systemic risk regulator.
WILLIAM DONALDSON, CHAIRMAN, DONALDSON ENTERPRISES: We feel that the -- basically the Federal Reserve has got its hands full in terms of monetary policy and so forth. We have felt that an independent group that is not coming out of any one of the existing agencies, independent group with great strength in terms of the chairmanship, strength in terms of its commissioners and board members and particularly strong staff with the mandate and the authority to go anywhere they want, it is a way of really getting at the systemic risk problem.
GHARIB: But you're proposing this oversight board and Treasury Secretary Geithner has said you can't put out a fire with a committee.
DONALDSON: The type of editing we're talking about here is a small group that by appointment and the people appointed to it have different dimensions of experience and so forth and has a strong chairman
GHARIB: You also proposed that hedge funds and private equity funds be required to register with the SEC. Now, Bernie Madoff's fund was also registered with the SEC and he still cheated thousands of investors, so why would this work?
DONALDSON: Bernie Madoff didn't register. Let me make that clear. The thing that was registered was a different business so that this business, his other business that was such a fraud was not registered. Nobody knew about it. It only seems logical that if funds are put together whether you call them hedge funds or whatever, that there should be some authority that has the right to go in and look at the procedures within that fund, look at things such as how they price their securities, what conflicts of interest they have, et cetera, et cetera.
GHARIB: I'm sure you've heard it said that we really don't need new regulation and new structures. We just need smart regulators who can enforce the rules that we already have. What are your thoughts on that?
DONALDSON: There are a number of rules and regulations we don't have. I mean the whole derivative area that has gotten us in so much trouble has no rules and regulations and no jurisdictional oversight from CFTC or the SEC. So I think that clearly we need effective regulators and clearly we need -- we need people who are trained and again this is a problem and a challenge and an opportunity to bring people into the regulatory agencies that are trained and know what they're talking about and eager to work through that agency.
GHARIB: What's your analysis of the Obama reform plan? Is it the right solution to reform the system?
DONALDSON: We say that it's a very good start, a good start but we're taking things a little bit further and we are also counseling that the whole systemic part of this and some of the conflicts of interest that are going require more study and we should not move too swiftly.
GHARIB: So what's the one take away message you would like the Obama administration to take from your report?
DONALDSON: I hope the administration will take a good hard look at some of these areas we've pointed out and take and see if they want to add to their proposal.
GHARIB: I guess what it boils down to is what investors care about and will these reforms ultimately spot risks in the future and will they be able to prevent a Bernie Madoff situation from happening again. What are your thoughts on that?
DONALDSON: There's always going to be in a society as big as ours and a global and financial investment world, there are going to be people who are going to come up with schemes and so forth and some of them are going to be pretty devious I'm sure. So can you say that a Madoff kind of thing would never happen again with proper regulation, I don't think you can say that. I think the best you can do is to address the causes of this situation which the congressional committee is taking this on is going to do and then to do the best you can.
GHARIB: Chairman Donaldson, it's a pleasure talking to you. Thank you.
DONALDSON: Thanks.
