On Tuesday, Oct. 21, UR President Joel Seligman testified in front of the House of Representatives Committee on Financial Services, offering his suggestions on changing financial regulation in order to avoid a future economic crisis. Seligman is considered an expert on securities law, having authored numerous books and papers about financial regulation.
‘We are really in a financial emergency,” Seligman said. ‘I have never seen credit markets fall so fast, so hard.”
In his testimony, Seligman noted that the world of finance has changed significantly in the past few decades while appropriate changes in financial regulation have not kept pace. He noted the complexity of our current financial regulation system. While banking regulation occurs at both the national and the state level, the regulation of the insurance industry only occurs at the state level. He also added that the United States was one of the only countries in the world to regulate securities and commodities separately.
‘It is almost inconceivable that if Congress were writing on a clean slate that Congress would create our current system of financial regulation,” he said last week.
Congress’ current oversight structure involves numerous committees for oversight in both the House and the Senate. According to Seligman, these committees have overlapping jurisdictions and conflicting interests, making it difficult for effective regulation.
Seligman called for the creation of select committees in both the House and the Senate. These committees would be solely responsible for congressional regulation of the financial industry, and he felt they would be a significant improvement to the current regulatory structure.
‘These select committees will have oversight over all industries and can suggest reform efforts,” Seligman said. He added that members of both houses of Congress were receptive to the idea, and that a similar plan was suggested by Securities and Exchange Commission chairman Christopher Cox.
Seligman felt that a proximate cause of the economic crisis stemmed from the American dream to own a home, and the banks insistence to facilitate that dream led them to make risky decisions.
He pointed out flaws in many banks’ systems of issuing mortgages. Banks were offering mortgages to people who had poor credit ratings and likely would not be able to pay them back.
Many of these banks were then turning around and selling these mortgage-backed securities to companies such as Fannie Mae and Freddie Mac.
‘There is much less incentive for banks to ensure their customers have proper credit ratings when the banks in turn are getting paid back by someone else,” Seligman said.
Seligman also emphasized that the only justification for the bailout plan was if it helped the overall economy.
‘The goal should not simply be to bail out Wall Street,” he said. ‘The only justification for the plan is if it helps Main Street as well.”
He insisted that we ought to look hard at a moratorium on home foreclosures, among other things, to help the economy.
Seligman did acknowledge that the economic crisis was having an effect on the University, particularly on the management of the endowment.
‘Currently, we are withdrawing six percent annually on the endowment,” he said. ‘We would like to withdraw between four-and-a-half to five percent.”
Before Seligman arrived in 2005, the endowment was being overdrawn. Seligman emphasized that University administration would like to reduce the draw on the endowment over time, but added that this would not have a negative effect on student spending and financial aid.
UR’s endowment growth has decreased seven percent, compared to a benchmark of endowments of other universities with similar demographics.
As for other pending building projects, Seligman noted that the lack of access to the credit markets makes it difficult to get loans. The Clinical and Translational Science Building, the new research building at the medical school, is set to open in 2010; construction began on Monday, Oct. 27. However, that date hinges on access to the credit markets, which is currently unavailable.
Seligman did not rule out a delay on the construction of the project, but he did not expect it to be significant.
Willis is a member of the class of 2011.
