The View From Here: One Of Wall Street's Own
Looks At Past Mistakes, Present Opportunities

By Meagan Murray

William H. Donaldson (right), a member of Barack Obama's transition team and former top boss at both the SEC and the NYSE, shares his insights on Wall Street, regulation and the bailout, in a conversation with National Public Radio's Robert Siegel.

The coming year, says William H. Donaldson, is most likely going to be a rough one. "But I have high hopes that we will have pulled ourselves out - that the world will have pulled itself out – of this in four years."

The economic forecast comes from one of Wall Street's own - a former chairman of the Securities and Exchange Commission whose many credentials in finance and government include a stint as president of the New York Stock Exchange and his current status as an economic advisor on President-elect Barack Obama's transition team.

Speaking in New York Nov. 17th at the latest installment of the Maxwell School/Public Agenda Policy Breakfast lecture series, Donaldson shared his misgivings about the strategy of trying to stem the slide on Wall Street by having the government use taxpayer funds to buy the banking industry's most loss-mired portfolios.

"The problem with attempting to buy the ‘so-called' toxic assets is, among other things, how you price them," said Donaldson. "If you pay too much, you are subsidizing the banks. If you pay too little, you may destroy the banking system."

The better option, Donaldson stated, is injecting equity capital into the banks to create the capability for lending again.

Known as a stickler for regulation during his time at the SEC, Donaldson sees now as pertinent a time as ever for the government to play a hand in monitoring the banking industry.

"There is some opaqueness as to what demands the government has made on the banking system for putting the money in," he said. "The banks are sitting on that capital and not investing it, not loaning it. That was not the reason they've been re-liquefied. There is not much sunlight in terms of exactly what is going on."

Donaldson continued to say that arguments for continued deregulation, similar to those the New York Times reports are now being advanced by former Texas Senator Phil Gramm, are destructive toward economic repair. Donaldson also believes Gramm's own deregulatory efforts – specifically the Gramm-Leach-Bliley Act of 1999 that allowed commercial and investment banks to consolidate and obviated the Glass-Steagall Act of 1933 (one of the many regulatory forms of legislation passed by Congress during the Depression era) – "let everybody get into everybody else's business." The fallout, he said, resulted in both the SEC and Federal Reserve being held responsible for monitoring the banking sector, which Donaldson claimed "left huge gaps of unregulated business – the most notorious being the mortgage business."

The problem lies in the differences of responsibilities between the two agencies. The SEC, Donaldson said, serves as a police agency for investor protection by ensuring public disclosure and oversight of issued securities. The Federal Reserve, on the other hand, is in charge of making sure the banking system is functioning strongly. The problem, Donaldson says, is there is no overlap or consideration for either bureau.

"Whose jurisdiction is this?" he asked in reference to the fallout of regulating the banking industry. "The Fed is not concerned about the investor; they're concerned about the impact of that business on the system, whereas the SEC is concerned about the investor information," Donaldson said. "Those are two totally different missions… and so there is a conflict."

Asked about the campaign by U.S. automakers to get government help, an issue on the front burner in the lame duck session of Congress, Donaldson was reluctant to back any one approach to the problem. "When you get into the automotive industry, we're dealing with a totally different animal," he said. "We're dealing with a commercial operation and a competitive industry that's competing on a world-wide basis."

An option he said both the automotive companies and government could consider is bankruptcy, wherein the company does not disappear, but winds up being restructured under new management - although American morale, he acknowledged, likely would be dented by a bankruptcy of a landmark corporation such as General Motors.

Another possibility could be a compromise between bankruptcy and a federal bailout plan, in which creditors and stockholders negotiate a plan of reorganization without filing for Chapter 11.

All in all, Donaldson believes the auto industry's woes will be another burden pushed onto the next administration. In his opinion, there is no "silver bullet" regulation that can be immediately put into effect and fix the economy, but he does suggest that the credit market should open up again to consumers, both at home and worldwide.

"We're no longer isolated," he said. "We can address some of these regulatory changes… and get our house in order, but it will be meaningless unless we have a global approach - unless we have regulation around the world that is coordinated and basically prevents somebody from fleeing a highly regulated environment to a less regular environment. That's going to be really tough to do… An attempt to get the world coordinated is one of the big challenges going on in the world right now."

Donaldson said that events such as the G-20 meeting held this past weekend in Washington are critical to addressing the need for global cooperation with economic regulation. While principles and guidelines are easy enough to extract from thought, he knows enforcing them worldwide as rules will be a task built from the ground up; something he believes our country has to achieve on its own before we can apply it to the global economy.

In the end, he left the audience with a glimmer of hope for the economy. "Things do change," Donaldson said. "There's an amazing resuscitating – from the ashes rise entrepreneurs – and I think that's going to continue."

To keep informed on the economy and the choices we face as a nation, and to let our leaders know what you want, check out our Citizen's Survival Kit and our Take It To The Next Level console of e-mail addresses for everyone from the president and president-elect on down to your Senators and Congressional representative.