A major focus of the Obama proposals to redesign the regulatory system is to bring all the major financial institutions that were implicated in the current financial crisis (or might be implicated in the next one) under regulation. These include hedge funds, investment banks and mortgage companies, which have been only loosely regulated. The general presumption seems to be that if all the major categories of firms are regulated, with clear lines of regulatory responsibility, all should be well. But will it? There should be some unease about this presumption, because major banks and thrifts subject to extensive regulation were nonetheless caught up in the crisis. The Citibank and Bank of America holding companies were regulated by the Federal Reserve; the banks themselves were regu...
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