Central Michigan University

• SEC proposal could worsen U.S. financial problems

Topics in this story: Business, finance, jobs and the economy, College of Business Administration, Finance and Law, News tips and sources

Federal regulators are proposing some of the biggest bailouts in U.S. history and also are implementing new rules for trading. Central Michigan University finance and law faculty member Theodore Bolema says that the Treasury proposal is generally sound, but the Securities and Exchange Commission's latest proposal is likely to worsen the current financial problems. Bolema is available for commentary on the issue.

A few of Bolema's initial thoughts on the subject:

• "The current financial industry crises all stem from the same fundamental source -- the willingness of Congress to provide financial support for essentially private activity by private corporations. The direct financial support each year is bad enough, but the willingness to shift risk from private financial institutions to the taxpayers led to the entirely foreseeable financial crisis we have today."
• "The Fannie Mae and Freddie Mac bailouts were foreseeable years ago, and Washington lacked the political will to take action when the cost would have been minimal. The 2005 Federal Housing Enterprise Regulatory Reform Act, which was proposed in the U.S. Senate, is an example of reform legislation that would have probably made the current bailouts unnecessary."
• "The new SEC ban on short selling will probably be counterproductive and will deprive the market of a useful tool for correcting over-reactions and adding liquidity to the market. One obviously better approach is to limit the ban on naked short selling, so that the short seller will have to have the stock it promises to sell in a short sale, and another approach is to allow short sales only after the stock price rises, which would allow most of the corrective short-selling while preventing short-sellers from accelerating market declines. The latter is the 'up-tick' rule, which unfortunately was eliminated by the SEC in early 2007."
• "The current Treasury plan is similar to the Resolution Trust Corporation plan in the late 1980s, which created a plan to liquidate the assets of failed savings and loans. That is probably the best option today and at least has the virtue of intervening earlier than was the case with the RTC."

Bolema, an expert on business and antitrust law, is a former trial attorney with the Department of Justice. He is a practicing attorney licensed in the State of Michigan and is also a Ph.D. economist. Bolema was an attorney with Weil, Gotshal & Manges in New York City and is a former special assistant attorney general for the Eastern District of Virginia.

Contact: Heather Smith, 989-774-1702, heather.smith@cmich.edu