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Roubini: New Regulations "Go in the Right Direction," But Not Far Enough

Posted Jun 18, 2009 12:47pm EDT by Tech Ticker in Newsmakers, Banking
Related: XLF, FAS, FAZ, SKF, AIG, BAC, JPM

The new Wall Street regulations announced by President Obama yesterday "go in the right direction" but only accomplish about "75% of what needs to be done," says Nouriel Roubini, professor at NYU's Stern School and chairman of RGE Monitor.

For example, making the Fed the systemic risk regulator makes sense from an institutional standpoint, "but have to have individuals committed to making sure the systemic risks are controlled," Roubini says, recalling the Greenspan Fed had the power -- but not the will -- to regulate mortgage lending during the housing boom.

"They allowed all this toxic underwriting because they did not believe in supervision," he says of the Greenspan Fed. "They were in favor of any kind of financial 'innovation'."

Similarly, requiring firms that create asset-backed securities must own them doesn't go far enough, the economist says. Individual traders and trading desks must also own the products they create, or have their compensation tied directly to their performance, he says. This speaks to Roubini's broader point that compensation must be risk-adjusted in order to prevent a repeat of the past cycle, where individuals put themselves in a position to generate huge short-term profits while putting their entire firms (if not the global economy) at risk of collapse.

The famed economist also believes there needs to be more consolidation of regulatory bodies, and fears the practice of firms "shopping" for the most lenient regulator will continue.

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