George Zanjani

A panel of Georgia State University professors said Oct. 22 that the current financial crisis may result in a regulatory model similar to the United Kingdom, but that future similar emergencies might not be avoided no matter how much regulation is in place.

George Zanjani, an associate professor of risk management and insurance at Georgia State’s J. Mack Robinson College of Business, said U.K. financial oversight includes a “super-regulator” body overseeing all aspects of the industry.

In the current U.S. system, regulators like the Federal Deposit Insurance Corporation and Federal Reserve can stop risky lending practices at commercial banks, but a super-regulator would also oversee other financial institutions like investment banks and insurance companies.

The U.K.’s Financial Services Authority performs that function across the Atlantic and is answerable to the country’s Treasury Ministry and Parliament.

Peter Eisemann

Dr. Zanjani’s colleagues on the panel, Conrad Ciccotello, professor of personal financial planning, and Peter Eisemann, professor of finance, agreed that the crisis began because financial companies did not think it was possible to have a nationwide drop in house prices and backed significant investments with mortgages.

“The idea that housing prices could not go down significantly on a national basis was held as gospel,” Dr. Zanjani said. 

He added that when regulators did step in to discipline companies on risky lending, the lack of an overarching industry authority made the effort meaningless.

“Part of the problem was even if a banking regulator got that idea and went into one of the institutions where it’s the primary regulator and lowered the boom, there’s all this stuff going on outside of their jurisdiction that they can’t do anything about,” he said.

The panelists were quick to add that economic downturns are a regular occurrence in a free-market system and greater regulation of the financial industry will not eliminate them altogether.

Conrad Ciccotello

“If we do move to that model, I don’t think our problems will be solved,” Dr. Zanjani said.  “Countries that have that model still have financial crises.  One of the mistakes you can make is to have too much faith in your regulators to solve everything.”

Despite his country’s regulations, U.K. Prime Minister Gordon Brown informed Parliament Oct. 22 that worldwide economic woes are likely to cause a recession there.

The panelists also predicted that bank failures and mergers are likely to continue, leading to a system in which a few large banks survive and numerous smaller, community-based institutions spring up. 

Dr. Eisemann said very large companies like Bank of America Corp. and JPMorgan Chase & Co. might acquire smaller ones like Atlanta’s SunTrust Banks Inc., which has about 1,700 branches throughout the Southeast and East Coast.

“I think the middle tier is going to disappear over time,” he said.  “I don’t think there’ll be SunTrusts a few years from now.  I think they’ll be acquired.”

Dr. Ciccotello said that the amalgamation of large institutions will leave room for innovation and entrepreneurship, encouraging young financial professionals to start their own businesses and invest while stock prices are low.

A question from a student in the audience noted the dollar’s rise against other currencies and said it makes Georgia State more expensive for international students.

Dr. Eisemann said that the dollar’s rise reflects confidence that the economy will turn around in the short term, particularly a belief that officials including Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke can handle the crisis.

Critics allege that these two could have done more to prevent the current situation, but Dr. Eisemann said they are probably the best people to manage a crisis.

He also addressed the question of whether the Emergency Economic Stabilization Act of 2008, which provides $700 billion to the financial industry in an attempt to encourage banks to lend, could actually end up turning a profit for the government.

Dr. Eisemann said the terms of the act, known widely as the Wall Street bailout plan, stipulate that the government is taking partial ownership stakes in some companies and could see a return once the banks involved become profitable again.

“It doesn’t mean that we’re giving $700 billion to these firms.  We are investing in securities, we’re investing in preferred stock in companies or making loans to companies and in response to that, the government’s going to receive dividends and in the long term receive interest,” he said.

“It’s not a pure gift, there is something coming back to the government.  The question is, ‘Is the amount that’s coming back equal to what’s being given to these firms?’.”

Dr. Eisemann added that, if the government were given a second chance, it would probably step in to save Lehman Brothers Holdings Inc., which collapsed in September.  That failure had ripple effects throughout the financial industry, but politicians realize that many Americans are uncomfortable with government aid to large corporations.

“I think if the government had a chance for a do-over they would not let Lehman Brothers fail,” he said.  “At the time they were trying to do as little as they could, and when Lehman came along with its financial problems the government decided the linkages with Lehman and the rest of the financial world were not so great that they had to prop it up. I think they realize they probably should have propped it up.”

Government intervention in the financial sector is a highly sensitive issue.  Many people see federal aid to corporations as abandoning free-market principles, while others think bailouts shield executives from the effects of failure and pass on the deficits to taxpayers.

Congressional hearings after Lehman Brothers’ failure found evidence that company officials refused to abandon multi-million bonuses while appealing for government help, according to news reports.

The version of the economic stabilization act passed by Congress Oct. 3 includes executive pay limits for companies involved and prohibits “golden parachutes,” or large payments to executives who leave participating institutions, making the act more palatable to the public.

Dr. Eisemann told GlobalAtlanta that other banks around the world are complicit in the current economic situation and the U.S. will remain a global financial center.

He said that today’s financial system is globalized to the point that complete disengagement from the U.S. is impossible.