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Chapter 3. Role of Government in Financial Markets

Chapter 3. Role of Government in Financial Markets. why regulate? types of regulation regulation in the U.S. I. Why regulate?. regulation necessary when there is a market failure market outcome is NOT optimal by itself financial markets important to entire economy. asymmetric information.

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Chapter 3. Role of Government in Financial Markets

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  1. Chapter 3. Role of Government in Financial Markets • why regulate? • types of regulation • regulation in the U.S.

  2. I. Why regulate? • regulation necessary when there is a market failure • market outcome is NOT optimal by itself • financial markets important to entire economy

  3. asymmetric information • some investors have access to more/better information • use it to profit at expense of others • discourage participation in markets

  4. II. Types of Regulation • Disclosure • issuers make financial information public • level playing field?

  5. Disclosure today • issues about accuracy of info made public • fraud • creative but legal accounting

  6. Financial activity • how orders to buy/sell securities are handled • rules to avoid conflicts-of-interest • rules against insider trading (trading on info not available to public)

  7. recent controversy • conflicts of interest between • investment banking clients • brokerage clients • did brokerage houses give stocks high ratings to gain the business of those companies?

  8. Financial institutions • depository & nondepository • permissible activities • protection of investor funds • Foreign participation • type/amount of institution ownership

  9. III. Regulation in the U.S. • result of financial crises • panic 1907 • crash of 1929 & Great Depression • S&L crisis 1980s

  10. Federal Reserve System • 1913, after panic of 1907 • central bank to prevent bank panics • regulator of financial institutions • control of money supply and interest rates

  11. Great Depression • creation of SEC and rules about disclosure, insider trading • insurance for bank deposits • other bank regulations later repealed

  12. S&L crisis • changes in regulation of S&Ls • changes in permissible activities of S&Ls

  13. Current issues in regulation • conflicts between stock research and investment banking at securities firms • accounting rules & conflicts between accounting & consulting • mutual fund oversight

  14. Case 1: Mutual funds Elliot Spitzer, NYS Attorney General • late trading • allowing certain clients to trade mutual fund shares after 4 p.m. • illegal

  15. market timing • allowed CERTAIN investors to buy and sell share to profit from daily market movements • not illegal UNLESS only certain investors allowed to do it

  16. fees • Spitzer complaining that fees are excessive • BUT fees are within SEC guidelines

  17. Case 2: Martha Stewart • currently on trial • accused of • obstruction of justice (lying) • stock fraud • NOT insider trading

  18. allegations • Stewart sold ImClone stock before big drop • did she get tipped off? • (company Pres. or by broker) • Stewart then lied to investigators & tampered with evidence

  19. Martha Stewart lied to prevent the stock in here own company from falling • stock fraud

  20. Stewart claims that she had a prior agreement with her broker to sell when price fell below $60 • read more at Slate.com

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