After seeing this stock price reaction in the week following Lehman Brothers' bankruptcy, the SEC, like the Federal Reserve, took immediate action to stabilize the system. On September 18, following the decision of the Financial Services Authority in the United Kingdom a day earlier, the SEC instituted an emergency ban and other restrictions on short selling financial institutions. In taking these steps, Chairman Cox explained: "Given the importance of confidence in our financial markets as a whole, we have become concerned about the sudden and unexplained declines in the prices of securities. Such price declines can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence without a fundamental underlying basis. The crisis of confidence can impair the liquidity and ultimate viability of an issuer, with potentially broad market consequences." These new restrictions are set to expire no later than October 17. Permanent regulation of naked short selling is needed to prevent a similar demise for the firms that survived with the government's help.
The final issue I will address is the changed landscape of our financial system and regulatory regime. Many have recently commented that what we have seen with this market is a once-in-a-century event. We should remember that even eighty years after the fact, academics, economists and politicians still debate the causes and cures of the Great Depression. We exist in a regulatory regime created in a vastly different world for vastly different markets. Some have compared the regulatory and risk management systems of our current markets to trying to run a bullet train on ancient track. In 1929, the New York Stock Exchange traded about ten million shares a day.
Today, that figure is over five billion shares a day – more shares traded every day than were traded in an entire year when the still current regulations were created and put in place. New types of firms, new types of instruments, electronic trading, and a truly global financial marketplace were not anticipated when these early efforts at regulation were enacted into law.
We now have the opportunity to create a new regulatory system and "best practices" for a functioning and orderly market. These new approaches must encourage rather than impede global investment in our capital markets. Shifting and inconsistent rules create a capital markets system that does not give confidence to investors or participants. We need a single set of transparent rules for all of the participants in order to have a fair and orderly market. We must stick to these rules and enforce them evenly, not selectively, or our great capital markets will not be attractive to investors. A loss of investment in our markets would have far-reaching consequences for this country and the American people.
The various proposals being debated came too late to benefit our Firm, but our system today needs liquidity. The inability of businesses and individuals to have access to credit – credit that builds new plants, creates new jobs, pays for college and graduate school for our children, finances the basic needs of families – is not a crisis only for Wall Street. It is a crisis for everyone.
I thank you for allowing me to speak on these issues, and I am available to answer any questions you may have.