The massive realignment that’s occurring in the financial markets must be affecting the mechanisms of governance. Our assumptions about governance have to change accordingly, particularly if we’re going to impose massive new regulation. Consider these two quotes from this morning:
What's really going on is another effect of the disappearance of dealer and arbitrageur capital. The dealers can't afford to make efficient markets, given their decapitalisation, downsizing, and outright disappearance. That means anomalies sit there for weeks and months, where they would have disappeared in minutes or seconds.
And from WSJ:
So far this year, 46 outside directors who are CEOs or chief financial officers left the boards of 42 companies in three struggling industries -- financial services, retail and residential construction -- concludes an analysis for The Wall Street Journal by Corporate Library in Portland, Maine. * * *George Davis, co-head of the global board practice at recruiters Egon Zehnder International, said about a half-dozen CEOs he had been wooing for board seats withdrew their names after investment bank Lehman Brothers Holdings Inc. collapsed in September. Their own boards told them, "Keep your hand on the tiller," the recruiter remembers. * * *
We should keep these effects in mind before we impose regulation that could exacerbate the strains – e.g., short-selling bans that further weaken market efficiency; and imposing additional pressures and monitoring burdens on outside directors.
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