FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
Last week, Deloitte published a report that spelled out what most financial market participants already sensed: that the current landscape of proposed regulatory change in the US rivals the early 2010s, after the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
There weren’t many people closer to the action through the 2008-2009 global financial crisis than Jay Clayton. Then an attorney at Sullivan & Cromwell, Clayton advised Bear Stearns in its fire sale to JPMorgan Chase in 2007, Barclays Capital in the purchase of Lehman Brothers‘ assets following their bankruptcy, and Goldman Sachs in connection with the investment by Berkshire Hathaway. Clayton, of course, went on to become Chairman of the U.S. Securities and Exchange Commission, a position he held from 2017 until 2020.
So who better to look back on the near-apocalyptic times of 14-15 years ago, and tie it back to today than Clayton? He recently discussed the GFC, the recent FTX bankruptcy, and current SEC Chair Gary Gensler on an Intercontinental Exchange “Inside the Ice House” podcast.
By working through the GFC, “you learn about things like how much liquidity matters in times of stress, and that having high-quality assets matters in times of stress, and that capital matters in times of stress,” Clayton said. “And that the more you have liquidity and capital, the less likely you are to get into a stress situation that turns into what I would say is a financial crisis. You learn that firsthand.”
Clayton, who rejoined Sullivan & Cromwell in 2021, noted that he is not involved in the FTX bankruptcy proceedings, but he spoke generally about how regulating cryptocurrency has proven so difficult.
“(Crypto) started in the retail space and it started globally,” Clayton said. “The way we regulate financial transactions, whether it’s at the consumer level, the investment level or not, is we actually regulate them through intermediaries. We don’t sit next to investors and say, ‘You should buy or sell, or you should ask these questions.’ We sit with the people who are selling to them and say, ‘Look, if you’re going to sell, you’ve got to do it in this way.’”
“Crypto came without those kind of regulated intermediaries, and it came offshore,” he said.
Additionally, firms that sell securities to the public “have to provide comprehensive disclosure, audited financial statements going back three years. A number of procedural and substantive boxes need to be checked. It’s costly,” Clayton said. “Crypto entrepreneurs…kind of blew through that fact.”
Clayton was asked about his successor as SEC Chair, Gary Gensler, under whose leadership the regulator has proposed more new rules than it has at any time in the past decade.
“It’s a provocative question because, of course, Chair Gensler and I disagree on some policy matters,” Clayton said. “That’s been clear because he has changed course on some areas where I obviously thought the policy was right.”
“But in terms of the overall job, look, you are a steward of an administrative agency. That’s very important. It’s important that all of us who’ve had these jobs support those who’ve come after us and came before us. Because that agency, leadership changes, commissioners change, but the staff, which have an average time there, well into the double digits and are very dedicated, they’re constant.”
Clayton noted a common thread running through all recent financial-market implosions, from the GFC to FTX, and whatever may be ahead.
“I don’t know what is next, but I think all of those things together, I would say, disprove the notion that technology can replace the fundamentals of financial regulation,” Clayton said. “Don’t commingle. Don’t have excessive leverage. Don’t allow people to be on both sides of a trade. Those types of things, they remain true.”
