As advocates for the rights of investors, we have long been proponents goals-based regulation in previous posts here and elsewhere. In a stunning admission today that deregulation has failed, the President’s Working Group on Financial Markets (PWG) reported on important first steps that must be taken to restore economic stability and investor confidence, though much damage has already been done to undermine the global financial system. The report identifies the following as some of the central underlying causes:

“• a breakdown in underwriting standards for subprime mortgages;
• a significant erosion of market discipline by those involved in the securitization process, including originators, underwriters, credit rating agencies, and global
investors, related in part to failures to provide or obtain adequate risk disclosures;
• flaws in credit rating agencies’ assessments of subprime residential mortgage backed securities (RMBS) and other complex structured credit products, especially collateralized debt obligations (CDOs) that held RMBS and other asset backed securities (CDOs of ABS);
• risk management weaknesses at some large U.S. and European financial
institutions; and
• regulatory policies, including capital and disclosure requirements, that failed to
mitigate risk management weaknesses.”

The Working Group recommended the following steps to restore stability:

“• reform key parts of the mortgage origination process in the United States;
• enhance disclosure and improve the practices of sponsors, underwriters, and
investors with respect to securitized credits, thereby imposing more effective
market discipline;
• reform the credit rating agencies’ processes for and practices regarding rating
structured credit products to ensure integrity and transparency;
• ensure that global financial institutions take appropriate steps to address the
weaknesses in risk management and reporting practices that the market turmoil has exposed; and
• ensure that prudential regulatory policies applicable to banks and securities firms, including capital and disclosure requirements, provide strong incentives for effective risk management practices.”

These remedies for financial firm excesses should be implemented as soon as practicable by the regulators and, if need be, Congress.