London and the Consequences of Regulatory Lite

Remember, back in the day, when SOX was the culprit for everything going wrong in the US capital markets?  As evidence of the pernicious effect of SOX, critics pointed to the growth in the London stock market, almost entirely in the Alternative Investment Market or AIM.  It was held up as an example of the benefit of the use of principles rather than rules.  We have written on this topic.  The data actually showed that many (if not most) of the additional listings on AIM were small, largely illiquid companies that the US stock markets would have little interest in including.

In any event, we couldn't help but think about the rules v. principles debate in the context of the recent announcement that Northern Rock, a publicly traded mortgage lender, would be nationalized by the British government. Trading in the shares have been suspended.  In other words, the government is willing to put in place a system of regulatory lite and then step to mitigate the consequences when the system doesn't work.      

This need for government intervention to make the system work effectively ought to be a caution to those in favor of regulation lite in the United States.  With regulatory lite may well come a greater risk of direct government intervention in the market.