AEI's Financial Markets Deregulation Project, directed by Charles W. Calomiris and Peter J. Wallison, analyzes the general structure and regulation of financial markets and the service sectors of banking, securities, and insurance.

The AEI Press published two books in 2002 under the project's auspices. In The Advantage of Competitive Federalism for Securities Regulation, Adjunct Scholar Roberta Romano of Yale Law School pro-poses that the exclusive jurisdiction of the Securities and Exchange Com-mission (SEC) over securities regulation be replaced with a regime under which firms would select their regulator from among the states, the SEC, or foreign governments. Such a system would be designed to harness the high-powered incentives of markets to the regulatory state to produce arrangements most compatible with investors' incentives.

Government-Sponsored Enterprises: Mercantilist Companies in the Modern World, by Thomas H. Stanton, takes a comprehensive look at government-sponsored enterprises (GSEs), which combine the characteristics of public and private organizations. While their ownership and control are private, the government gives the six existing GSEs significant subsidies, including tax and regulatory advantages. The author traces the origins of the GSEs to mercantilist companies of the sixteenth century and shows how this old institutional form has taken on new vitality because of its growing political power.

The collapse of Enron has led to much greater scrutiny into the adequacy of disclosure by public companies. Because they are exempt from reporting to the Securities and Exchange Commission, Fannie Mae and Freddie Mac can determine for themselves what information they disclose to investors and how. A June conference explored whether the two housing GSEs are adequately informing investors and others who need to rely on their public disclosures. U.S. Representative Christopher Shays (R-Conn.) delivered the keynote address at this event.

Fannie Mae and Freddie Mac channel billions of dollars into the housing market by buying mortgages and guaranteeing mortgage-backed securities. Because the two institutions are perceived as having the backing of government, they are able to borrow in the credit markets at a much lower rate than others and provide lower rates of interest on qualifying residential mortgages. An October event looked at how changes in mortgage rates affect homeownership and at the degree to which Fannie Mae and Freddie Mac actually do lower mortgage rates.

AEI sponsors the Shadow Financial Regulatory Committee, a group of publicly recognized, independent experts on the financial services industry, including banking, insurance, and securities. The committee's quarterly meetings in 2002 covered topics such as the fallout from the Enron and Arthur Andersen cases, terrorism insurance, predatory lending, deposit insurance reforms, catastrophe insurance, fair disclosure, new securities deregulation legislation, and national charters for insurance companies. Its largest event included representatives from the shadow financial regulatory committees of Europe, Japan, and Latin America, as well as R. Glenn Hubbard of the President's Council of Economic Advisers, Anne Krueger of the IMF, and AEI's Allan H. Meltzer. The discussants debated the need for sovereign debt restructuring.

AEI hosted a conference in March that focused on the debate behind the quality of Generally Accepted Accounting Principles (GAAP). Critics believe that the differences between GAAP and International Accounting Standards (IAS), used in Europe, provide a reason for the failure of policymakers to develop a global securities market. The speakers addressed whether competition would provide a way to resolve the controversy between GAAP and IAS and whether a new accounting model is needed for a thriving international securities market to develop.

Kevin A. Hassett's Bubbleology: The New Science of Stock Market Winners and Losers (2002) analyzes the conventional wisdom about stock market bubbles. Mr. Hassett considers the traditional way of evaluating risk--equating it with volatility--and determines that investors have to understand the distinct roles that uncertainty and ambiguity play in investing.