Friday, September 26, 2008

Deregulation Fueled Crisis

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S.E.C. Chief Says Deregulation Fueled Crisis By STEPHEN LABATON Published: September 26, 2008 WASHINGTON— Christopher Cox, the chairman of the Securities and Exchange Commission and a longtime proponent of deregulation, acknowledged on Friday that the voluntary supervisory program of Wall Street’s largest investment banks had contributed to the global financial crisis and abruptly shut the program down. The agency’s oversight responsibilities will largely shift to the Federal Reserve. The commission’s inspector general, in a report also released on Friday, strongly criticized the agency’s performance in monitoring Bear Stearns before it collapsed in March. Mr. Cox said he agreed that the oversight program was “fundamentally flawed from the beginning.” “The last six months have made it abundantly clear that voluntary regulation does not work,” Mr. Cox said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily,” he added. “The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness.” The commission’s decision to end the regulatory program was somewhat academic. The five biggest independent Wall Street firms have all disappeared. The Fed and the Treasury Department forced Bear Stearns into a merger with JPMorgan Chase in March. And in the last month, Lehman Brothers went into bankruptcy, Merrill Lynch was acquired by Bank of America, and Morgan Stanley and Goldman Sachs changed their corporate structure to become bank holding companies, which the Fed regulates. The retreat on investment bank supervision is a heavy blow to a once-proud agency that has seen its influence over Wall Street steadily erode as the financial crisis has exploded over the last year. Because it is a relatively small agency, the S.E.C. tries to extend its reach over the vast financial services industry by relying heavily on self-regulation by stock exchanges, mutual funds, brokerage firms and publicly traded corporations.

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Source: Kansas City Star
NewsDateTime: 9/25/2008

S.E.C. Chief Says Deregulation Fueled Crisis
WASHINGTON— Christopher Cox, the chairman of the Securities and Exchange Commission and a longtime proponent of deregulation, acknowledged on Friday that the voluntary supervisory program of Wall Street’s largest investment banks had contributed ...
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The program abolished by Mr. Cox was unanimously approved in 2004 by the commission under his predecessor, William H. Donaldson. Known by the clumsy title of the “consolidated supervised entities,” the program allowed the S.E.C. to monitor the parent companies of major Wall Street rirms, even though technically the agency only had authority over the firms’ brokerage firm components. At the time, the commission’s decision followed heavy lobbying for the plan from all five big investment banks. At the time, Goldman Sachs was headed by Henry M. Paulson Jr. He left two years later to become the Treasury secretary and has been the architect of the administration’s bailout plan. The investment banks favored the S.E.C. as their umbrella regulator because that allowed them to avoid regulation of their fast-growing European operations by the European Union. Facing the worst financial crisis since the Depression, Mr. Cox has begun in recent weeks to call for greater government involvement in the markets. He has imposed restraints on short-sellers, market speculators who borrow stock and then sell it in the hope that it will decline. On Tuesday, he asked Congress for the first time to regulate the market for credit default swaps, financial instruments that insure the holder against losses from declines in bonds and other types of securities. The commission will continue to be the primary regulator of the broker-dealer units of the companies, and will work cooperatively with the Fed in supervising holding companies even though the Fed is expected to take the lead role. The Fed had already begun regulating Wall Street firms that borrowed money under a new Fed lending program, and the S.E.C. had entered into an agreement under which its examiners worked jointly with Fed examiners, an arrangement that is expected to continue. The commission will continue to have primary responsibility for regulating securities brokers and dealers. The announcement was the latest illustration of how the turmoil in the markets was rapidly changing the regulatory landscape. While Congress considers over the coming months how to overhaul the regulatory structure, the markets and the regulators are already transforming it in response to events. Still, the inspector general’s report made a series of recommendations for the commission and the Federal Reserve that could ultimately reshape the way the nation’s largest financial institutions are regulated in the future. The report recommended, for instance, that the commission and the Fed consider imposing tighter limits on borrowing by the companies to reduce their heavy debt loads and risky investing practices. The report found that the S.E.C. division that oversees trading and markets had failed to update the rules of the program and was “not fulfilling its obligations.” It said that nearly one-third of the firms under supervision had failed to failed to file the required documents. And it found that the division did not adequately review many of the filings made by other firms. The division’s “failure to carry out the purpose and goals of the broker-dealer risk assessment program hinders the commission’s ability to foresee or respond to weaknesses in the financial markets,” the report concluded. The Consolidated Entities Program was approved by the commission in 2004 after several important developments in Congress and Europe. In 1999, the lawmakers adopted the Gramm-Leach-Bliley Act, which broke down the Depression-era restrictions between investment banks and commercial banks. As part of a political compromise, the law gave the commission the authority to regulate the securities and brokerage operations of the investment banks, but not their holding companies. In 2002, the European Union threatened to impose its ownrules on the foreign subsidiaries of the American investment banks. But there was a loophole: if the American companies were subject to the same kind of oversight as their European counterparts, then they would not be subject to the European rules. The loophole would require the commission to figure out a way to supervise the holding companies of the investment banks. In 2004, at the urging of the investment banks, the commission adopted a voluntary program. In exchange for the relaxation of capital requirements by the commission, the banks agreed to submit to supervision of their holding companies by the agency.


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