Posts Tagged ‘SEC’

Some people have been making a big fuss about who exactly caused this deregulatory mess (Bush, Greenspan), and this topic has been a particularly prevalent theme over at The Big Picture:

Today’s New York Times has a damning article linking Senator Chuck Schumer to many of the radical deregulatory policies that underlie much of the current crisis.

I have assessed a lot of blame for the crisis on several people — Greenspan at the top of the list, followed by several others, including President Bush. Phil Gramm was a prime sponsor of all manners of ruinous legislation — which, I hasten to add, was signed into law by one President Clinton (he sure isn’t blameless in the mess).

I guess it’s fun to point fingers and try to single out a scapegoat, but we can’t go much deeper than recognizing our mistakes and trying to make sure they don’t happen again. In The Great Depression, for example, we learned that using the gold standard likely exacerbated a series of demand shocks which could have been averted if we had targeted the money supply using interest rates, like we do today (hence, learning from our mistakes).

That said, where are we in the process of identifying what is wrong with our current system, and what will it mean for the future? If we determine that the problem is 30-1 leverage ratios and easy access to money, we are going to accommodate their absence with a much slower rate of growth in our next expansion.

All of that said, I’d like to point fingers for a moment. Anyone think about blaming the SEC? The news of Bernard Madoff’s ponzi-scheme is especially sobering to the fact that no one was/is watching these guys.

From Bloomberg:

Dec. 14 (Bloomberg) — Bernard Madoff’s investment advisory business, alleged to be a Ponzi scheme that cost investors $50 billion, was never inspected by U.S. regulators after he subjected it to oversight two years ago, people familiar with the case said.

The Securities and Exchange Commission hasn’t examined Madoff’s books since he registered the unit with the agency in September 2006, two people said, declining to be identified because the reviews aren’t public. The SEC tries to inspect advisers at least every five years and to scrutinize newly registered firms in their first year, former agency officials and securities lawyers said.

Wait…this is the best part:

“Given what the SEC claims is the magnitude of the fraud, this is something you would hope an inspection would have uncovered,”

Hmm. Good point. Did they even check this Madoff guy out? As soon as the fraud was exposed, a series of reports came out (almost instantaneously) which identified how this was a blatant ponzi-scheme – here, here, here, and here. So how did the SEC not figure this out? Is our public sector really that far behind the curve, as not to identify a $50 billion scam?

Either way, I think there is no chance that the current SEC chairman, Christopher Cox, makes it into the Obama administration. None. Please read his Op-Ed in the WSJ to see how Bob Rubin-esque his analysis of this situation is. As many have pointed out, the SEC has utterly failed to carry out their explicit responsibility in regulating rating agencies, the same agencies which deemed Fannie Mae and Freddie Mac AAA caliber debt, just before they had to be nationalized. The SEC was also responsible for relinquishing the mandated debt-to-net capital ratio (read: leverage) from 12:1 to 40:1, by the way.

As much as I’m not a fan of Jim Cramer’s antics, he could do a better job than Cox – what more could he do worse? He’s talked about reinstating the uptick rule, banning these leveraged ETF’s (which would undoubtedly lower volatility), changing mark-to-market accounting principles for illiquid assets (think of any 3 letter acronym – CDO. CDS. MBS.) – All of which would have a positive influence on the markets, and ultimately our economy.


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Courtesy of the Financial Times:

Bank of America, JC Flowers & Co, the financial investor, and China Investment Co., the Chinese sovereign wealth fund, are considering a possible joint bid for Lehman Brothers, the embattled Wall Street bank.

According to people familiar with the matter, the BofA-led group is among those examining a rescue of Lehman, which is racing to find a buyer after shareholders, creditors and counterparties gave a thumbs-down to its efforts to survive as an independent entity. Barclays, the UK bank, is also interested.

A forced sale of Lehman Brothers at a fire sale price appears to be the most likely option in the wake of the massive drop in Lehman’s share price over the last few days, people familiar with the matter add. “The only question now is what price,” says one person who has been in discussions with Lehman over possible asset sales as well as with regulators.

FED representatives are more worried about moral hazard in this instance (relative to the Bear Stearns bailout) since Dick Fuld had so much time to shop around the company, and since their lack of financial credibility has been so apparent for the past 6 months.

Here are some additional interesting tid-bits:

“Bear Stearns happened so quickly,” says one former Fed official. “At the time, there was no infrastructure to keep Bear alive. Now, there is an infrastructure to prevent a disorderly liquidation with the Fed willing to lend against good collateral.”


“During a call this week, Lehman officials said the book was marked at about 85 cents on the dollar while its stakes in real estate investment firms Archstone and SunCal were carried at something less than 75 cents on the dollar. Lehman reported a net mark to market loss of $5.6 bn for the third quarter.”

Again, Lehman’s financial credibility…85 cents on the dollar? That is the problem with GAAP (Generally Accepted Accounting Principles). If we had the IFRS like rest of the world, Lehman’s buyer would have a much better idea of what they were buying, since the values of the underlying assets would be marked to market value.

As our SEC chairman has said:

“A global set of high-quality accounting standards would be an international language of disclosure, transparency and comparability,” SEC Chairman Christopher Cox said at an open meeting in Washington. “It’s a goal worth pursuing.”

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