Since I am teaching Securities Regulation this fall, I was interested to read about the "scathing report" recently issued by the Securities and Exchange Commission's inspector general in connection with the collapse of Bear Stearns. According to the Wall Street Journal, the report concludes that the SEC missed "numerous potential red flags" and "failed to carry out its mission in its oversight of Bear Stearns." Certainly this is not the only source of criticism the SEC has faced in recent weeks. Assuming at least some of these concerns are valid, I got to wondering what some of the likely candidates were for causes of the SEC's shortcomings. Here's my current short list:
1. The SEC lacked the necessary expertise. We have been told repeatedly that the financial instruments underlying the current financial crisis were complex to the point of being indecipherable. Did this complexity create problems for the SEC that it wasn't prepared to deal with? True, the inspector general's report noted that the SEC missed "numerous potential red flags" in connection with its supervision of Bear Stearns. However, flags have a funny way of turning a brighter and brighter shade of red the more hindsight and crises you add to them.
2. The SEC lacked the necessary authority. Jim Hamilton reports:
When Congress passed the Gramm-Leach-Bliley Act, it created a significant regulatory gap by failing to give to the SEC or any agency the authority to regulate large investment bank holding companies, like Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns. Because of the lack of explicit statutory authority for the Commission to require these investment bank holding companies to report their capital, maintain liquidity, or submit to leverage requirements, the Commission in 2004 created a voluntary program, the Consolidated Supervised Entities program, in an effort to fill this regulatory gap. The chair acknowledged that voluntary regulation has failed.
However, the SEC has been criticized for not seeking more authority from Congress to address this regulatory gap.
3. The SEC was blinded by an ideological commitment to laissez faire economics. Up until the credit recently started running dry, there seemed to be no shortage of souls in Washington worshiping at the Altar of the Free Market. Like zombie lemming monks, they marched toward the precipice responding to every problem with four words: "Cut taxes. Cut regulation." (Of course, on some other blog a writer is describing the other side in similar terms and simply inserting: "Raise taxes. Add regulation.") Was the SEC, and in particular Chairman Cox, blinded to the need for more oversight by just such an ideological commitment?
4. Chairman Cox was not up to the job. Was Chairman Cox to the current financial crisis what Michael Brown was to Katrina? That's a stretch. (Although, Mark Sunshine writes that, "Almost all paths of incompetence in the current crisis run through the office of the Chairman of the SEC, Chris Cox.") And, Chairman Cox certainly has his share of reputable defenders and arguments to make in self-defense. Nonetheless, if absence in the face of a call to duty is the yardstick, then some might still want to pull out their tape measures.
5. The evolution of our financial markets made our current regulatory structure obsolete. In a financial world more interconnected than ever before, has the time come for a single regulator? At the very least, the role of the SEC is likely to change. Steven Davidoff writes:
I fear that the S.E.C. will not fare well in the coming regulatory reform. It may indeed absorb the Commodity Futures Trading Commission, but the real, substantive regulation will go under the aegis of the Treasury Department or the Federal Reserve. The S.E.C. is probably about to become a pure consumer protection agency, like the Food and Drug Administration.
6. The SEC was done in by the lobbyists. I'm just starting to work on this angle so I'll just leave this point hanging with the thought that it seems every time a particular cause is cited for the current financial crisis the words "lobbied for by the financial industry" seem always to be lurking nearby. That includes the failed bailout plan itself.
Till next we meet, here's to interesting times.
{ 10 comments… read them below or add one }
I choose door number 2.
And this…
"the SEC has been criticized for not seeking more authority from Congress to address this regulatory gap."
..would be like foxes asking the farmer for tighter security on the hens.
"worshiping at the Alter of the Free Market" coming from a Professor at a University, I find most objectionable. It certainly confirms the contention
that the left position of academia is alive and kicking.
Thought I might clear the record a bit.
As to Professor Padfield being part of "the left position of academia [that] is alive and kicking" … I assure you, he is not!
Professor Padfield is a great prof… but, he is not a liberal. He is in fact the advisor for the Federalist Society at the law school. I am one of those very liberal people, and I rarely agree with his politics/biases (though our conversations are limited). He is openly conservative. He perhaps just doesn't believe in completely free markets like a lot of conservatives do — he said once that he thinks it doesn't work and it doesn't exist.
Professor Padfield may be guilty of hyperbole in that phrase. He is guilty of using the wrong spelling of "alter" (it should have been "altar" in the context.) But, he is most certainly not guilty of being a liberal stuck in the ivory tower. Alice, I think you perhaps are guilty of buying the stereotype that all University's are packed with liberals…?
In terms of the free market angle, how does the tax rate relate to this? Issues of regulation I can understand in terms of the crisis, but would like to hear more about how the desire for lower corporate taxation contributed.
Jess, "nice catch" (as we say in the drafting biz) on "Alter". I tried hard to come up with a nifty way of claiming I was purposely playing with words there, but I quickly had to give up, make the correction, and move on.
And while I'm here, thanks for all the comments. I think one of my roles as a prof is to inform and stimulate dialogue. Sometimes, we stimulate dialogue by purposely taking extreme positions. There is obviously some line-drawing that goes on there and I want to make sure I stay on the right (no pun intended) side of that line. So, please do let me know if you feel my attempts to stimulate dialogue have crossed the line into stifling dialogue.
Thanks, Jess, "I needed that"……I would love to be convinced that the liberal stereotype of academia is not true….I guess I've seen too much of it in the family and otherwise…..
I REALLY like this blog and cherish the opportunity to participate!
Can someone help me out? I've read in 2 places recently that a couple months ago there was a run on the money market acounts and mutual funds that took several trillion dollars out to the sidelines…..anyone else read of this?
Alice
Alice: There have been a variety of "runs", redemptions, closures, etc. over the last several months in money market funds/products, however, you may be refering to the liquidation of the Reserve Fund(s) which started a few weeks ago. This event caught up Goodyear and looks to cost GT at least 30 million, although the funds are still liquidating and the total loss is not yet known.
Buckeye bob, does that mean that the money taken out during the "runs" is
sitting on the sidelines till the confidence in the market returns maybe not
to 'normal' but at least stabilized? Isn't this money that needs to be invested'
in order to make more money? money for cash flow? Surely it can't just sit
and wait it out for months and months…..
Completely unrelated to the Securities issue – lemming suicide is a myth.
http://www.snopes.com/disney/films/lemmings.asp
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