This story notes that in 2004, the Securities Exchange Commission loosened the rules as to how much the five largest financial firms could leverage their capital.
Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.As part of the ruling, there was supposed to be an increase in SEC surveillance of the bank portfolios. This is what the Times says:
The 2004 decision for the first time gave the S.E.C. a window on the banks’ increasingly risky investments in mortgage-related securities.Comment: Just think about that. The regulatory agency assigned seven people to an office responsible for the information on which to evaluate the safety of a seven trillion dollar portfolio, and left that office without a director for more than a year, during which the banks actually failed. It used the same computer models to evaluate the risks on which the companies were making their own decisions.
But the agency never took true advantage of that part of the bargain. The supervisory program under Mr. Cox, who arrived at the agency a year later, was a low priority......
In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves......
The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Mr. Cox more than a year and a half ago.
The few problems the examiners preliminarily uncovered about the riskiness of the firms’ investments and their increased reliance on debt — clear signs of trouble — were all but ignored.....
Last Friday, the commission formally ended the 2004 program, acknowledging that it had failed to anticipate the problems at Bear Stearns and the four other major investment banks.
“The last six months have made it abundantly clear that voluntary regulation does not work,” Mr. Cox said.
The United States is offering advice to developing nations on managing their own economies. Perhaps it should look to its own problems first! JAD
Christopher Cox is a lawyer who was appointed to the SEC after 16 years in the House of Representatives. He was elected from Orange County, California, one of the most conservative constituencies in the nation. I recall one Orange County Representative who gave speeches on the floor of the Congress warning against the spear carrying Africans who were unbeknownst to the rest of use, invading the United States. How about the one with two families, whose daughter went to jail after seducing a 13 year old student in her class?Read about Cox:
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