Corporate Governance

From the Pages of The Pomerantz Monitor: Fingers Point at the SEC

By Carolyn Moskowitz

During the recent election campaign, when John McCain publicly declared that SEC Chairman Cox should be fired, most dismissed it as a cheap shot designed to grab headlines. But on second thought, he may have been on to something. The November issue of The Pomerantz Monitor reports on recent finger-pointing at the Securities and Exchange Commission.

On September 26, Securities and Exchange Commission Chairman Christopher Cox announced a decision by the Division of Trading and Markets to end the Consolidated Supervised Entities (CSE) program, created in 2004 as a way for global investment bank conglomerates that lack a supervisor under law to voluntarily submit to regulation. Also on September 26, the SEC Inspector General released a report revealing that the SEC had fiddled while Bear Stearns burned. The report concludes that the SEC ?failed to carry out its mission?: it was well aware that Bear Stearns? capital ratio had fallen dangerously low, but although it politely suggested that Bear Stearns might want to look for additional capital, it did not push when Bear Stearns resisted. Moreover, it did not act even though it knew that Bear Stearns was inflating the value of its assets, including mortgages.

The CSE oversight program for the five largest investment banks was initiated in 2004, when the SEC voted to exempt their brokerage divisions from the net capital rules, allowing the release of billions of dollars to parent companies, which in turn used the windfall to speculate in mortgage-backed securities. In return for this release, the five parent companies allowed the SEC to review their books and records for the first time, under a program of voluntaryoversight.

In discontinuing this failed program in September, Chairman Cox admitted that, had the Commission more vigorously and effectively participated in the CSE program, it might have foreseen some of the problems that ultimately arose. Voluntary oversight programs, it confessed, ?do not work.?

Full post as published by PomTalk on November 06, 2008 (boomark / email).