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The Financial Crisis and the Finger of Blame

By J. Robert Brown

The NYT had an article over the weekend that discussed the assignment of blame for the recent financial crisis.  There isn't much content, with blame apportioned among democrats and republicans.  We note a few observations, however.   The article gave as one example the repeal of Glass Steagall. As the article notes:

• Perhaps the most significant recent deregulation of the banking industry ? the landmark act that allowed commercial banks to expand into other financial activities, like investment banking and insurance ? was signed into law by Mr. Clinton in 1999.

This is a theme that we have discussed at great length on this Blog.  The repeal of Glass Steagall may not have contributed to the current risk taking environment on Wall Street but it did spell the demise of independent investment banking firms since commercial banks, once allowed in, have substantial competitive advantages.  With Lehman having filed for bankruptcy and Merrill agreeing to a merger, only two have survived.  Even then, they also will eventually fail or, more likely, merge with commercial banks.

The NYT article also noted that some reformers in Washington left the current administration ouf of frustration.  As the article notes:

• Instead, voices inside the administration for tougher policing of Wall Street found themselves with few supporters. William H. Donaldson, a former Wall Street executive with respected Republican credentials who became chairman of the Securities and Exchange Commission under Mr. Bush, quit after facing resistance from the White House and Republican members of the agency, who criticized his support for stiffer regulations on mutual funds and hedge funds.
  

Republican members of the agency?  The culprits are Paul Atkins and Cynthia Glassman.  We've discussed the anti-regulatory approach taken by Atkins while he was on the Commission.  It is fitting that he should be remembered when assigning responsibility for the current state of affairs but it would have been more appropriate to mention him by name. 

As for responsibility and the current chairman, Chris Cox, the article notes:

• Critics say the S.E.C. has been less active under its current chairman, Christoper Cox, a former Republican congressman from California. It has spent less on enforcement and imposed less in fines on wrongdoers, according to the Government Accountability Office.  

Other articles have taken the same position.  In fairness to the Chairman, however, he was stuck with a Commission for much of the time where Atkins and Kathleen Casey controlled the agenda.  Moreover, early in his term, he was a vigorous defender of SOX at a time when the knives were out.  The last year or so of his tenure has been less successful, particularly with the decision to bar access (he probably lacked the votes for a rule change that would allow access but he could have left matters alone, without taking steps to affirmatively bar access). 

A better place to put blame?  Henry Paulson and his philosophy that there was no financial problem that couldn't be corrected by the market.  That was a laissez faire approach that only let the wound fester until reaching crisis proportion.  

Full post as published by The Race to the Bottom on September 22, 2008 (boomark / email).