PrintJune 25, 2008
Sub-Prime Bounty Hunters
With so-called "housing bill" being debated, and the primacy of the economy as an issue in this year's election the hunt is on for the "sub-prime villain(s)." Taken together with the "Countrywide 6" sweetheart loan scandal that's swept up among others, Senators Chris Dodd (D CT) and Kent Conrad (D SD) this should make interesting convulsions on Capital Hill.
Last week, the FBI shamelessly staged a completely unnecessary scene as their bounty hunters strode into town with two heads, former managers of a collapsed Bear Stearns Hedge Fund.
Surely, this spectacle is just a preview of coming attractions. Monday, the Wall Street Journal ran a front page piece in an attempt to set the table for SEC Chairman Chris Cox's head.
Fortunately, Cox knows the old adage that it's much better to be at the table than on the menu, as he was afforded and took the opportunity to defend his role in the Bear Stearns rescue/JP Morgan bailout.
The Journal reporters teed it right up, leaving no doubt where they were going with it.
"...with investment bank Bear Stearns Cos. teetering toward collapse, the chieftains of U.S. financial regulation dialed into a 5 a.m. conference call to craft a bailout plan. When they were done, the Treasury secretary informed the president. Thehead of the Federal Reserve Bank of New York called Bear Stearns. Christopher Cox, chairman of the Securities and Exchange Commission, didn't call anyone. Though the SEC was Bear Stearns's regulator, he didn't take part in the meeting."
This is not exactly accurate, the SEC is not Bear Stearns' regulator in the same way the National Highway Traffic Safety Administration regulates auto-makers, with micro oversight of the industry down to the level of approving such details as door latch design and performance. The 1934 securities act creating the SEC authorizes the commission to regulate the issuance of securities to the public and oversee the markets that trade in them. It's not the SEC's job to make qualitative assessments of a security issuer's business. When Google went public with their stock offering it was not the SEC's responsibility to judge if internet search advertising is a good business.
Piling on, they recount how Cox was at parties and then went on vacation when all of the details of the Bear-Morgan rescue were being worked out. If one assumes that there are no coincidences, apparently the genesis of this story was Hank Paulsen's Treasury department.
After the dust settled from the Bear-Morgan debacle, Treasury presented a proposal to overhaul financial-services regulation calling for the dissolution of the SEC and handing its securities regulation to another federal agency.
Unfortunately, Chairman Cox added fuel to the fire with his less than zealous protection of the SEC's turf, writing internal memos and making speeches that left the impression that he was content to fold his tent and let the Fed take over.
It is unclear to me how the Federal Reserve Bank can assume a regulatory function. The Fed is a quasi-public bank member owned institution whose primary mission is the execution of monetary policy by setting interest rates. This is an actual and apparent conflict that is insoluable.
The SEC was established as a commission for good reason. As the principal body charged with regulating the securities markets, unlike an executive agency, the commission structure insulates them from undue political influence while preserving an appropriate measure of political control to allow for well warranted redress.
I am unpersuaded that reshuffling regulatory authority as a response to this credit market meltdown is the solution to this problem. It seems to me that the failures can addressed under the existing regulatory regime. The regulators need to reassesss their effectiveness handling this crisis and initiate internal reforms.
