U.S. regulator's 2004 rule let banks pile up new debt

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By Stephen Labaton


From left, Treasury Secretary Henry Paulson, Ben Bernanke, chairman of the U.S. Federal Reserve, and Christopher Cox, chairman of the Securities and Exchange Commission, addressing the Senate Banking Committee. (Andrew Councill for The New York Times)

"We have a good deal of comfort about the capital cushions at these firms at the moment."

- Christopher Cox, chairman of the U.S. Securities and Exchange Commission, March 11, 2008.

As rumors swirled in March that Bear Stearns faced imminent collapse, Christopher Cox was told by his staff that Bear Stearns had $17 billion in cash and other assets - more than enough to weather the storm.

Drained of most of that cash three days later, Bear Stearns was pushed into a hastily arranged merger with JPMorgan Chase - backed by a $29 billion dowry of taxpayers' money.

Within six months, other lions of Wall Street would also either disappear or transform themselves to survive the financial maelstrom - Merrill Lynch sold itself to Bank of America, Lehman Brothers filed for bankruptcy protection, and Goldman Sachs and Morgan Stanley converted themselves into commercial banks.

How could Cox have been so wrong?

full article: http://www.iht.com/articles/2008/10/03/business/sec.php

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1. kick

[TexasLawyer]

2. This is really important information

Our regulators were utterly ineffective in stopping the investment banks' outlandish gambling enterprise. SEC regulators were either asleep at the switch, in cahoots, sabotaged (Cox reshuffled SEC supervisory department, no director was hired) or plain stupid.

The SEC's job is to protect the investor, not to goose Goldman Sach's bottom line regardless of the possible risk to the public.

Shame!

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3. Thanks for reading, I wish this got more press coverage

I agree completely. The SEC became a partisan organization looking out for the bottom line of big business instead of protecting the overall market. It is another major contributing factor to this financial crisis, however this one seems to be getting ignored.

I think my eyes started getting wider right about here:

The proceeding was sparsely attended - none of the major media outlets, including The New York Times, covered it.

After 55 minutes of discussion, which can be heard on the Web sites of the agency and The Times and its international edition, the International Herald Tribune, William Donaldson, then the SEC chairman and a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in the Federal Register a few months later.

With that, the five big independent investment firms were unleashed.

In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the SEC also decided to rely on the firms' own computer risk models, essentially outsourcing the job of monitoring risk to the banks. Over the following months and years, all would take advantage of the looser rules.

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4. completely shameless kick in the hopes we realize here that Cox needs to go