Crisis Yields Turnabout by SEC Chair
posted by Lawrence Cunningham
In a
at the Practising Law Institute’s program on securities regulation, the historically arch-conservative, deregulatory Chair of the Securities and Exchange Commission, Christopher Cox, offered very surprising recommendations for financial regulation reform based on lessons taught by the current economic meltdown. Highlights include:
1. Establishing a Congressional Select Committee on Financial Services Regulatory Reform.
2. Merging the SEC and the Commodity Futures Trading Commission “with a clear mandate to protect investors by regulating the markets in all financial investments, including securities, futures, and derivatives.” Many such calls have been made, dating to the 1987 market crash to the Treasury Department’s March 2008 blueprint for financial regulation reform. Most propose diluting the resulting agency by having the merged agency adopt the lax approach to regulation used by the CFTC rather than the relatively tight approach of the SEC. Mr. Cox’s statement emphatically prescribes sticking with traditional SEC approaches in the resulting merged agency. He says the crises “highlight the need for a strong SEC.”
3. Merging all existing bank regulators, of which there are six at the federal level and scores at state levels. Again, this proposal has been often made, including by Treasury, although Mr. Cox again signals an urgency and muscularity that differs from the looser supervisory approach Treasury contemplated. Mr. Cox says: “the lessons of the credit crisis all point to the need for strong and effective regulation.” He contrasts the traditionally “strong SEC” with the comparatively lax banking regulatory structure: the SEC is independent of those it regulates. In contrast: “banks regulated by the Federal Reserve Bank of New York elect six of the nine seats on the board of the New York Fed. Both the CEOs of J.P. Morgan Chase and Lehman Brothers served on the New York Fed board at the beginning of the credit crisis.”
4. Mr. Cox also takes the lessons from the crisis to reject proposals, made as recently as a year ago, to weaken US regulations on the grounds such regulation results in the US losing financial business to less-regulated markets. The “mortgage meltdown” and “credit crisis” show that what is needed is strong regulation backed by statute, not mere supervision, voluntary compliance, weaker regulation or limited enforcement, Mr. Cox said.
The speech overall is an impassioned defense of a strong SEC, and strong regulation. Numerous SEC observers over Mr. Cox’s tenure may recognize this as a bit of a turnabout for him.
November 14, 2008 at 5:16 pm
Posted in: Securities Regulation
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Responses (4)
Mark Edwards - November 14, 2008 at 5:51 pm
Wow! That is VERY surprising. I suspect that when he suggests merging the SEC and CFTC, he really means letting the SEC capture the CFTC and moves its function in-house.
*I also suspect that having his reputation blistered — by his own party — for conditions he couldn’t control, might lead him to regulatory policy re-awakening.*
A.J. Sutter - November 14, 2008 at 11:44 pm
Do I understand correctly that he proposes to eliminate all bank regulation by states?
Carol Cross - November 15, 2008 at 8:19 pm
Chairman Cox, when he spoke to the Securitisation Seminars and Conferences always complimented this sector on the advantages that securitisation had provided to our economy
However, he always warned the audiences to be on the outlook for fraud and to report fraud to the SEC. Apparently, Chairman Cox was aware that current law and regulation would or could be manipulated to commit fraud.
Apparently ENRON did not wake up the regulators ENOUGH to the dangers of “off balance” accounting and special off-shore vehicles, etc… and tax avoidance, etc… The accounting changes didn’t do the job. The Congress apparently didn’t understand the problem.
Apparently Chairman Cox didn’t realize that the Rating Companies were also interested in “product” to feed their bottom lines, and a lot of “shit” was sold to innocent investers because the rating agencies were not rating the securities in terms of the possible risks in down markets. The inflation in the rating of securitizations contributed to the losses suffered by institutional investors like pension funds for teachers and policemen and cities, etc..
The “inflation” in the ratings process that complemented the production of “new” financial products has a price that will be paid by those on Wall Street and the American people.
It will be a long time before a politician advocates the abolishment of Social Security for private investment in the free market economy of the United States.
What brought the great Bull down. Is betting on the future of cash flows really very risky and were the regulators, the SEC, and the Treasury Department aware of all of the bad bets that were being made because these bets were allowed under law and ineffective regulation?
Chairman Cox did not promulgate law and regulation and was charged with implementing current SEC Law. Chairman Cox has learned a lot from the wounding of the great BULL OF WALL STEET, and he understands probably better than anyone how and why this crisis is upon us.
I hope that Senator Obama will consult with Chairman Cox and the other regulators and the Federal Reserve directly in the process of forming his own opinion as to the causes of the current crisis in our economy.
J. Gaglani - November 18, 2008 at 7:45 am
He had to say something.
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