Sunday, September 28, 2008

SEC Inspector General: Deregulation and lack of oversight led to crisis

A very important bit of insight from the New York Times published Friday - which I missed when it first came out - can be read here. Stephen Labaton writes that according to a report recently released by the SEC's Inspector General, the agency tasked with oversight of Bear Sterns and other financial services institutions completely dropped the ball in relying upon a "voluntary" supervision program for the industry wherein these companies essentially monitored themselves.

The key paragraphs from the article:
The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.

The S.E.C.’s oversight responsibilities will largely shift to the Federal Reserve, though the commission will continue to oversee the brokerage units of investment banks.

Also Friday, the S.E.C.’s inspector general released a report strongly criticizing the agency’s performance in monitoring Bear Stearns before it collapsed in March. Christopher Cox, the commission chairman, said he agreed that the oversight program was “fundamentally flawed from the beginning.”

“The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.

Mr. Cox and other regulators, including Ben S. Bernanke, the Federal Reserve chairman, and Henry M. Paulson Jr., the Treasury secretary, have acknowledged general regulatory failures over the last year. Mr. Cox’s statement on Friday, however, went beyond that by blaming a specific program for the financial crisis — and then ending it.

The complete Inspector General's report can be viewed here and here. And check out this post on Christopher Cox's pro-industry (and anti-investor) policies from last year here.

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