SEC: always playing catch-up
October 2008
In a major Washington Post story on the financial crisis, Anthony Faiola, Ellen Nakashima, and Jill Drew examine the regulatory failures that led to economic meltdown. The Post story cites a series of decisions in the late 1990s and early 2000s to place oversight of derivatives in the hands of industry as a major factor in the financial crisis. An SEC-sponsored voluntary program of risk analysis, implemented by the major investment banks in 2004, is also faulted. At the time, commissioner Harvey Goldschmid, who supported the voluntary program, said, “If anything goes wrong, it’s going to be an awfully big mess,” the Post notes. When the voluntary program is finally shuttered in September of 2008, it is written off as an utter failure. Wrote Cox on the SEC website, “The last six months have made it abundantly clear that voluntary regulation does not work.”
2009
Business Week reports that 1,471 hedge funds went out of business in 2008, almost twice the previous record for a year. A shortage in liquidity as well as losses on mortgage-backed securities are cited as prime causes of the weakness of the hedge fund sector; widespread redemptions by anxious or cash-hungry investors also endanger funds’ stability.
In the wake of the global financial crisis, hedge funds continue to resist regulation. In particular, the industry takes issue with a plan to designate certain funds as “systemically significant.” But Andrew W. Lo, a professor at the Massachusetts Institute of Technology, is quoted on Dealbook criticizing this opposition: “It’s disingenuous for anyone to claim in this day and age that no hedge fund is systemically important…Frankly, I don’t think any hedge fund manager in his right mind could argue that the industry needs no oversight.”
July 2010
Congress passes the Dodd-Frank financial reform act. Sen. Chris Dodd (D-Conn.) says the act will safeguard the American economy and American investors: “Never again will we face the kind of bailout situation as we did in the fall of 2008 where a $700 billion check will have to be written.” The legislation is criticized for not providing sufficiently thoroughgoing structural reform.
Both during the consideration of Dodd-Frank and thereafter, the legislation is subject to withering criticism from the financial industry, featuring dire predictions of doom and gloom. Among other things that Dodd-Frank does — two years after the collapse of two of Bear Stearns’ funds and more than a decade after the bailout of Long Term Capital Management — is to give the SEC regulatory oversight over hedge funds.
January 2011
The Financial Crisis Inquiry Commission finds that federal regulators failed absolutely in their role overseeing the financial industry. The SEC comes under heavy criticism. Reporting in the Washington Post, Zachary Goldfarb and Brady Dennis quote the report, which says the agency “failed to restrict their [investment banks’] risky activities and did not require them to hold adequate capital and liquidity for their activities, contributing to the failure or need for government bailouts of all five of the supervised investment banks.”
Sewell Chan, of the New York Times, sees the commission casting “a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packing and sale of loans to investors and risk bets on securities backed by the loans.”
February 2011
Less than three years removed from the heart of the financial crisis, the Washington Post reports that budget freezes are threatening the SEC’s attempts to carry out its regulatory responsibilities, notably those specified in Dodd-Frank. The Post quotes Mary Schapiro, chairman of the SEC, who says “we need to ask ourselves if we want our market analysts to continue to use decades-old technology…to monitor trading that occurs at the speed of life…if we want our chief securities regulator…to pull the plug on data management systems and on a digital forensics lab.” Shapiro also complains about inadequate staffing. In April, the agency receives a small increase in its budget, which remains more than $100 million below the amount originally requested by President Obama.
The Madoff scandal: where was the SEC?
In December 2008, Bernie Madoff is arrested after investigators discover he has defrauded investors out of billions in the largest Ponzi scheme in Wall Street history. Thereafter, a paper trail of earlier complaints to the SEC about Madoff’s investment business come to light. The Associated Press describes, for example, one of a series of complaints from Harry Markopolos, an industry executive, who “contacted the agency’s Boston office in May 1999, telling SEC staff they should investigate Madoff because it was impossible for the kind of profit he was making to have been gained legally.” The AP also notes that the Boston office had previously “been accused…of brushing off a whistleblower’s legitimate complaints.” The SEC comes under increasing fire for its failure to act.
The Washington Post describes how, in the view of Cox, “the agency inappropriately discounted allegations that staff did not relay concerns to the agency’s leadership and that examiners relied on documents volunteered by Madoff rather than seeking subpoenas to obtain critical information.”
Rep. Paul Kanjorski (D-Pa.), chairman of the House subcommittee on capital markets, quoted in the Los Angeles Times, blasts the SEC at a panel in Washington: “We now know that our securities regulators have not only missed opportunities to protect investors against massive losses from the most complex financial instruments like derivatives, but they have also missed the chance to protect them against the simplest of schemes, the Ponzi scheme…Clearly, our regulatory system has failed miserably. And we must rebuild it now.”