SEC Censors Report Finding That Bear Stearns Warning Signs Were Ignored

secii.pngAccording to a report by Bloomberg News, the U.S. Securities and Exchange Commission – which is the federal agency charged with protecting investors and maintaining fair marketscensored a report by its own Inspector General showing that “regulators stood by as shrinking capital ratios and growing subprime holdings led to the collapse of Bear Stearns Cos.”

Bloomberg stated that “before [the report] was released to the public on Sept. 26, [SEC Inspector General] Kotz deleted 136 references, many detailing SEC memos, meetings or comments.” These deletions came “at the request of the [SEC’s] Division of Trading and Markets (TM) that oversees investment banks.”

Sen. Chuck Grassley (R-IA), who initially asked that the SEC examine its regulation of Bear Stearns, said that “people can judge for themselves, but it sure looks like the SEC didn’t want the public to know about the red flags it apparently ignored in allowing Bear Stearns and other investment banks to engage in excessively risky behavior.” SEC spokesman John Nester said the deletions were made because “the requests from the Division of Trading and Markets covered non-public information.”

According to Bloomberg, the portion of the report that was removed found “that the Division of Trading and Markets knew Bear Stearns’s capital ratio had dropped to 11.5 percent in March from as high as 21.4 percent in April 2006.” And while the SEC regulators “inquired whether Bear Stearns was contemplating capital infusions,” the regulators “didn’t formally or informally pressure the firm to do so.”

The original, censored version of the report still found fault with the SEC for “not fulfilling its obligations” in regards to assessing risky behavior within broker-dealers like Bear Stearns:

TM is not fulfilling its obligations in accordance with the underlying purpose of the Broker-Dealer Risk Assessment program in several respects. First, TM has failed to update and finalize the rules governing the program, which would ensure that broker-dealers file pertinent information with the Commission in a timely manner. Second, TM has failed to enforce the temporary rules’ document retention and filing requirements that are incumbent upon broker- dealers. As a result, nearly one-third of the firms failed to file 17(h) documents as required by the rules.

The Wonk Room has previously noted the regulations that the SEC actively eliminated in the last five years, which contributed to the current financial crisis. Today, the New York Times also reported that “a federal inquiry has concluded that the Securities and Exchange Commission should consider disciplining its director of enforcement and two supervisors for their role in handling an insider trading investigation.” This newest report contributes to the picture of an SEC both unwilling to enforce existing regulations, and ready to cover up that unwillingness.

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