In an address given before a Securities and Exchange Commission (SEC) roundtable two days ago, Chairman Christopher Cox said that “the current credit crisis has shown the importance of transparency to a healthy marketplace — and how costly hidden risk can be.”
To that end, the SEC – which is mandated to “protect investors and the markets” – released an outline of the “decisive actions” it has taken “to address the extraordinary challenges caused by the current credit crisis.”
However, the SEC left a large part out of its document: the ways in which the agency’s actions actively contributed to the crisis. In fact, some of the moves that the SEC is now touting were necessary because the agency was previously lax in its oversight. Here is a roundup of the SEC’s actions and the reality behind them:
Action: Adopted a package of measures to strengthen investor protections against naked short selling.
Action: Announced emergency plans for a rule to ensure public disclosure of short selling positions of hedge funds.
Reality: The SEC once tried, and failed, to register hedge funds, and have them open their books periodically to SEC examiners. The registration rule was tossed aside by the U.S. Court of Appeals for the District of Columbia, due to legal complications. Cox chose not to appeal the ruling to the U.S. Supreme Court.
Action: Began a study on mark-to-market accounting standards.
Reality: The removal of mark-to-market accounting is a proposal put forth by conservatives like Newt Gingrich, and was part of an alternative bailout bill put forth by conservative house members – led by Rep. John Boehner (R-OH) and Rep. Eric Cantor (R-VA). The suspension of mark-to-market would let financial institutions pretend “that the value of long-term assets are more valuable than the market says.”
Action: Cox has asked Congress to provide the statutory authority necessary for government oversight of the $58 trillion credit default swaps market.
Reality: Cox has arrived to the credit default swaps game extremely late. Trading in credit swaps is what caused insurance giant AIG to fall, leading to the company receiving two federal government loans – one for $85 billion and another for $37.8 billion.
It’s not surprising that the SEC is looking to prove that it has a handle on the financial crisis, since it failed so miserably in its oversight during the crisis’ buildup. This week, Bloomberg news reported that the SEC both ignored warning signs that Bear Stearns was going to fail, and then censored a report by its own Inspector General noting the regulatory failure. Furthermore, the SEC totally eliminated regulations like the net-capital rule and the uptick rule, which could have tempered the irresponsible actions of financial institutions.
In the end, it seems that decisive action is indeed necessary – to save the reputation of the SEC.