Culpable malfeasance at the SEC?

“Governance”? I think I was too generous in the post I wrote last night on the flaws in the American theory of governance. Well, okay, I did write that the Bush administration has pursued an active policy of what you might call de-governing this country and all the other parts of the world it could lay its hands on…
Lee Pickard, a former director of the SEC has now said publicly that back in 2004 the SEC changed the rules it applied to the country’s five biggest broker-dealer firms, allowing them to borrow up to 40 times their net capital holdings, where previously they’d been held to the same cap of 12 times net holdings as all the other, smaller brokerage firms.
It was Julie Satow of the New York Sun who broke that story this morning.
Barry Ritholtz of the Big Picture writes,

    Who were the five that received this special exemption? You won’t be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

Ritholtz also has some good other writings on the topic there from Lee Pickard.
I got all this with a hat-tip to Bernhard of MoA who notes that Christopher Cox, who has chaired the SEC since 2005, was mentioned by rightwing commentator Bob Novak back in March as an excellent VP pick for McCain. (I note that Novak had been acting strangely for a while, including claiming he didn’t remember he’d knocked over a pedestrian on DC’s K St; and recently, he was diagnosed with a large cancer on the brain.)
All the more ironic that McCain has now called for Cox’s firing.
But there is clearly a far deeper rot at the SEC than just Cox– who became chair after the 2004 rule change, after all.
Congress is in the last portion of its term now. But it and the president between them face a tsunami of huge and very immediate decisions about economic governance. These include:

    1. How to govern the newly nationalized entities to maximize the common good of the citizenry, rather than the take-home of the bankers and their often very cosy-cosy regulators who got us into this mess;
    2. What further steps need to be taken by the federal government to stanch the present rapid erosion of global confidence in the integrity of US economic governance; and
    3. How to hold accountable those responsible for the crisis up until now.

None of these tasks can wait until after January 21. I imagine it is quite possible that as I sit here and write, people at the SEC might be holding a huge shredding party to destroy evidence of past malfeasance. (Two good questions: What influence was brought to bear that resulted in that highly irresponsible 2004 rule-change? Who knew about it at the time? Lee Pickard should certainly be called as a witness.)
And regarding the confidence of overseas investors, yesterday, the overseas edition of China’s People’s Daily published a (signed) commentary arguing that,

    Threatened by a “financial tsunami,” the world must consider building a financial order no longer dependent on the United States…

De-coupling, anyone?
Hat-tip Salah for that Reuters report. Reuters notes that de-coupling is not actually Chinese state policy at this point, and adds:

    Vice Premier Wang Qishan, on a visit to the United States, told U.S. trade officials in a meeting on Tuesday that China and the United States needed to maintain close economic ties with global markets going through such turbulence.
    “The Chinese government is well aware of the fact that the United States, which is the world’s largest developed country, and China, which is the world’s largest developing country, should have constructive and cooperative economic and trade relations,” he said.

Today, in response to the US’s financial woes, stocks on the Shanghai Composite Index plummeted 5.84 percent.
As of July 31, China held $518.7 billion of US T-bills, second only to Japan ($593.4 bn.)
Keep watching all strands of this story. The earth is shifting.

5 thoughts on “Culpable malfeasance at the SEC?”

  1. FYI, as Matthew Yglesias blogs, quoting McCain:
    “The regulators were asleep, my friends,” McCain said. “The chairman of the SEC serves at the appointment of the president. And in my view has betrayed the public trust. If I were president today, I would fire him.”
    But while the president nominates and the Senate confirms the SEC chair, a commissioner of an independent regulatory commission cannot be removed by the president.
    –Confused, Mr McCain? The President can’t fire the SEC chair, only Congress.

  2. “Lee Pickard, a former director of the SEC has now said publicly that back in 2004 the SEC changed the rules it applied to the country’s five biggest broker-dealer firms, allowing them to borrow up to 40 times their net capital holdings, where previously they’d been held to the same cap of 12 times net holdings as all the other, smaller brokerage firms.
    Who were the five that received this special exemption? You won’t be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley”.
    I didn’t know this before, but it is astonishing that it was ever allowed.
    Have you ever been offered a mortgage of 40 times your earnings?
    While we’re about it, anyone who was employed by any of these 5 firms and is currently employed by the government should be sacked immediately (By Congress, President or rail-roading mob is not that important).
    That would denude the Federal Reserve, the SEC and the IMF of important staff immediately, but their effectiveness could hardly be much diminished.

  3. Ms. Cobban.
    Your referencing the word “tsunami” reminded me of a comment attributed to then New Yoork Governor Eliot Spitzer and carried by AFP on February 14, 2008.
    WASHINGTON (AFP) – New York state governor Eliot Spitzer warned Thursday that bond and credit woes afflicting Wall Street and global markets could turn into a more damaging “financial tsunami.”
    In testimony to the US Congress, Spitzer urged lawmakers and regulators to urgently address the bond and credit problems roiling the financial industry which have forced some big firms to writeoff billions of dollars in troubled securities.
    “If we do not take effective action, this could be a financial tsunami that causes substantial damage throughout our economy,” Spitzer said, according to a transcript.
    As most everyone knows a few weeks after Mr. Spitzer’s remarks he became known as Client #9 and had to resign his position as governor. Forces one to opine that the “tsunami” obviously began sometime in 2007 and its full impact according to some European experts is still to occur.
    Very timely topic and perspetive comments.

  4. Does the End of Bretton Woods Hold Lessons for Today?

    The closing of the “gold window” on August 15, 1971 by President Nixon ended the convertibility of the US dollar into gold and triggered the collapse of the Bretton Woods international monetary regime. The crisis was caused by a persistent US balance of payments deficit, which was the result of inflationary US fiscal and monetary policies.

    The US dollar was the sole reserve currency in the Bretton Woods international monetary system and the only currency to be pegged to gold. Other currencies set a par value to the dollar, which remained “passive” in the exchange markets and let other currencies determine parity rates. The dollar, in turn, could be exchanged for gold at the fixed rate of $35 per ounce. This last institutional feature would prove to be an important one, for it explicitly took away US policy autonomy in the sphere of setting exchange rates. Other countries could change and/or manipulate their exchange rates against the dollar, but the US was unable to effect a devaluation (or a revaluation) of its currency against others.

    As the only reserve currency in the Bretton Woods system, the US was obliged to maintain price stability as the primary goal of its monetary policy. Over the course of the previous decade, US officials had become increasingly unwilling to pursue price stability as they grappled with the problems of financing the Vietnam War and domestic Great Society programs. US deficits put severe pressures on the dollar, requiring US policy makers to jack up interest rates and/or decrease the money supply in order to restore market confidence in the strength of the dollar.

    For more about this issue see this link (pdf)
    The End of Bretton Woods and the
    Oil-Price Shocks of the 1970s

  5. Great information on the alleged “economic meltdown” necessitating nationalizing many financial institutions that engaged in making a profit out of selling government backed mortgages.
    Does your statement absolve these financial institutions of corruption or malfeasance creating legalized corruption?
    “Lee Pickard, a former director of the SEC has now said publicly that back in 2004 the SEC changed the rules it applied to the country’s five biggest broker-dealer firms, allowing them to borrow up to 40 times their net capital holdings, where previously they’d been held to the same cap of 12 times net holdings as all the other, smaller brokerage firms.”

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