The Wall Street Journal story on the Securities and Exchange Commission's Christopher Cox feels like a part four of its Bear Stearns Cos. implosion series from the end of May. Missing from that earlier blow-by-blow of the Bear run was really any sighting of Cox and the SEC. Now it appears that wasn't just an oversight; Cox sat on a few phone calls, but the traditional regulator of investment banking played no significant role. The question is: Was that deliberate, a sort of Republican free-market mindset; incompetent; overly consensus-minded; or was Cox and his agency simply told by the administration to step back?
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There was some incompetence here that resembles the FEMA phenomenon. The notion, that Cox still defends, that Bear was adequately capitalized two days before the liquidity run demonstrates a sort of naive blindness to the forces at work that's scary in a regulator. Moreover, his argument that the role of a regulator was to regulate, not sell, Bear -- thus regulating its own transaction -- is the kind of legal parsing that sounds good but is meaningless in a crisis. (Hell, the role of the Fed is, strictly speaking, monetary control, not bailing out failing investment banks.) The SEC could have remained a major voice, despite the fact that it lacked the resources of the Federal Reserve. After all, the SEC remains the statutory regulator of the firm, and if Cox wanted to be a pain in the ass, he could have tangled up the sale of Bear in all kinds of ways. Instead, he missed calls, attended birthday parties and went on vacation. He succumbed bureaucratically to the Fed, perhaps under pressure from above. Who might have wielded that hammer? Only Hank Paulson at Treasury comes to mind. But all that's still very murky.
A few other thoughts on what's now clearly the decline of the SEC. Cox bears a lot of the blame, but the agency has been suffering for years, at least as far back as Harvey Pitt's tenure when New York Attorney General Eliot Spitzer carved out a big chunk of its hide; perhaps even earlier. The SEC was limited by its enabling legislation from roaming into areas that were becoming commercially and politically important. But there was also a sense that the SEC was growing captive of its firms. This is less a matter of outright corruption as -- ala Cox before the Bear run -- an inability to recognize practices that would prove either destabilizing (a liquidity run) or disquieting (analysts working for investment bankers, various accounting tricks). As global markets morphed in new, complex ways, the very foundations of SEC regulatory policy grew more ambiguous. The largest, most sophisticated institutions generated a steady stream of arguments and pressure to trade transparency for efficiency. If the SEC was not a captive of Wall Street, it certainly did become a captive of the efficiency argument -- and to the notion that certain practices could be overlooked because they weren't lethal. That is, until they were.
All this should raise caution flags about our new super-regulator, the Fed, which will find itself buffeted by many of the same pressures that kept Cox at the birthday party. Does anyone really believe that the Fed's "independence" will protect it from these pressures to keep the game going? How long will it take for the mission of the Fed to insure that a growing economy undermines its new de facto role as a Wall Street regulator (a role it played very poorly in subprime lending)? How does the Fed juggle the interests of retail and the interests of institutions? There is still a fantasy element to all these plans circulating to put the Fed in charge of everything markets related, which means just about everything. Someday we might wish that there was another voice in the room, another center of power. And when that happens, we'll remember the passivity of Christopher Cox. - Robert Teitelman
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You should see the article about Cox at www.newsOC.org entitled 'El Toro/Great Park...' it reveals some very interesting things about Cox' involvement in a deal that defrauded taxpayers out of billions, and more.