A ‘Flawed’ SEC Program [A Retrospective “April Fool’s Day” Analysis]

Join Our Mailing List

SEC Failed to Rein in Investment Banks [April Fool’s Day – 2015]

By Ben Protess, ProPublica – October 1, 2008 5:01 pm EDT

Editor’s Note: This investigative report was first published ten years ago. And so, we ask you to consider – on this April Fool’s Day 2019 – how [if] things have changed since then?  

***

Flag MOney

***

The Securities and Exchange Commission [SEC] last week abolished the special regulatory program that it applied to Wall Street’s largest investment banks. Known as the “consolidated supervised entities” program, it relaxed the minimum capital requirements for firms that submitted to the commission’s oversight, and thus, in the view of some experts, helped create the current global financial crisis.

But, the SEC’s decision to ax the program currently affects no one, since three of the five firms that voluntarily joined the program previously collapsed and the other two reorganized.

The Decision – 18 Months Ago

The decision came last Friday, one day after the commission’s inspector general released a report [1] (PDF) detailing the program’s failed oversight of Bear Stearns before the firm collapsed in March. The commission’s chairman, Christopher Cox, a longtime opponent of industry regulation, said in a statement [2] that the report “validates and echoes the concerns” he had about the program, which had been voluntary for the five Wall Street titans since 2004.

The report found that the SEC division that oversees trading and markets was “not fulfilling its obligations. “These reports are another indictment of failed leadership,” said Sen. Charles Grassley (R-Iowa) who requested the inspector general’s investigation.

The SEC program, approved by the commission in 2004 under Cox’s predecessor, William Donaldson, allowed investment banks to increase their amount of leveraged debt. But, there was a tradeoff: Banks that participated allowed their broker-dealer operations and holding companies to be subject to SEC oversight. Previous to 2004, the SEC only had authority to oversee the banks’ broker dealers.

Longstanding SEC rules required the broker dealers to limit their debt-to-net-capital ratio and issue an early warning if they began to approach the limit. The limit was about 15-to-1, according to the inspector general report, meaning that for every $15 of debt, the banks were required to have $1 of equity.

But the 2004 “consolidated supervised entities” program revoked these limits. The new program also eliminated the requirement that firms keep a certain amount of capital as a cushion in case an asset defaults.

Bear Sterns

As a result, the oversight program created the conditions that helped cause the collapse of Bear Stearns. Bear had a gross debt ratio of about 33-to-1 prior to its demise, the inspector general found. The inspector general also found that Bear was fully compliant with the programs’ requirements when it collapsed, which raised “serious questions about whether the capital requirement amounts were adequate,” the report said.

The report quoted Lee Pickard, a former SEC official who helped write the original debt-limit requirements in 1975 and now argues the 2004 program is largely to blame for the current Wall Street crisis.

“The SEC gave up the very protections that caused these firms to go under,” Pickard said in an interview with ProPublica. “The SEC in 2004 thought it gained something in oversight, but in turn it gave up too much public protection. You don’t bargain in a way that causes you to give up serious protections.”

Pickard, now a senior partner at a Washington, D.C.-based law firm, estimated that prior to the 2004 program most firms never exceeded an 8-to-1 debt-to-net capital ratio.

The previous program “had an excellent track record in preserving the securities markets’ financial integrity and protecting customer assets,” Pickard wrote [3] in American Banker this August. The new program required “substantial SEC resources for complex oversight, which apparently are not always available.”

Asked if he believes the 2004 program was a direct cause of the current crisis, Pickard told ProPublica, “I’m afraid I do.”

The New York Times reported Saturday that the SEC created the program after “heavy lobbying” for the plan from the investment banks. The banks favored the SEC as their regulator, the Times reported, because that let them avoid regulation of their fast-growing European operations by the European Union, which has been threatening to impose its own rules since 2002.

SEC Spokesman

A SEC spokesman declined to comment for this article, referring inquires to Chairman Cox’s statement. In the statement, Cox admitted the program “was fundamentally flawed from the beginning.” But Cox, a former Republican congressman from California, offered mild support for the program as recently as July when he testified before the House Committee on Financial Services. The program, among other oversight efforts, Cox said, had “gone far to adapt the existing regulatory structure to today’s exigencies.” He added that legislative improvements were necessary as well, and has since told Congress that the program failed.

More Questions

So why did the commission not end the program sooner? Some say that the program’s flaws only recently became apparent. “As late as 2005, the program seemed to make a lot of sense,” said Charles Morris, a former banker who predicted the current financial crisis in his book written last year, The Trillion Dollar Meltdown [4]. The SEC “didn’t know it didn’t work until we had this stress.”

And leverage does not always spell trouble. In a strong economy, leverage can also be attractive because it can increase the profitability of banks through lending.

In his recent statement, Cox said the inspector general’s findings reflect a deeper problem: “the lack of specific legal authority for the SEC or any other agency to act as the regulator of these large investment bank holding companies.”

Secretary of the Treasury Henry Paulson has called for a refining of the regulatory structure to reflect the global and interconnected nature of today’s financial system. In any case, the program’s failure can be seen in the disappearance of the participating banks: Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs.

skeleton-jpeg1

***

Assessment

Merrill Lynch’s leverage ratio was possibly as high as 40-to-1 this year and Lehman Brothers faced a ratio of about 30-to-1, according to Bloomberg [5].

The Fed and Treasury Department forced Bear Stearns into a merger with JPMorgan Chase in March. And the last two months, Lehman Brothers went bankrupt and sold their core U.S. business to British bank Barclays PLC, and Merrill Lynch was acquired by Bank of America. Morgan Stanley and Goldman Sachs, the two remaining large independent investment banks, changed their corporate structures to become bank holding companies, which are regulated by the Federal Reserve.

As these banks have folded or reorganized over the last several months, the Federal Reserve has largely assumed the SEC’s oversight responsibilities, though the commission will still have the power to regulate broker dealers.

Original Essay: http://www.propublica.org/article/flawed-sec-program-failed-to-rein-in-investment-banks-101

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Product DetailsProduct DetailsProduct Details

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

How Banks’ Fee Bonanza Dries Up

Join Our Mailing List

Changes in rules and customer behaviors are squeezing what was for decades a key source of revenue

[By Dr. Carey via FDIC]

***

fees

***

Assessment

More:

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Product DetailsProduct Details

At a Time of Needed Financial Overhaul

A Leadership Vacuum

By Jesse Eisinger
ProPublica, May 18, 2011, 3:10 p.m.

Join Our Mailing List 

After the worst crisis since the Great Depression, President Obama has unleashed an unusual force to regulate the financial system: a bunch of empty seats [1].

With Sheila C. Bair soon to leave her post at the Federal Deposit Insurance Corporation, the Obama administration will have five major bank regulatory positions either unfilled or staffed with acting directors.

About The Trade

In this column, co-published with New York Times’ DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at jesse@propublica.org

The administration has inexplicably left open the vice chairman for banking supervision, a new position at the Federal Reserve created by the Dodd-Frank Act, despite having a candidate that many people think is an obvious choice: Daniel K. Tarullo [2]. The new Consumer Financial Products Board chairman is unnamed. There are some lower-level positions that don’t have candidates, including the head of the Treasury’s Office of Financial Research and the Financial Stability Oversight Council insurance post.

Perhaps most important, the Office of the Comptroller of the Currency, is being headed by an acting comptroller, John Walsh, who took over the agency last August. Nine months have passed without a leader who might better reflect the Obama administration’s views on banking regulation, a time lag made worse by the office’s coddling of the banks [3] even as they have acknowledged rampant abuse and negligence in the foreclosure process.

The vacancies come at a time that calls for stiffer regulatory examination. The financial regulatory system was remade under Dodd-Frank and requires strong leaders to put the changes into effect. Though the acting heads insist they feel empowered to make serious decisions, they have roughly the same authority as substitute high school teachers.

The Obama Administration

Supposedly, the Obama administration is getting close to naming people to head the comptroller’s office and the F.D.I.C. But we’ve been hearing that for a while. In April, Barbara A. Rehm of American Banker wrote that the administration was working on a big package of nominations to send to the Hill all at once. A month later, we’re still twiddling our thumbs in anticipation.

So what’s going on?

In a vacuum of leadership, conspiracy theories arise. One is that Treasury Secretary Timothy F. Geithner is making a power grab and doesn’t mind that these roles aren’t filled. The idea is that he is asserting his influence over the Dodd-Frank rule-making process. A former adviser to Mr. Geithner dismissed that notion as ridiculous, and that’s persuasive to me. It seems too Machiavellian by half.

If it’s not Mr. Geithner, then who or what is responsible for the vacancies? Not surprisingly, people close to the administration blame Republicans. The nomination process has become hopelessly broken in Washington. Even low-level appointments are now deeply partisan affairs, the playthings of score-settling senators with memories like elephants and the social responsibility of hyenas (which probably insults hyenas).

The Obama administration put up Peter A. Diamond for a position on the Federal Reserve board. Winning a little something called the Nobel Prize [4] hasn’t helped him with confirmation, however Sen. Richard Shelby, the powerful Alabama Republican and ranking member of the banking committee, is standing in his way. The senator also quashed the nomination [5] of Joseph A. Smith Jr. to head the Federal Housing Finance Agency.

Blame Game

But much of the blame for this situation lies with the Obama administration. It’s almost as if the president and his staff have thrown up their hands. The administration has had trouble finding good candidates who are willing to go through the vetting process and has shied away from fights. It also hasn’t seeded the ground or supported the nominations it has made, people complain.

A Democratic Senate staff member confided worry to me about the fate of Mark Wetjen, whom the administration nominated last week as a candidate for a seat on the Commodity Futures Trading Commission. “They didn’t shop it and they didn’t get buy-in,” the staff member said. “The administration doesn’t seem to be putting any sort of effort into it.”

Making these appointments will help answer a question: Where does Mr. Obama stand on financial regulation?

With the Geithner appointment, the president chose early on the path of continuity over muscular regulation. Immediately, the Treasury secretary became the personification of every Obama financial policy. Mr. Geithner remains the most politically costly appointment Mr. Obama has made, saddling him with all the Bush presidency’s financial crisis decisions. After all, Mr. Geithner, as head of the Federal Reserve Bank of New York, was intimately involved in the emergency actions of September 2008. Republicans made great hay tying Democrats to the Wall Street bailouts in the 2010 midterm elections. Now, of course, Republicans are leading Democrats in Wall Street campaign donations [6].

With these positions unfilled, Mr. Obama is losing out on a political opportunity to draw a line between himself and his opposition.

Assessment

But it’s more important than that. Allowing these vacancies to linger drains leadership from the financial overhaul at the exact moment when it is needed most.

Link: http://www.propublica.org/thetrade/item/at-a-time-of-/0763745790

Channel Surfing the ME-P

Have you visited our other topic channels? Established to facilitate idea exchange and link our community together, the value of these topics is dependent upon your input. Please take a minute to visit. And, to prevent that annoying spam, we ask that you register. It is fast, free and secure.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Product DetailsProduct DetailsProduct Details

Product Details  Product Details

   Product Details 

Understanding Money Market Account Risks

Terms and Definitions for Physician Investors

By Staff Writers56371606

The recent banking industry debacle has prompted several of our cost-conscience doctor-clients to rethink money market account risks and related products. We trust this brief review is helpful to all concerned.

Money Market Deposit Accounts

First, the term “money market account” must be defined.

Link: http://www.HealthDictionarySeries.org

dhimc-book2

There are two types of money market accounts [MMAs] that most people refer to when using this term. The first is a money market deposit account (MMDA). This is an account at a bank designed to compete with money market mutual funds (MMMF). MMDAs usually pay less interest than money market mutual funds and in return offer federal insurance on balances, now up to $250,000 with convenience through check writing and access through ATMs [reverts back to $100,000 after December 31, 2009]. MMDAs under this amount do not have any risk of failure because they are insured by the US government.

Money Market Mutual Funds

Money market mutual funds are mutual funds that invest in short-term instruments with maturities of less than one year, and usually offer check writing on the account. They are not federally insured, but are considered safe in stable economic times. Net Asset Value [NAV] is one dollar; USD. Nevertheless, a few have “broken-the-buck” with NAV at some increment below $1.00 USD.

fp-book7

Evaluation Methods

The first way to evaluate the MMMF risk is to look at the average length of maturities in the portfolio. The shorter the maturity – the safer the MMMF. The second way is to look at the type of security owned by the fund. Government securities are generally less risky than corporate securities. Interested investors can also contact a rating service that evaluates the securities in a MMMF’s portfolio.

And now – a few related words about “so-called” high-yielding CDs.

High Yielding Brokered Bank CDs

insurance-book5

First, the physician-investor should determine if the CD is issued by a federally insured institution. If the answer is yes, the investor knows that a portion of his money is safe if the institution fails. If the answer is no, the doctor should obtain the institution’s ratings from the appropriate rating agencies and analyze the institution’s financials. Second, the physician-investor should investigate the volatility of the CD’s return.

Assessment

When interest rates fluctuate, the price of MMAs and CDs fluctuate much like bonds. Therefore, short-term securities are less risky than long-term securities; all things being equal.

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. Are you looking at these terms and conditions more closely during this national economic crisis? Please opine and advise.

 

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

 

About FDIC.gov

What it is – How it works

Staff Reporters

handcuffsThe Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the US financial system by insuring deposits in banks and thrift institutions for up to $250,000 (through December 31, 2009); and by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails

Mission

The FDIC is an independent agency created by the Congress that maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.

Vision

The FDIC is a leader in developing and implementing sound public policies, identifying and addressing new and existing risks in the nation’s financial system, and effectively and efficiently carrying out its insurance, supervisory, and receivership management responsibilities.

The Website

The website www.FDIC.gov has these tabs-of-interest:

  • Deposit Insurance
  • Consumer Protections
  • Industry Analysis and Analysis
  • Regulations and Examinations
  • Failed Bank Information
  • Institutional Asset Sales
  • Breaking News and Events

Assessment

This site is an excellent resource for physicians, financial advisors, medical executives and all investors in this time of national economic crisis:

For more information:

Federal Deposit Insurance Corporation
Consumer Response Center
2345 Grand Boulevard, Suite 100
Kansas City, MO 64108-2638
Fax Number (703) 812-1020

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

Subscribe Now: Did you like this Medical Executive-Post, or find it helpful, interesting and informative? Want to get the latest E-Ps delivered to your email box each morning? Just subscribe using the link below. You can unsubscribe at any time. Security is assured.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

%d bloggers like this: