Posted on 09/28/2008 4:05:10 PM PDT by Shermy
The Securities and Exchange Commission failed in its oversight of investment bank Bear Stearns, ignoring that the company took excessive risks with mortgage-related securities before its demise, according to a report released yesterday by the agency's inspector general.
In a review of the agency's supervision of investment banks, inspector general David Kotz said that the SEC had identified "numerous, potential red flags prior to Bear Stearns' collapse . . . but did not take action to limit these risk factors." J.P. Morgan Chase bought Bear Stearns last March after initial emergency funding to keep it operating failed.
SEC Chairman Christopher Cox has said Bear Stearns was "well-capitalized and apparently fully liquid" but "experienced a crisis of confidence" that led to its collapse. ...
The report pointed to Bear Stearns's large concentration of mortgage securities, its poor management of mortgage-related securities and its high leverage -- the practice of taking heavy debt compared to capital to make big investment bets. When the housing market began to collapse and mortgages went into default, the market for mortgage-related securities froze up and the banks were saddled with crippling loads of worthless assets.
"These reports are another indictment of failed leadership," ranking Senate Banking Committee member Charles E. Grassley (R-Iowa) said in a statement. "We had it at Fannie Mae and Freddie Mac, it was throughout Wall Street, and these reports document the failure of regulators at the Securities and Exchange Commission to either make its oversight program work or seek authority from Congress so that it could work."
... Republican presidential candidate John McCain said last week that Cox should be fired because he "betrayed the public's trust."
(Excerpt) Read more at washingtonpost.com ...
If you’re a large investment bank or insurance company or broker/dealer holding other people’s money in your accounts, yes, it is the SEC’s job to monitor how much risk you take.
If you’re an investment bank issuing credit instruments such as muni bonds, corporate bonds, buying/selling US Treasury and agency debt, yes, it is the SEC’s job to monitor how much risk you take.
The government already regulates if you can buy a stock deemed risky. Check out how much margin you can get to buy an IPO stock. None. That’s a result of the dot-bomb implosion. The government regulates how much leverage you get in your brokerage account (as an individual) to buy stocks on margin. The government regulates how large a margin position you can have in commodities. The government regulates when you have to settle stock trades, what the requirements are on your broker for record keeping, etc.
There are no “free markets” (in the sense you describe) other than the markets for contraband. All legit markets are regulated to one extent or another.
Because Bear management went to the SEC on the night of 3/13 and told them that they couldn’t open the next morning.
Before calling, the President of Bear called JPM’s CEO and asked JPM to buy Bear. It’s a famous story, told by the WSJ.
You've got to be kidding me. A "regulatory" agency that is voluntary?
"You can volunteer to honest, if you want. But if you want to be corrupt, don't worry about it."
Partially true. However, leverage is not the issue here. Irresponsible lending is the root cause. How do you propose to legislate risk? Would you be willing to bail out hedge funds next?
Leverage is one of the central issues in what caused the melt-down in i-banks. The SEC allowed them to go from 12:1 to 40:1 leverage, and this guarantees a bank’s failure when they’re using this leverage to buy illiquid instruments.
History shows us that leverage, coupled with securities that you cannot sell easily, is a deadly combination. Unless you have large quantities of liquid investments that you can sell quickly at a profit or low loss, you’re screwed.
So, translating this into the current issue:
Irresponsible lending (to mortgage borrowers who cannot afford the home), which is then turned into an illiquid “mortgage backed security” (like a CDO), which is then bought with leverage... is like pouring a can of gasoline out all over the floor, and now you’re standing in the middle with a lit match. If you don’t drop the match, you’re A-OK. If there is sufficient ventilation in the room, you’re OK.
As soon as someone closes the doors and windows.... you’re living on borrowed time.
I propose to legislate risk by limiting how much leverage can be used to buy illiquid instruments. If you have to use “mark to model” accounting on an instrument, it should not be allowed to be bought on margin, AND it should not be counted against capital reserve requirements. If the banks want to call it a “level 3” asset, then that sword should cut both ways - it isn’t considered a liability because there isn’t sufficient market liquidity to get a fair bid for it. By the same standard, it shouldn’t be considered an asset, because we cannot value it appropriately.
Forcing this type of accounting down on banks would make them cease playing these games with illiquid instruments that they hide off in the basement of their balance sheets like a crazy old aunt...
Are you confusing your Chris Cox's? :P
Here is the SEC chairman and former congressman:
Here is the current NRA chief lobbyist:
Thank you! I thought Chris Cox was the NRA Board Member, it is a delight that I was completely wrong!
Anyone who says that leverage is not the issue is completely clueless.
Leverage is the MAIN issue. The MBS would not be the disaster it has become if it weren’t for the ridiculous leverage ratios that these banks had.
The government sets a reserve ratio for deposit banks, they should go the same for all of these financial institutions.
>>I’m convinced Fannie/Freddie is at the CORE of the problems
Look at who issued the first MBS based on subprime mortgages:
First Union, Bear, Stearns Price Securities Offering Backed By Affordable Mortgages (1997)
http://www.freerepublic.com/focus/f-news/2090118/posts
From that press release:
“The $384.6 million in senior certificates are guaranteed by Freddie Mac and have an implied “AAA” rating. First Union Capital Markets Corp. is the investment banking subsidiary of First Union Corporation.”
I’m sure it took the Freddie Mac backing to make them AAA.
Thanks for finding that- bookmark!
Yes, I thought that quite an interesting document, from a financial history perspective.
Wall St collapses are the Bush administration fault for not regulating Wall St.
But Wall St running wild is a Democrat phenomena in the sense that Wall St is full of Democrats these days. Just like Rush said last week. The dirty little secret is that Wall Streeters are overwhelmingly Democrat these days. Political donations bear this out
Fannie Mae didn’t invent credit default swaps. That was Wall St and first came out in 1997 long before the housing mess caused by Federal Reserve flooding economy with money. Starting in 2001-2002 after Al Qaeda hit us
Where did I say that they did invent them?
Wall Street has a big chunk of the blame. And the Do-Goodism of CRA, in concert with FM/FM loans and guarantees, is a big part of the genesis of the problem.
Half the blame is Fanny/Freddy-—totally Democrat
Other half is Wall St which is full of money crazed Democrats..... Though G Bush should have regulated them more. Chris Cox is awful
http://www.freerepublic.com/focus/f-news/2096255/posts
Bear Sterns ping.
Something really fishy going on.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.