A little more on SEC Commish Cox's failure to properly regulate the Ratings Agencies:
seekingalpha.com
5 Failures of SEC Chairman Cox
Almost all paths of incompetence in the current crisis run through the office of the Chairman of the SEC, Chris Cox. McCain’s solution to fire Cox isn’t tough enough. Exile is better. Fortunately for Cox this isn’t the Stalinist Soviet Union or his fate could be a lot worse.
Cox’s failures are too numerous to count. However, I’ll give it a try. Below are what I think are his top 5 failings.
Failure to enforce disclosure laws and regulations.
Disclosure rules and regulations protect investors by requiring companies to disclose everything that is needed for informed investment decisions. And, CEO’s and CFO’s are required to sign certifications that such disclosure is materially accurate, complete, and that their companies have adequate internal controls to ensure such accuracy and completeness.
Enforcement of disclosure rules and regulations has been a joke. CEO’s lie to shareholders with impunity and without fear of SEC enforcement. It is impossible to conclude that SEC filings for Freddie, Fannie, AIG, Lehman, or Bear Stearns complied with SEC rules and regulations.
However, instead of enforcement by the SEC, there is silence. While not all management actions are criminal, why hasn’t the SEC used its civil enforcement authority, i.e., assessing fines and penalties? How about protecting future investors by banning failed executives and boards of directors from serving in executive management at other public companies?
Failure to enforce accounting standards.
When Cox states that the SEC doesn’t have regulatory authority over capital adequacy of financial services companies, he isn’t telling the truth. The SEC has regulatory authority over the financial statements of ALL publically traded companies in the U.S. which of course includes the financials. If Cox had required greater reserves and transparency of financial services companies it would have happened.
Every quarter all publically traded companies file reports with the SEC that are provided to shareholders and the SEC has review and comment authority. If the SEC deems financial disclosure inadequate, incomplete or opaque it has the authority to force the company to amend its filings. It also has authority to establish accounting standards for publically traded companies which means it can have different requirements than GAAP.
So when the AIG filed its last quarterly report and decided that it didn’t need to have loan loss reserves against defaulting mortgages and securities, the SEC had the ability to require additional loan loss reserves. When Freddie and Fannie decided to pretend that defaulted mortgage were good assets because it changed its accounting standards, the SEC could have just said “no”. When Lehman manufactured $2.4 billion of pre-tax income by pretending that it wasn’t going to repay its debts (one of the dumber aspects of mark to market accounting), the SEC should have protected investors with disclosure.
Failure to supervise the rating agencies.
Cox wants everyone to believe that despite being the rating agency’s only regulator, the SEC has no oversight or enforcement authority and cannot influence their performance. Once again, the SEC’s statements are false. Cox assumes that no one will take the time to read the Credit Rating Agency Reform Act of 2006 which states that the SEC has the right to suspend or revoke the license of any of rating agency for a wide range of reasons. Rating agency regulation and reform is Cox’s responsibility.
Failure to investigate and prevent market manipulation, i.e., naked short selling.
Free markets are supposed to be honest markets. The naked short selling issue isn’t new and the SEC’s knee jerk emergency response is an embarrassment. The ban on short selling of 799 stocks is very similar to Putin’s actions this week to manipulate the Russian stock market. I haven’t a clue whether or not the uptick rule works, but I know that enforcing rules on naked short selling shouldn’t have required destructive and ill thought out emergency orders. In the middle of the 1800’s the legendary financial scoundrel, Daniel Drew, understood naked short selling was bad (as he lost his fortune covering a short squeeze) when he said, “He who sells what isn’t his’n, Must buy it back or go to prison.” Too bad Cox never took economic history in school (or googled economic trivia).
Failure to protect small investors.
It is no coincidence that according to the FT, stock ownership by individual investors is at an all time low. The average individual investor knows that their chances in the market aren’t good. And, the SEC doesn’t seem to care if the average guy is disenfranchised from the economic future of America. In addition to the above failures, Cox forgot that it was his job to make sure that brokers shouldn’t engage in deceptive sales practices (like in the sale of auction rate securities and the sale of Freddie and Fannie common and preferred stock to small investors because they were “guaranteed” by the government). Cox refuses to support private litigation by individual investors who were ripped off in the stock and bond market. If the SEC doesn’t protect the little guy, who will?
It is hard to think of how anyone could have done a worse job than Chris Cox (other than engaging in illegal conduct). But, if anyone can think of things that I have missed please feel free to tell everyone reading this blog by commenting. I doubt that my list is complete.
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I have to admit that I concur. But it's not just Cox, it's the folks on the commission, as well in Congress. With regard to Naked Short Selling, we have to recognize that it represents a tremendous revenue source for brokers. NSS permits the big broker/dealers to collect margin interest for lending out stock they don't have, and when the "buy-in" occurs, the onus is on the actual short seller to provide the stock he "borrowed". And so long as they can keep the shell game going, it's almost impossible to surveil and investigate.
Hence, the widespread anti-shortselling rules having to be put in place so the market can get a handle on who's short, and to what degree.
But now there's a risk that some of the folks who the B/D loaned "stock" to might just wind up going belly up as they face margin calls.
This is truly economic war between the government and the Hedge Funds, on a vast scale.
Hawk |
