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To: LLCF who wrote (366830)	4/27/2008 8:01:59 PM
From: Giordano Bruno	Read Replies (1) \| Respond to of 436258

All true but there are a few stumbling blocks foxbusiness.com Through the act, the S.E.C. — acting as one of Wall Street’s chief regulators, mind you — also allowed such things as “hybrid capital instruments” (much riskier than cash or Treasuries), subordinated debt (ditto) and even deferred return of taxes, to be counted as capital. The S.E.C. even allowed the banks to hold securities “for which there is no ready market” as capital. “These adjustments reduced the amount of required capital to engage in increasingly risky activities,” Mr. Einhorn says. In response to Mr. Einhorn’s critique, an S.E.C. spokesman told me that these changes could theoretically lower capital, but that the agency has seen no evidence that that has, in fact, occurred. But Mr. Einhorn has even more troubling observations. He says the S.E.C. also allowed broker-dealers to set their own valuations on assets and liabilities that were hard to value. And broker-dealers could assign their own creditworthiness ratings to counterparties in complex derivatives transactions when those counterparties were otherwise unrated. In a word, Mr. Einhorn says, the S.E.C. told Wall Street to police itself to save on regulatory costs, while not bothering to “discuss the cost to society of increasing the probability that a large broker-dealer could go bust.” A result of all this, he says, was as follows: “The owners, employees and creditors of these institutions are rewarded when they succeed, but it is all of us, the taxpayers, who are left on the hook if they fail. This is called private profits and socialized risk. Heads, I win. Tails you lose. It is a reverse-Robin Hood system.” And when it all went kaput during the Bear Stearns debacle, the likable chairman of the S.E.C., Christopher Cox, said that the system was fine and needed no immediate repairs. Of course, Henry M. Paulson Jr., the Treasury secretary, is calling for merging the S.E.C. with the easygoing Commodity Futures Trading Commission, in the financial equivalent of setting off a Doomsday Device. The S.E.C. told me that all of its actions were helpful to investors and that no one could have prevented the Bear Stearns collapse because it was caused by liquidity issues, not capital issues. My respectful response is that if Bear were thoroughly well capitalized, why would liquidity issues come up at all? There is much more in Mr. Einhorn’s speech about how dramatically understaffed the ratings agencies are in assessing risk on Wall Street and how even the biggest ratings agencies largely allowed the Street to rate itself. The big ratings firms, according to Mr. Einhorn, do not even bother to assess the major investment banks’ portfolios because they change so often. It looks to me as if the inmates are running the asylum. One truth, that deregulation is sometimes a good thing, has been followed down so long and winding a road that it has led to an immense lie: that deregulation carried to an extreme will not lead to calamity. To think that people of this mind-set are in charge of the finances of the nation that is the cornerstone of world freedom is terrifying. Mr. Einhorn may well have done us a service of great value. nytimes.com