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Posted October 3, 2008 12:43 PM
The Swamp

by Frank James

After nearly every disaster involving Americans, there's the usual investigation to figure out why the plane crashed or the ship sank and to affix blame. The difference between most calamities and the present financial-markets meltdown is that the investigation of the latter can actually occur while the disaster is still unfolding.

Stephen Labaton's New York Times story is part of the examination
of how the financial markets were laid so low. After reading the piece, I predict many people will join Sen. John McCain in calling for Securities and Exchange Commission Chair Christopher Cox's firing. Treasury Secretary Henry Paulson Jr. will look a whole lot worse, too.

In a nutshell, in 2004 before Cox took over the SEC, in a public meeting that was largely ignored at the time, the commission responded to heavy lobbying by Wall Street's large investment banks by changing a critical rule that required Wall Street's big five investment banks to maintain large enough cash cushions in their brokerage units to withstand periods of market turmoil.

By jettisoning that requirement, the investment bank giants, including Goldman Sachs, run at that time by Paulson, were able to use the freed-up cash to buy many of the risky assets that are at the heart of the present crisis.

Bad enough, right? It gets worse.

In exchange for this liberalized cash-reserve requirement, the SEC was supposed to pay closer attention to the debt levels at the investment banks.

This is where Cox comes in. When he became SEC chairman in 2005, he not only didn't appear to care much about this enforcement responsibility, he actually reduced the number of SEC cops on the beat. Also, the investment banks were supposed to self-regulate. We all know how that went.

Continue reading "Bailout crisis partly created in DC room" »

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