Sunday, September 28, 2008

Voluntary regulation

In the NYTimes the other day, I read that SEC Chairman Chris Cox is
admitting that maybe the oversight and deregulation of the Securities industry was a problem.

“The last six months have made it abundantly clear that voluntary regulation does not work,” Cox said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.

What!?! Voluntary regulation??? What genius came up with that bright idea in the first place? And why did it have to come to this before they figured out that it was a stupid idea to begin with???

The program Mr. Cox abolished was unanimously approved in 2004 by the commission under his predecessor, William H. Donaldson. Known by the clumsy title of “consolidated supervised entities,” the program allowed the S.E.C. to monitor the parent companies of major Wall Street firms, even though technically the agency had authority over only the firms’ brokerage firm components.
The commission created the program after heavy lobbying for the plan from all five big investment banks. At the time, Mr. Paulson was the head of Goldman Sachs. He left two years later to become the Treasury secretary and has been the architect of the administration’s bailout plan.

Voluntary regulation was the genius idea of a Republican administration and a Republican congress. Just remember that.

In the meantime, it seems that eliminating the rule now is pointless since all the major investment banks it applied to are now gone - either gone belly up, or changed their charters to become normal commercial banks under federal regulation.

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