Senate Panel Opens Debate On Stronger SEC Enforcement

Wed. May 7, 2008


Two former SEC chairmen called on Congress today to significantly beef up the agency's enforcement authority and resources in the wake of the crash of credit markets and the home loan foreclosure crisis. In testimony before the Senate Banking Securities Subcommittee, former chairmen David Ruder and Arthur Levitt agreed that federal regulatory agencies overseeing the markets were asleep at the switch as freewheeling financial innovators -- among them the investment bank Bear Stearns -- gambled with shaky investments in mortgage-backed securities. "We had a runaway marketplace," Levitt said, "where leverage and greed trumped the efforts of the [regulatory] gatekeepers, auditors and regulators.

Both of the former chairmen urged Congress to move smartly and deliberately to find out exactly what happened to trigger the situation and take steps to strengthen the ability of federal regulatory authorities to prevent a replay of the practices by mortgage brokers and dealers, packagers of mortgage securities, investment banks and holding companies that apparently conspired, to varying degrees, in the crash. Both concurred in urging the depoliticization of financial markets enforcement by the White House and Congress. Ruder was particularly insistent on congressional action to strengthen the SEC's Consolidated Supervised Entities program, which relies now on the voluntary self-regulation of investment banks to adhere to a set of principles laid down by the agency. The entities program, he said, "should be given more power to look at the systemic risks of holding companies and investment banks" as well as "some dramatic increase in its budget in order for it to meet its obligations."

Levitt expressed support for granting SEC the authority to regulate the investment banks and holding companies. While acknowledging the need for stronger oversight, the chairmen and Erik Sirri, head of SEC's division of trading and markets, said that a delicate balance between monitoring and regulating the markets should be struck to keep the big investment firms from fleeing to balmier regulatory climes abroad. Banking Securities Subcommittee Chairman Jack Reed, D-R.I., indicated he would continue to pursue tougher enforcement but acknowledged that its complexity and impact on the competitiveness of American companies in the global marketplace calls for careful deliberation. Even so, Reed said, "Regulators need to be more vigilant, not less, especially in times of low interest rates" and easy credit that sparked the interest of brokers and mortgage underwriters, along with the holding companies and investment banks, that swooped in for big profits.

by David Hess