Senator Charles Grassley asked the SEC Inspector General Kotz to give him a report on the collapse of Bear Stearns.
Before it was released to the public on Sept. 26, Kotz deleted 136 references, many detailing SEC memos, meetings or comments, at the request of the agency’s Division of Trading and Markets that oversees investment banks.
“People can judge for themselves, but it sure looks like the SEC didn’t want the public to know about the red flags it apparently ignored in allowing Bear Stearns and other investment banks to engage in excessively risky behavior,” Grassley said in an e-mailed statement.
Since the beginning of this most recent episode of the credit collapse I have written that the roots of the crisis lay in the SEC’s June 2004 decision to let the investment banks set their own capital ratios, a radical move away from the traditional leverage regulations. But Bloomberg’s reporting of the unredacted report shows that the SEC was clearly aware that Bear Stearns was in uncharted territory in terms of its debt to equity ratios.
Trading and Markets (SEC Division) had oversight of holding companies for the five biggest U.S. investment banks via the Consolidated Supervised Entity Program. The division failed to follow up on “red flags” raised by New York-based Bear Stearns’s increasingly “significant concentration of market risk” from mortgage securities, according to the full document.
All the other attempts to find a scapegoat, by Republicans (Barnie Frank pushing Fannie to finance poor people’s homes) and Democrats (Phil Gramm pushing through the termination of Glass-Steagel) alike, pale in comparison to the asleep at the switch role of the SEC. Never in the history of “Regulatory Capture” has an agency gone so in the bag for the business it was supposed to be regulating. There is no way the Republicans can escape responsibility for this one.