Cohmad, a conjunction of the last names of investor Maurice “Sonny” Cohn and Mr. Madoff, carried especially tight ties. Cohmad was filled by employees with long-term or family relationships with the Madoffs, and its operations were enmeshed in the main Madoff businesses, interviews and records show.
I must say it takes a lot of nerve for SEC Chairman Chris Cox to write an Op-Ed calling for better regulation of the Derivatives Market. As I have pointed out recently, Cox’s appointment to head the SEC was part of a clear Bush/Cheney plan to neuter any enforcement of bad actors in the market. Cox looked the other way when his subordinates told him Bear Stearns was way overleveraged and continued to abide by his voluntary enforcement plan of reserve limits. Now he has the balls to say we should be regulating derivatives, when Phil Gramm , john McCain and other Republicans like Cox fought tooth and nail to keep derivatives unregulated.
Even more indicative of the Bush Administration view about law enforcement and the financial industry is that repeated requests from the FBI to restore some of the 1800 agents that were moved from the white collar crime division into counter-terrorism, were denied by the White House.
Interviews and internal records show that F.B.I. officials realized the growing danger posed by financial fraud in the housing market beginning in 2003 and 2004 but were rebuffed by the Justice Department and the budget office in their efforts to acquire more resources…
Several former law enforcement officials said in interviews that senior administration officials, particularly at the White House and the Treasury Department, had made clear to them that they were concerned the Justice Department and the F.B.I. were taking an antibusiness attitude that could chill corporate risk taking.
A little chilling of corporate risk taking might have been a good thing in 2003 and 2004. In fact it might have prevented the current crisis.
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.
Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.
They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.
As I said before, this was the moment when the government outsourced the regulation of the banks–to the banks themselves.
After that, it was only a matter of waiting for the train-wreck to occur.
In August 2004, Moody’s Corp.unveiled a new credit-rating model that Wall Street banks used to sow the seeds of their own demise. The formula allowed securities firms to sell more top-rated, subprime mortgage-backed bonds than ever before.
A week later, Standard & Poor’s moved to revise its own methods. An S&P executive urged colleagues to adjust rating requirements for securities backed by commercial properties because of the “threat of losing deals.”
The world’s two largest bond-analysis providers repeatedly eased their standards as they pursued profits from structured investment pools sold by their clients, according to company documents, e-mails and interviews with more than 50 Wall Street professionals. It amounted to a “market-share war where criteria were relaxed,” says former S&P Managing Director Richard Gugliada.
So anxious were the two ratings agencies to get market share that they gave the AAA rating to packages of sub-prime mortgages with unheard of leverage put on top of a pile of liar loans. Continue reading →
This seemingly innocuous power point slide from the Securities and Exchange Commission (SEC) was used in June of 2004 to explain to market participants a new ruling on how broker dealers could compute their “net capital”. Instead of the previous fixed limits on leverage of 10:1, broker dealers like Lehman Brothers could use their own “internal models” to determine how much leverage they could put on their capital. As we saw with the crash of Bear Stearns and now Lehman Bros., both firms were leveraged more than 30:1.
When you combine this ridiculous willingness to let broker dealers determine their own leverage with the decision three years later to alter the short selling rules to make it easier to short a stock, you have a recipe for financial chaos. These are both Bush administration SEC moves. They stem from a idealogical hatred of regulation. They cannot be blamed on Democrats. This needs to be stated clearly by Obama and Biden.
“This is even worse than insider trading. This is deliberate and malicious destruction of value and people’s lives,” Dimon said. “They shouldn’t go to jail for a short period of time. If I was the SEC, I’d find out who made the money and I’d investigate like they do when they come after us all the time, emails, phone records, you name it, and I’d find out.”