Sunday, 28 September 2008

Goodbye to Consolidated Supervised Entities

With Bloomberg reporting that the bailout has been agreed after days of intense debate, the last few days have been a great time to sneak out financial news that you do not want too well read. One would never suspect the SEC of acting that way, of course, but it is interesting that the audit of the SEC's oversight of Bear Stearns came out on the 25th. The two parts are here and here, and they do not reflect very well on the SEC's Trading and Markets Division (TM). For instance:
TM became aware of numerous potential red flags prior to Bear Stearns' collapse, regarding its concentration of mortgage securities, high leverage, shortcomings of risk management in mortgage-backed securities and lack of compliance with the spirit of certain Basel II standards, but did not take actions to limit these risk factors
The broker/dealer capital regime (CSE, introduced in 2004 by the SEC as an attempt to fend off EU regulation of the broker/dealer's European subsidiaries) does not fare well either:
Bear Stearns was compliant with the CSE program's capital and liquidity requirements; however, its collapse raises questions about the adequacy of these requirements
The SEC was in such a hurry to offer their 5 big clients a friendly capital regime that it approved their applications before it had even completed the inspection:
The Commission issued four of the five Orders approving firms to use the alternative capital method, and thus become CSEs (including Bear Stearns) before the inspection process was completed;
Go and read both the documents: they are peaches.

To be fair, the SEC admits there are problems. Chairman Cox released a statement saying `the CSE program was fundamentally flawed from the beginning' and ending the program forthwith.

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