Hullabaloo

Sunday, September 21, 2008

 
Heckuva Job Coxie and The Parasites

by digby

One of the most galling things about this economic crisis is that it isn't the first time we've seen financial wizards put together some byzantine products and transactions that were designed to obscure rather than reveal what was really going on. Hell, it isn't even the first time in this administration.

You'll recall that Enron and Worldcom were only a few years ago. And everyone was assured that the system was going to be "cleaned up." But we should have had a clue when Bush nominated Chris Cox to be the head regulator.

Consumer Watchdog put out the warning at the time, but naturally, it made no difference. After all, Cox was a member in good standing of the Village and they all knew him:

It's not like nobody warned them.

Here's the result:

Cox’s failures are too numerous to count. However, I’ll give it a try. Below are what I think are his top 5 failings.

1.

Failure to enforce disclosure laws and regulations.

Disclosure rules and regulations protect investors by requiring companies to disclose everything that is needed for informed investment decisions. And, CEOs and CFOs are required to sign certifications that such disclosure is materially accurate, complete, and that their companies have adequate internal controls to ensure such accuracy and completeness.

Enforcement of disclosure rules and regulations has been a joke. CEOs lie to shareholders with impunity and without fear of SEC enforcement. It is impossible to conclude that SEC filings for Freddie, Fannie, AIG, Lehman, or Bear Stearns complied with SEC rules and regulations.

However, instead of enforcement by the SEC, there is silence. While not all management actions are criminal, why hasn’t the SEC used its civil enforcement authority, i.e., assessing fines and penalties? How about protecting future investors by banning failed executives and boards of directors from serving in executive management at other public companies?
2.

Failure to enforce accounting standards.

When Cox states that the SEC doesn’t have regulatory authority over capital adequacy of financial services companies, he isn’t telling the truth. The SEC has regulatory authority over the financial statements of ALL publicly traded companies in the U.S. which of course includes the financials. If Cox had required greater reserves and transparency of financial services companies it would have happened.

Every quarter all publically traded companies file reports with the SEC that are provided to shareholders and the SEC has review and comment authority. If the SEC deems financial disclosure inadequate, incomplete or opaque it has the authority to force the company to amend its filings. It also has authority to establish accounting standards for publically traded companies which means it can have different requirements than GAAP.

So when the AIG filed its last quarterly report and decided that it didn’t need to have loan loss reserves against defaulting mortgages and securities, the SEC had the ability to require additional loan loss reserves. When Freddie and Fannie decided to pretend that defaulted mortgage were good assets because it changed its accounting standards, the SEC could have just said “no”. When Lehman manufactured $2.4 billion of pre-tax income by pretending that it wasn’t going to repay its debts (one of the dumber aspects of mark to market accounting), the SEC should have protected investors with disclosure.
3.

Failure to supervise the rating agencies.

Cox wants everyone to believe that despite being the rating agency’s only regulator, the SEC has no oversight or enforcement authority and cannot influence their performance. Once again, the SEC’s statements are false. Cox assumes that no one will take the time to read the Credit Rating Agency Reform Act of 2006 which states that the SEC has the right to suspend or revoke the license of any of rating agency for a wide range of reasons. Rating agency regulation and reform is Cox’s responsibility.
4.

Failure to investigate and prevent market manipulation, i.e., naked short selling.

Free markets are supposed to be honest markets. The naked short selling issue isn’t new and the SEC’s knee jerk emergency response is an embarrassment. The ban on short selling of 799 stocks is very similar to Putin’s actions this week to manipulate the Russian stock market. I haven’t a clue whether or not the uptick rule works, but I know that enforcing rules on naked short selling shouldn’t have required destructive and ill thought out emergency orders. In the middle of the 1800’s the legendary financial scoundrel, Daniel Drew, understood naked short selling was bad (as he lost his fortune covering a short squeeze) when he said, “He who sells what isn’t his’n, Must buy it back or go to prison.” Too bad Cox never took economic history in school (or googled economic trivia).
5.

Failure to protect small investors.

It is no coincidence that according to the FT, stock ownership by individual investors is at an all-time low. The average individual investor knows that his chances in the market aren’t good. And the SEC doesn’t seem to care if the average guy is disenfranchised from the economic future of America. In addition to the above failures, Cox forgot that it was his job to make sure that brokers shouldn’t engage in deceptive sales practices (like in the sale of auction rate securities and the sale of Freddie and Fannie common and preferred stock to small investors because they were “guaranteed” by the government). Cox refuses to support private litigation by individual investors who were ripped off in the stock and bond market. If the SEC doesn’t protect the little guy, who will?

Well, I don't think Cox believed it was his job to protect the little guy. He believed it was his job to ensure that the Big Money Boyz could swallow a fire hose of money for as long as possible. (That's what conservatives call "free markets.")

McCain thinks that firing Cox will solve the problem. But Cox is just a natural symptom of the illness of modern conservatism's Randian philosophy, which, at its core, really does hold that the Big Money Boyz should be allowed unfettered freedom to make money without restrictions or rules. And when they gamble on the wrong thing, they believe that it is the right thing for the rubes to bail them out. Their basic philosophy holds that the taxpayers are parasites who benefit when the John Galts of the world make money so they should shoulder the burden when they fail. Indeed, they believe the serfs should be grateful for what they got out of it (which, by the way, wasn't much lately since the BMB decided some time back that they didn't have anything to lose by taking more and more of the pie for themselves.) Cox was just being a good servant.

Recall Alan Greenspan writing to the ditor of the NY Times in response to a negative review of Atlas Shrugged:

"To the Editor:

Atlas Shrugged is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should. Mr. Hicks suspiciously wonders "about a person who sustains such a mood through the writing of 1,168 pages and some fourteen years of work." This reader wonders about a person who finds unrelenting justice personally disturbing.

Alan Greenspan, NY"

It is from philosophies like this that revolutions are made.



H/T to ej

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digby 9/21/2008 03:00:00 PM |