Congress Probes SEC’s Role in Credit Crisis

Former SEC chairmen say the current U.S. regulatory system needs to be modernized, and that the commission needs more money to keep up with its responsibilities.

The Securities and Exchange Commission has been forced to play defense in the wake of the Bear Stearns implosion — and the credit crisis overall. Indeed, its supervision of five investment banks and oversight of the credit rating agencies have been repeatedly scrutinized by Congress during the past few months.

On Wednesday, two former SEC chairmen used the most recent Congressional inquiry into the commission’s actions to encourage lawmakers to approve a higher budget for the regulator. In addition, current chairman Christopher Cox testified at a separate congressional hearing about the SEC fiscal year 2009 budget request, which would give the regulator a 4 percent boost for a nearly $1 billion budget.

Cox has claimed that the financial boost would allow the SEC to keep its staff resources level. Nevertheless, he is still requesting a staffing increase so that the commission is able to expand its fairly new oversight role of the rating agencies. He also pointed out that Congress was considering supplementing the funding gap to support the SEC’s investment bank and credit rating agencies’ programs.

Meanwhile, at the Senate subcommittee hearing on Wednesday, Levitt echoed Cox’s concerns. “I fear that the SEC does not have what it needs to meet the demands of the day,” said Levitt, who served as SEC chairman from 1993 to 2001. The commission’s enforcement budget has not kept up with inflation levels, he lamented.

Lawmakers have expected more from the SEC in terms of oversight. The regulator has been questioned repeatedly about what it could have done to intercede in the rating agencies’ business practices when they were issuing slow — and what some observers consider inadequately positive — assessments of structured financial products. In addition, Congress has wondered whether the SEC should have done more during the time leading up to the Bear Stearns collapse.

In response, last month, Cox called for Congress to provide more oversight of investment bank liquidity. During a Senate Banking Committee hearing he asserted that Bear Stearns had a better capital cushion than what the current rules require leading up to its downfall and during its agreement to be acquired by JP Morgan Chase.

Then again, maybe the future version of the SEC won’t need as much money as it does now, considering the movement underway to strip the regulator of some of its responsibilities. During Wednesday’s hearing of the Senate Subcommittee on Securities, Insurance, and Investment, Senator Charles Schumer of New York said the entire U.S. financial regulatory system needs to be “revamped.” Bear Stearns fell “behind the cracks” through no fault of the SEC’s investment-bank program but because the entire system has not kept up with changing technologies and globalization, he said.

“We need a regulator who can look at a company like Bear Stearns from both points of view, together, as opposed to the SEC looking at whether Bear Stearns is [making proper disclosures] or defrauding potential investors … and the Fed worried about safety and soundness,” Schumer added.

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