The SEC/Federal Reserve Information Sharing Pact
Monday, July 07, 2008SUSIE GHARIB: In Washington today, the Federal Reserve and the Securities and Exchange Commission announced a wide-ranging, information-sharing agreement covering investment and commercial banks. The move is aimed at heading off potential risks to the nation's financial system and preventing another Bear Stearns type of meltdown. NBR's Stephanie Dhue sat down with SEC Chairman Christopher Cox this afternoon and began by asking him what the pact will accomplish.
CHRISTOPHER COX, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION: If we're going to get a grip on what's going on in these markets, how best to regulate them and how best to anticipate and deal with systemic risk across the entire economy, it's really important that we share this information in real time and get a picture of all of the risk and all of the market activity.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT: Investor advocates are concerned more generally that the SEC ceding is ceding its regulatory authority to the Fed and that you'll be less well positioned to protect investors.
COX: In recent years, the SEC has put together a voluntary program that permits us to take a look not just at the broker-dealer subsidiary, but the entire consolidated entity. With this arrangement with the Federal Reserve, we'll now have the same opportunity to look at the consolidated holding company level for commercial banks that have broker-dealer subsidiaries and the SEC will be in a much better position to perform our function as consolidated supervisor of investment banks.
DHUE: You've also been investigating credit-rating agencies. A recent poll found 11 percent of financial advisors witness credit rating agencies changing ratings under pressure from either an investor, an underwriter or an issuer. Is that consistent with the SEC's findings?
COX: What we've found, for example, is that as a result of rapid increase and sustained increase in work flow, big burdens placed on the staffs of these firms to analyze a lot of new sophisticated products, they sometimes deviated from their own models and their own procedures. They cut corners. These problems are serious and we are dealing with them in real time in two main ways. First the firms themselves are addressing these shortcomings with changes in their own procedures. Second, the SEC has proposed sweeping new rules in a number of areas focused on how the credit rating agencies do their business.
DHUE: There's been a lot of discussion about fair value accounting and that fair value accounting has actually made the credit crisis worse, as banks have had to write off massive losses. What is the SEC's thinking on that right now?
COX: There's a real lively debate about whether or not fair value accounting is making things worse and speeding up the cycle of prices drying up, markets disappearing and being unable to produce reliable price information for assets. And then it becomes even more difficult for people to sell what increasingly is worthless on their balance sheets. We're going to have for this reason a round table at the SEC in just a few days focused on fair value accounting. We are not questioning market-to-market accounting or fair value accounting in so far as it applies wherever there's an active market. The concern is where there is no market. There's no price information and people are using strictly models, are we getting the best numbers? Are we doing it in the best way?
DHUE: You've come under fire for not seeing the signs of Bear Stearns' near collapse and coming out just days before and saying their capital position was strong. Looking back, what would you have done differently?
COX: As we now know looking back on that, Bear Stearns' capital was not the problem. They had a lot of capital. They had a loss of confidence and effectively a run on the bank, the first time that this had occurred in anyone's experience in the investment banking space. We don't want to have a system of perpetual bailouts and so what we'll do and what we're already doing as regulators is focus on the problems in evaluating the position of investment banks, the problems in being able to see through where the risk lies. Some of this is accounting. Some of this is regulation of capital and liquidity. And make sure that were an investment bank to go over the edge because of unsound practices or risk-taking or what have you, that its demise wouldn't automatically spread problems throughout the markets. That's not where we were with Bear Stearns. That's where we expect to be in the future.
DHUE: We've been speaking to Chris Cox, chairman of the Securities and Exchange Commission. Thank you.
COX: Thank you.
