SEC Asleep at the Switch or Did It Throw the Wrong Switch?

Critics have long suggested that the SEC has been asleep at the switch when it comes to new financial frauds.  The SEC may have done more--it may have thrown the switch to the wrong track.  In 2004, the SEC changed its accounting releases to allow brokerage companies to include risky capital in the capital reserves that it requires brokers dealers to hold when engaging in securities transactions.  The brokerage companies are also banks and used the diminished capital requirements to increase leverage and participate in the asset backed securitization markets.  Great.  Recall that the Chairman of the SEC, Cox, noted that the system was fine and needed no repair on the eve of the Bear Stearns emergency bailout.