Saturday, September 27, 2008

Bad News for Deregulation and Voluntary Compliance

On Friday, Christopher Cox, chair of the Securities and Exchange Commission (SEC) abruptly shut down a voluntary supervision program for Wall Street’s largest investment banks, acknowledging that the program had contributed to the global financial crisis: 

“The last six months have made it abundantly clear that voluntary regulation does not work...[the program] was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the [program's] perceived mandate and weakened its effectiveness.”

SEC chair Cox, Federal Reserve Bank chair Bernanke, and Treasury secretary Paulson have all admitted to general regulatory failures over the past year, but Cox now has specifically blamed this voluntary compliance program for the financial crisis.  Cox's termination of the voluntary supervision program will have no practical significance because the five largest Wall Street investment banks subject to the program have failed.  Bear Sterns was forced into a merger with JPMorgan Chase in March 2008.  During the last month, in rapid succession, the remaining four investment firms (Lehmann Bros., Merrill Lynch, Morgan Stanley, and Goldman Sachs) have gone into bankruptcy, been acquired by regulated banks, or transformed into bank holding companies that are regulated by the Federal Reserve Bank.

In 1999, Congress adopted the Gramm-Leach-Bliley Act, eliminating Depression-era restrictions on the relationhships between investment banks and commercial banks. In a compromise, the law gave the SEC authority to regulate the securities and brokerage operations of investment banks, but not their holding companies.  In 2002, the European Union was prepared to impose its own rules on the foreign subsidiaries of US investment banks, unless the US investment firms were subject to the same kind of oversight as their European counterparts.  So in 2004, after intense lobbying by all five large investment banks, including Goldman Sachs headed then by now Treasury Secretary Paulson, the commission adopted a voluntary program.  In exchange for relaxing capital requirements, the investment firms submitted to SEC supervision of their holding companies even though technically the agency only held regulatory authority over the firms’ brokerage components.

HT:  Huffington Post

There is a larger lesson in this saga for voluntary compliance programs of all stripes, including environmental voluntary compliance programs.  So long as maximizing short-term profits and larger salaries, bonuses and stock options remain the goals of US corporations and their executives, they cannot be trusted to regulate themselves.

Governance/Management | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference Bad News for Deregulation and Voluntary Compliance:


Post a comment