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SEC Oversight of Lehman, or Ignorance is Not Bliss

Posted by Larry Doyle on April 1, 2010 9:42 AM |

Ignorance is never an excuse. Whether in regard to law enforcement, financial regulation, or other forms of supervisory oversight, ignorance may be the reality . . . but we can never allow it to be used as an excuse. Regrettably, ignorance (if not worse) was clearly on rampant display as the SEC (and in my opinion, FINRA as well) failed America miserably in its oversight of Lehman Brothers.

One of my favorite financial journalists, Bloomberg’s Jonathan Weil, highlights the pathetic performance of the SEC regulators who were charged with overseeing one of the firms that catapulted our economy off a cliff. Weil writes, Wall Street’s Repo 105 Cops Wake Up From Dead:

The good news this week from the Securities and Exchange Commission is that it’s on the hunt for companies that have used Lehman-style accounting tricks to make themselves look less leveraged than they really are. Now for the downside: The headline-chasing agency is way too late, as usual.

A real regulator, of course, would have done something to stop Lehman’s legerdemain while it was still in progress. The SEC, by contrast, wasn’t merely unaware of Repo 105 before Lehman blew up. It probably wouldn’t have cared back then, notwithstanding its sudden burst of interest in the subject matter this week.

In his report, Valukas said he interviewed six SEC employees last August who had been responsible for monitoring Lehman’s business operations. “None had been informed of Lehman’s use of Repo 105 transactions,” he wrote.

Even more telling was the explanation Valukas got last November when he interviewed Matthew Eichner, a former assistant director of the SEC division that supervised Lehman. Valukas said Eichner wasn’t aware of Repo 105, by name or description. Yet even if the agency had known about the volume of Lehman’s Repo 105 deals, Eichner said it wouldn’t have been a signal “that something was terribly wrong.” Eichner, now an adviser at the Federal Reserve Board, said this was because the SEC’s monitors didn’t put much stock in leverage numbers.

Are you kidding me? How does this mentality permeate a financial regulator? If that is not evidence that the Wall Street inmates were  running the asylum I do not know what is.

So, even with the benefit of hindsight, the SEC’s staff was still clueless. It must be nice to go through life like that. On the bright side, at least the SEC now says it plans to make the responses to its latest questionnaires public after it finishes its reviews.

All this reminds me of an old saying by the renowned short seller Jim Chanos of Kynikos Associates Ltd. “Short sellers are the financial markets’ real-time detectives, while financial regulators all too often end up as market archaeologists,” Chanos likes to say.

Is America supposed to sit idly by and pretend that the regulators were merely ignorant? While we will get nowhere in an attempt to dig deeper into the failures of the SEC, I firmly believe there is a LOT America can learn by investigating FINRA. To wit, I welcome repeating my commentary, Sense on Cents Calls for Independent Investigation of FINRA.

Will you endorse this call? If so, please leave comments at that post stating as much.

Who in Washington has the balls to call for this investigation? Darrell Issa? Barney Frank? Paul Kanjorski? Do your jobs!! Make this call. An investigation of FINRA is an easy way to show a bipartisan effort and address the outrage of the American public toward Wall Street. Let’s go!!


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  • Patriot

    There is no doubt all kinds of dirt that remains under America’s rug. While some may be best left there, plenty of light needs to be shone on the rest of it.

    The ongoing evidence of total incompetence at the SEC is numbing.

  • Bill

    SEC personnel were, are and will be too busy chasing the likes of Martha Stewart and Mark Cuban, plus looking at porn on the internet while not day trading their accounts, to ferret the perverse machinations of the Wall St. denizens. Also, as the piece points out, by the time somebody has managed to focus them on any shenanigans, the game will have moved on to some new phase well beyond their competence (incompetence) to discern. It is the same as a security guard who is asleep.

    • LD


      Why did I just get the mental picture of somebody running out for a dozen doughnuts and some large coffees, extra sugar.

  • Bill

    I’ll also add that probably no amount of regulation and oversight as regards the operations of the financial powerhouses will prevent the sort of experience we’ve undergone at their hands the last three years or so. SEC and FINRA are exhibits A and B for this proposition. The only effective cure is some sort of structural reform which targets the incentive for risk taking by the captains of finance who ran these titanics on the shoals. This would take the form of constraint on the gargantuan compensation for the undue risk taking, perhaps in the form of receipt over some period of years dependent upon how the risk/reward actually plays out, rather than limitation, especially by perverse government fiat, of the amount of compensation. Claw back is another possibility, but it’s always an easier proposition to hold money back than to get it back after it’s out the door. Regulation could be effective to insure compliance with these objective limitations.

  • The SEC needs to be far more engaged in its oversight and enforcement actions. They have been far too lax and complacent, especially since the days of Eliot Spitzer being New York’s Attorney General and competing with them to nab the investment banking related criminals. It’s time to be aggressive and get some people in place who are willing to dig into potential financial and securities crimes.

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