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Friday, September 19, 2008


who caused this crisis?

there's a lot of blame to go around, but -- as pointed out by tim duy -- let's not forget this.

As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years -- as well as the massive current unwind

Satow interviews the above quoted former SEC director [Lee Pickard], and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

As Mr. Pickard points out that "The proof is in the pudding — three of the five broker-dealers have blown up."

here's the SEC statement regarding the alternative net capital requirement for broker-dealers. in short, it was excessive leveraging that helped the investment banks facilitate the credit boom and killed them in the subsequent bust. short selling has nothing whatever to do with it -- the idea is a red herring perpetuated almost singularly by investment banking chiefs who desperately need scapegoats onto which they can deflect blame for the disaster they have created.

so who exactly relieved these broker-dealers of their leverage restrictions and enabled idiot bankers to commit financial suicide -- now at terrible public expense?

the director of the SEC at that time was william donaldson, founder of the erstwhile donaldson, lufkin and jenrette and former nixon undersecretary of state -- and appointee of the george w. bush administration. it is important, however, to see this sort of risk-modeled view of regulatory capital to be pushed initially by the basel ii accords produced by the basel committee. at the time, protest was predictably wrongheaded -- many complained that this would be "another layer of regulation" and somehow a burden to the i-banks. that too, it turns out, was a red herring.

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