SEC's Cox Catches Blame for Financial Crisis

The SEC chairman says he did all he could, in his limited role, to prevent a financial crisis, but critics see missed opportunities all around

by Theo Francis

Criticism of the Securities & Exchange Commission and its chairman, Christopher Cox, rose sharply on Sept. 18 as Republican Presidential candidate John McCain suggested he should be fired. "Mismanagement and greed became the operating standard while regulators were asleep at the switch," McCain said at a campaign appearance in Cedar Rapids, Iowa. "The chairman of the SEC serves at the appointment of the President and has betrayed the public's trust. If I were President today, I would fire him."

While the comments sharply escalate public criticism of the SEC's role in the unfolding financial crisis, they echo complaints that have been building since Bear Stearns' collapse last spring, when Cox took heat for his apparent absence as other regulators and corporate chiefs drafted a rescue plan. Cox, formerly a representative from California, has been more visible in recent weeks, joining key weekend meetings with Federal Reserve officials and Treasury Secretary Henry Paulson—who has been careful to mention the involvement of Cox and the SEC—and issuing two statements saying the agency had "worked closely with regulators around the world…in the interest of orderly markets."

In a statement on the evening of Sept. 18, Cox defended his agency's actions during the financial crisis, saying it had taken multiple steps to curb short-selling, crack down on market manipulation, and share information with other regulators. "History will judge the quality of our response to this economic crisis, but now is not the time for those of us in the trenches to be distracted by the ebb and flow of the current election campaign," he said. "And it is precisely the wrong moment for a change in leadership that inevitably would disrupt the work of the SEC at just the wrong time."

Too Little, Too Late?

But critics argue that the agency has leaned toward a hands-off regulatory approach in recent years that has left it unprepared or unwilling to use the powers it has and slow to step in as trouble brewed. Too often, they say, it cracks down only after misdeeds have become blatant. "The SEC hasn't been leading the charge as much as they've been following it," says Howard Schiffman, a former SEC enforcement division attorney and partner at Schulte Roth & Zabel in Washington, D.C. "The house burns down and then they do a really good job to say, 'Whose fault is that?'" The philosophy in recent years, says Tamar Frankel, a Boston University law professor specializing in financial regulation, has been "to do as little as possible—the market will take care of it."

Supporters counter that the SEC's role is necessarily limited: It can't lend to struggling companies, and a balkanized regulatory structure spreads oversight of commercial banks, investment banks, mortgage lenders, and insurers across multiple state and federal agencies. Though the SEC is the primary regulator for broker-dealers—the operating units of the giant investment banks—it has less authority over their parent companies. So while it could demand that the broker-dealers stay adequately capitalized, it has little control over parent companies that have loaded up on risky investments.

"The one thing that's clear is that the SEC didn't cause these problems," says former SEC Chairman Harvey Pitt. Rather, Congress, by failing to modernize financial regulation when it deregulated the financial-services industry in the 1990s, left the SEC and other regulators without the tools to regulate new markets and securities as they arose. "In essence what we have is a 21st century financial system and a 19th century regulatory system," Pitt said. That's a view shared by Richard Breeden, the SEC chairman under President George H.W. Bush.