Philip Maddocks: Official calls for voluntary redoubling of voluntary supervision of Wall Street

Philip Maddocks

Acknowledging that flaws in oversight had contributed to the global financial crisis, the chairman of the Securities and Exchange Commission called for a voluntary redoubling of efforts in the voluntary supervision programs for Wall Street.

Still shaken by the release of the S.E.C.’s inspector general’s report strongly criticizing the agency’s performance in monitoring Bear Stearns before it collapsed in March, Christopher Cox, the commission chairman, said, "I understand the criticism, but it’s still difficult for me to fathom how such a fundamentally strong regulatory program that allowed for those under its watch to withdraw from voluntary supervision at their discretion could fail so badly."

Mr. Cox and other regulators, including Ben S. Bernanke, the Federal Reserve chairman, and Henry M. Paulson Jr., the Treasury secretary, have acknowledged general regulatory failures over the last year. Mr. Cox’s statement, however, went beyond that.

Saying the need for voluntary regulation has never been greater or more apparent, he called for a sweeping volunteer effort to make volunteer regulation work.

"It is plain now that the voluntary regulation we have now is not expansive or voluntary enough," he said.

Mr. Cox called on Congress to enact regulation that allowed for much stricter flexibility for volunteer supervision by the nation’s largest financial institutions to ensure they continue to serve as the sole watchdogs of their own dealings.

The S.E.C. commissioner said the recent disappearance of the five biggest independent investment banks on Wall Street was bound to make the voluntary supervision program for Wall Street’s largest investment banks more effective than it had been. But he said the program’s failure to help those institutions to save themselves revealed shortcomings in the way it operated, particularly with its onerous tendency to suggest that companies might, when it suited them, file specific documents and undergo review procedures, actions that all but doomed the operation from the start as a volunteer program.

"As we go forward we have to keep in mind that the transparency of our financial institutions depends on the transparency of our regulations," Mr. Cox said. "If we hope to get transparency from our most important and reckless investment and lending institutions, we must, in turn, offer them the most transparent and reckless regulations possible."

Mr. Cox called any government bailout plan offering billions of dollars of relief for financial giants on Wall Street with very little company collateral in exchange "a step in the right direction."

Articulating a sentiment widely held among the big players in global finance, Mr. Cox emphasized that while a government bailout may offer a reprieve to some undeserving companies, its more important purpose was to "maintain the value" of making a wrong choice in the free market.

"If financial institutions were suddenly unable to make money off bad loans and irresponsible investment schemes, they would have to withhold money from responsible workers. That’s just the logic of our free market," he said. "So it’s in everyone’s interest to keep things going the way they are on Wall Street – no matter how it may affect Main Street."

The best way to do that, said Mr. Cox, was to greatly increase the level of voluntary supervision of financial institutions by the leaders of those institutions. This would enable those who know the businesses best to do what they do best — reap profit for themselves by losing other people’s money.

The S.E.C. chairman said he was optimistic there would be a correction to some of the excessive valuation in the market "as long as we can make our own correction there first."

"We have to work together on this to find a solution that puts our financial well-being back into the hands of those who got us into this mess, because a time of crisis is no time to make a change in leadership," he said.

While conceding that the last six months have made it abundantly clear that voluntary regulation "has not performed at the level we would like," Mr. Cox said he remained confident that the fundamentals of volunteer oversight remained strong.

"Our voluntary regulation remains the standard by which the rest of the world measures voluntary regulation," he said.

Philip Maddocks can be reached