Word: sec
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...Much has been made of the SEC's failure to spot trouble brewing at the investment banks that fell under its purview. An SEC rule change in 2004 - which didn't generate a lot of attention at the time and passed before Cox came along - let the five largest investment banks significantly raise the amount of money they could borrow. In retrospect, the new ratio - $40 dollars borrowed for each dollar of capital to back it up - was precariously high, considering smaller broker-dealers were capped at a ratio of $12 borrowed for each dollar of capital...
...Should Cox have prioritized building an early warning system to detect the risk that was slowly and steadily building at these companies? Perhaps. But that wouldn't exactly be a job the SEC is built for. "I'm not sure the SEC had the manpower or internal expertise to quickly ramp up to being able to spot highly sophisticated risk that, as far as we can tell, no one was good at spotting," says Donald Langevoort, a law professor at Georgetown University and former SEC staffer...
...also come under fire for not acting more quickly to curb short sellers - investors who borrow shares and make money when a stock's price drops. After certain financial stocks started diving over the summer, and market players and attorneys began ringing alarm bells about rumor-mongering, the SEC temporarily banned a particularly aggressive form of short selling in 19 financial stocks. A new ban, which prohibits all types of short selling for some 800 financial stocks, went into effect on Sept. 19 and lasts until...
...simply responding to calls to stop the slide in certain stocks - Morgan Stanley CEO John Mack put in a personal call to the SEC - isn't necessarily the best policy. Short sellers, as anyone in finance will tell you, often provide very useful early signals about the weakest players in the market. And there is little rigorous data on whether bans on short selling broadly, or specific modifications to how it's conducted (like whether a stock must tick up before a short can go in), truly reduce volatility in markets. Little wonder that many market observers, including former Federal...
...There are, for sure, legitimate criticisms of the SEC under Cox. The agency, by most accounts, could have taken a more active role in going after firms that misleadingly sold long-term auction-rate securities as cash-like investments, as the Secretary of the Commonwealth of Massachusetts, who filed complaints against a number of companies, has suggested. In April, when the Treasury Department put out a blueprint for reforming financial markets, which included a possible abolition of the SEC, Cox probably didn't bolster his staff's spirits by not immediately standing up for his agency's autonomy...