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The SEC Rule that Let Banks Pile on Debt

Discussion in 'Economics and Financials' started by joeydolfan, Oct 3, 2008.

  1. joeydolfan

    joeydolfan Season Ticket Holder Club Member

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    “We have a good deal of comfort about the capital cushions at these firms at the moment.” — Christopher Cox, chairman of the Securities and Exchange Commission, March 11, 2008.

    Wrong again Colonel Sanders.

    Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

    On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

    They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

    The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

    The SEC Rule that Let Banks Pile on Debt - General * US * News * Story - CNBC.com
     
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  2. texasPHINSfan

    texasPHINSfan New Member

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    yeah i'm with you 100%! i said this in another thread last week, but it bears repeating here.

    A rule change by the SEC in 2004 allowed financial service firms with a market capitalization of $1 billion or more to significantly increase their leverage. The five firms which qualified were: Merrill Lynch, Goldman Sachs, Lehman Brothers, Morgan Stanley and Bear Stearns.

    This article describes the evolution of this rule change:
    http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/

    The details of the rule change, titled the Consolidated Supervised Entities program, can be found on the SEC website, here:
    http://www.sec.gov/divisions/marketreg/hcliquidity.htm

    Firms which were previously capped at a 12-to-1 leverage ratio were within a few years carrying a 40-to-1 leverage.

    Three of these firm(Bear, Lehman and Merrill) are no longer independent entities, and two (Goldman, Morgan) have chosen to become commercial banks, where their leverage ratios will be substantially reduced and highly regulated.

    The world of investment banks has changed forever. The consequences of this massive unwinding of leverage are now being felt.
     
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  3. texasPHINSfan

    texasPHINSfan New Member

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    oh and great article, joey. i think that paulson did a great job at GS when he was there, but i hope he doesn't use that same business philosophy from GS at the Treasury. He tends to be riskier with his investments, which was fine when you're a leveraged investment bank.... not so much when you run the Treasury.
     
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  4. joeydolfan

    joeydolfan Season Ticket Holder Club Member

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    Thanks Bro, I really liked the article myself, as for Hank Paulson, my opinion of him has hit the skids now.

    He did a great job running GS, bit leading the charge to allow more leverage knowing fully well what could happen with market disruptions? Then leave the firm 2 years later with over a 100 million severance to become Treasury Secretary to engineer a bail out on something he propagated?

    So many things stink in this whole mess its not even funny.
     
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  5. texasPHINSfan

    texasPHINSfan New Member

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    seriously. that dude is SMART!

    shady as hell, but smart. that guy has made more money from all this than anyone else, i believe, and now that he's holding the role of an official, he appears to let his biases affect his decision-making.

    the person who should be the Treasury Secretary should be that one dude that shot down the proposal to extend the leverage to all the investment banks. i would also admit that having the former CEO of one of the larger investment banks be the treasury secretary in all this is a huge conflict of interest.
     
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  6. joeydolfan

    joeydolfan Season Ticket Holder Club Member

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    I don't think most Americans would see it that way but yeah, that take some balls and brains to orchestrate something like that on such a large scale. He needs to be in Jail though.

    No way he should be Treasury Secretary and I agree it should have been the programmer that warned the officials against allowing the leverage.
     

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