Monday, October 06, 2008

"After hopefully things settle down..."


In "Throwing the bank babies out with the bath water" I pondered today's Global Market Meltdown, the Net Capital Requirement rule and wondered who in the *&%$# had been responsible for changing it.

I just couldn't believe that there would be ANYBODY that ...irresponsible.

Well, I found her. Yep. I found the person involved in the change of the Net Capital requirement rule on Wall Street. Unh-huh. And if she says she wasn't the one? Then why was she bragging all over the place about throwing it out the window, including in her official interview with the SEC Historical Society???

And who knew there even was such a thing as an SEC Historical Society. Did you? Me neither. Go figure. But back to our special someone. That special someone making my blood boil right about now.

Ms. Annette Nazareth, former SEC Commissioner.

Ms. Nazareth served as the Commission's Director of the Division of Market Regulation, a position she held from March of 1999 until August of 2005. As Director, Ms. Nazareth had primary responsibility for the supervision and regulation of the U.S. securities markets, principally through the regulation of brokers and dealers, exchanges, clearing agencies, transfer agents and securities information processors. Significant initiatives adopted by the Commission during her tenure include: execution quality disclosure rules, implementation of equities decimal pricing, short sale reforms, implementation of a voluntary regime for consolidated supervision of broker-dealer holding companies and modernization of the national market system rules. (Editor's note: i.e. The Consolidated Supervised Entity System)

True, Ms. Nazareth probably still has to go a ways to catch up with good old "Typhoid Jamie Gorelick" After all, Ms. Gorelick has her fingerprints all over BOTH 9/11 AND the Fannie-Freddie crisis! Talk about a one woman wrecking crew! Keep her out of the stables with Mrs. O'Leary's cow! But, it's early days yet and I've just started in on Ms. Nazareth when it comes to the google scratching, so we shall see what place she ends up in this Mistress of Disaster bake-off we're conducting.

The good news. It looks like someone in DC IS paying attention to the net capital oversight problem. Senator Chuck Grassley instigated an investigation into the collapse of Bear Stearns back in April and the SEC Inspector General reports were just issued on September 26. In the summary of their results, what do we find, first on the list, front and center?

The Consolidated Supervised Entity Program:

The audit noted that the Trading and Markets division (TM) failed to act in the face of potential red flags regarding Bear Stearns' "concentration of mortgage securities, high leverage, shortcomings of risk management in mortgage-backed securities and lack of compliance with the spirit of certain" international standards.

Specifically, among the Inspector General's findings were:

The CSE program's capital and liquidity requirements may not be adequate, given the collapse of Bear Stearns despite compliance with the capital and liquidity limits.

TM failed to limit Bear Stearns' mortgage securities concentration, despite being aware of the growing concentration of such securities beyond Bear Stearns own internal limits. TM should have required a leverage ratio limit on CSE firms, and should have forced Bear Stearns to reign in its leverage. Despite having knowledge of them, TM failed to encourage Bear Stearns to address serious deficiencies in their risk management and pricing models.

TM concurred with 20 of the 23 relevant recommendations.

What is the Consolidated Supervised Entity program? That's what replaced the Net Capital Requirement Law of 1975 and was the SEC program created to monitor market risk in it's place.

What does that mean? It means the division of the SEC responsible for monitoring firms leverage and risk and exposure and all that stuff? Well, their models were crap and then even when they kind of saw everything spiraling out of control at Bear Stearns? They didn't say anything!!!!

How do you like them apples?

But back to our woman of the hour, Ms. Nazareth. Here on the SEC Open Meeting Agenda for April 28, 2004 we find this little nugget:

Item 3: Alternative Net Capital Requirements for Broker-Dealers that are Part of Consolidated Supervised Facilities and Supervised Investment Bank Holding Companies.

The Commission will consider whether to adopt rule amendments and new rules under the Securities Exchange Act of 1934 ("Exchange Act") that would establish two separate voluntary regulatory programs for the Commission to supervise broker-dealers and their affiliates on a consolidated basis.

It goes into a bunch of other stuff that is venturing off into the tall weeds for now, but I'm not done with this thing yet and will report back. Perhaps I will attempt to contact Ms. Nazareth's former underlings at the SEC who worked on this project for further information:

For further information, please contact Linda Stamp Sundberg at (202) 942-0073, Bonnie Gauch at (202) 942-0765, Rose Wells at (202) 942-0143, David Lynch at (202) 942-0059, or Matt Comstock at (202) 942-0156.

But right now there are more pressing matters about Ms. Nazareth to address. For instance her view on the Net Capital Requirement Law of 1975 as expressed to the SEC historian, Kenneth Durr:

AN: "...everybody over the years had come saying we really have to do some sort of net capital reform, that the net capital rule needed updating."

KD: Explain that a little.

AN: We had a rule in place that, given modern risk management techniques, was considered somewhat rudimentary or antiquated. We imposed high capital charges for securities positions that did not take into account things like portfolio margining and value at risk analysis and the like, and there were a lot of people on Wall Street who believed that the Commission should be moving more in that direction as the banks had done with the Basel Accord. There was a lot of pressure to do that. It's a very, very complicated issue and we did ultimately make some significant changes, but something that I thought would be easy was not easy and I can say it took us nearly seven years to do it, I think if I hadn't been here so long it wouldn't have gotten done."

There you have it my friends, out of the mouths of SEC Commissioners. Which brings me to my next questions: Who were these "lot of people on Wall Street?" What were the real forces behind the move to emulate the Europeans and the Basel Accord, and why? Who was applying the pressure to move away from a regulatory requirement that had seemed to be working just fine up to this point? More questions than answers at this point possums. For now.

But this is really what I wanted to share. You'll be happy to know that Ms. Nazareth, a Democrat, is no longer with the SEC. (A screen capture is provided just in case the article starts to disappear like these Democrat things sometimes do.)

Okay - are you sitting? Have you swallowed your beverage to avoid screen spew? Good.

Get this. So now, Ms Nazareth, the one SEC Commissioner and DEMOCRAT that most certainly had a hand in lighting the fuse on this financial crisis is now going to work for "the most visible (law) firm on the front lines of the financial crisis."

How Barney Frank of her. I swear, just looking at her face and reading this makes my head want to explode.

Davis Polk fortifies its ranks: With Davis Polk the most visible firm on the front lines of the financial crisis — repping Freddie Mac, the Fed, the Treasury Dept and Citi — you wouldn’t think they need anymore firepower. nazarethBut they’re getting it. Former SEC Commissioner Annette Nazareth (Brown, Columbia law) is joining the financial-regulation practice at Davis Polk, where she used to be an associate. Here’s the WSJ report.

“Right now my role is helping people navigate through this crisis and keeping them abreast of the changing landscape,” said Nazareth, 52. “There will be a big role going forward, after hopefully things settle down, with the restructuring of the financial-regulatory architecture.”

"After hopefully things settle down," she says. Like she was in Montserrat the whole time or something. It's just unconscionable.

Now, don't get me wrong. I know she isn't the ONLY one responsible for this fiasco but come on.... you name it, you claim it. If something like this had happened on my watch, I would be sitting in my room with a shaved head, drinking diet pepsi, wearing sack cloth and ashes....

Does this woman have no shame whatsoever?