Tuesday, September 30, 2008

Ritholtz on the SEC

Barry Ritholtz (BR) skewers the SEC at rgemonitor.com on 18 September 2008, "Is Financial Innovation just another word for excessive and reckless leverage? Apparently so. ... [T]he events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow [investment banks] to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1. ... Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns and Morgan Stanley. ... So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis. You couldn't make this stuff up if you tried. ... As the SEC itself has noted, this alternative program requires significant judgment, as contrasted with the numerical tests and capital charges (the haircuts) imposed on broker-dealers under the basic net capital rule. The alternative approach requires substantial SEC resources for complex oversight, which apparently are not always available", my emphasis.

Right on BR. Imagine, Chris Cox's (CC) SEC wants to replace GAAP, with its hard and fast numerical tests with the "more judgmental" IFRS. Why? The SEC favors more bad accounting among other things. Even CC, JD and MBA Harvard, ain't that dumb. CC understands the implications of replacing GAAP with IFRS. BR notes certain "SEC resources ... apparently are not always available". That's interesting. Why not? Because the SEC pursues ridiculous cases like that of the Price Waterhouse Two, my 19 January 2008 post, http://skepticaltexascpa.blogspot.com/2008/01/of-planks-and-specks.html.

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