I’m not a big fan of Floyd Norris’s column today, in which he essentially blames regulators in general, and the SEC in particular, for "letting leverage get so far out of hand" that Bear Stearns collapsed.
We all know that there’s a big regulatory gap when it comes to investment banks – and that’s a gap which Tim Geithner, Hank Paulson and others are trying to fill. So it’s reasonable to complain that no federal regulator was really keeping a close eye on investment banks’ balance sheets. But I think it’s a bit much to jump from there to blaming the SEC for everything which happened.
Yes, the SEC, in the absence of any other regulator, was in charge of regulating Bear Stearns, just as it’s in charge of regulating all other publicly-listed companies. And in fact the SEC did check up on Bear’s capital adequacy on a daily basis. But it’s not the SEC’s job to set those requirements. Asking the SEC to do something which even the BIS finds all but impossible is, I think, unreasonable.
Yet that’s exactly what Norris – and Chris Dodd, for that matter – is doing.
Is it reasonable to regulate the amount of leverage that investment banks are allowed to take on? Of course it is, especially if those banks get access to the Fed’s discount window. But it has to be the Fed which is doing that kind of regulating, not the SEC. And in any case, it’s hard to see what any regulator could have done to prevent the Bear Stearns collapse. If counterparties like Goldman Sachs refuse to do business with another broker-dealer, that bank will go out of business sooner rather than later. No matter how much capital it has, and no matter how little leverage it has.