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Response to Drunken Irishman (Original post)

Mon Dec 30, 2013, 12:05 PM

7. Other factors

played into the collapse, including the GOP reluctance to regulate at all. This seldom quoted decision intensified the crisis effects, IMHO:

"2008 September 21 Sunday
SEC Leverage Rule Change Contributed To Investment Bank Failure
Julie Satow of the New York Sun reports a 2004 US Securities and Exchange Commission rules change contributed to the failure of investment banks.

The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch.

The SEC allowed five firms the three that have collapsed plus Goldman Sachs and Morgan Stanley to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.

Making matters worse, according to Mr. Pickard, who helped write the original rule in 1975 as director of the SEC's trading and markets division, is a move by the SEC this month to further erode the restraints on surviving broker-dealers by withdrawing requirements that they maintain a certain level of rating from the ratings agencies.

Keep in mind that this is not the main cause of the financial crisis. Countrywide Financial, Washington Mutual, Fannie Mae, and Freddie Mac (among others) got into trouble due to the mortgage bubble and poor lending practices.

Barry Ritholtz says this rules change helps explain the extreme amounts of leverage in the crashing investment banks.

You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms 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.

Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1."

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Drunken Irishman Dec 2013 OP
rpannier Dec 2013 #1
Enthusiast Dec 2013 #3
onwardsand upwards Dec 2013 #2
Enthusiast Dec 2013 #4
JDPriestly Dec 2013 #6
Thinkingabout Dec 2013 #5
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Pantagruelsmember Dec 2013 #7
L0oniX Dec 2013 #8
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