Cox And The Right Set Up Wall Street's Fall

In 2005, our co-director Robert Borosage warned readers [1] about the travesty of appointing Christopher Cox to the Securities and Exchange Commission.

Business Week described corporate lobbyists as "almost giddy" at the prospect of Cox at the head of the SEC because Cox has devoted his career to shielding corporate executives from accountability. As an attorney, Cox was sued for touting a flimflam operator to regulators in a scam that ended up bilking small investors of some $130 million. As a legislator, Cox spearheaded the effort to pass the Private Securities Litigation Reform Act of 1995, which essentially gave corporate executives a "license to lie" about their stocks' future prospects and sought to shield CEOs, their lawyers and accountants from investor lawsuits. Cox also championed leaving stock options off the corporate books, encouraging the very instrument that gave CEOs a personal stake in fixing the books so they could cash in. President Bush has made a man who contributed directly to the explosion of corporate fraud and abuse that cost investors trillions of dollars the chief cop on the corporate beat. With the heat turned down on corporate cons, small investors are likely to get burned.

An article in The New York Times [2] on Friday details how one rule changed in the mold of Cox's doctrinaire deregulatory mindset helped set up the collapse on Wall Street we're now dealing with. That rule, pushed by lobbyists from the nation's largest investment firms, allowed them in 2004 to add billions of dollars of debt to their books without the reserves to cover them. Then, it allowed the firms to police their own risk, using complex computer models.

The coup dé grace took place after Cox arrived at the SEC a year later, when he failed to give a high priority to an office tasked with monitoring institutions with $4 trillion in assets.

"Since March 2007, the office has not had a director," the Times reported. "And as of last month, the office had not completed a single inspection since it was reshuffled by Mr. Cox more than a year and a half ago."

It is reminiscent of the failures of the Consumer Product Safety Commission [3], which since 2000 embraced the right-wing ideology of minimal regulation, voluntary compliance and no serious commitment to having cops on the beat to protect the public interest. The failures at the CPSC led to tainted food and toxic toys [4]. The failures at the SEC, as everyone now knows, has brought up to the precipice of a potentially far more wide-reaching collapse of the economy.

It is a devastating indictment of anti-government, corporation-worshiping conservatism [5].

The Times quotes a former Republican SEC chairman (italics mine):

“It’s a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs,” said Roderick M. Hills, a Republican who was chairman of the S.E.C. under President Gerald R. Ford. “The problem with such voluntary programs is that, as we’ve seen throughout history, they often don’t work.”

A long-time professor of securities and corporate law admits in the Times that his faith in the policies that the conservative leadership of the SEC was pursuing were wrong.

“We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing,” said Professor James D. Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).

“Letting the firms police themselves made sense to me because I didn’t think the S.E.C. had the staff and wherewithal to impose its own standards and I foolishly thought the market would impose its own self-discipline. We’ve all learned a terrible lesson,” he added.

The paper also notes Cox's background and his track record at the SEC:

Christopher Cox had been a close ally of business groups in his 17 years as a House member from one of the most conservative districts in Southern California. Mr. Cox had led the effort to rewrite securities laws to make investor lawsuits harder to file. He also fought against accounting rules that would give less favorable treatment to executive stock options.

Under Mr. Cox, the commission responded to complaints by some businesses by making it more difficult for the enforcement staff to investigate and bring cases against companies. The commission has repeatedly reversed or reduced proposed settlements that companies had tentatively agreed upon. While the number of enforcement cases has risen, the number of cases involving significant players or large amounts of money has declined.

Mr. Cox dismantled a risk management office created by Mr. Donaldson that was assigned to watch for future problems. While other financial regulatory agencies criticized a blueprint by Mr. Paulson, the Treasury secretary, that proposed to reduce their stature — and that of the S.E.C. — Mr. Cox did not challenge the plan, leaving it to three former Democratic and Republican commission chairmen to complain that the blueprint would neuter the agency.

In the process, Mr. Cox has surrounded himself with conservative lawyers, economists and accountants who, before the market turmoil of recent months, had embraced a far more limited vision for the commission than many of his predecessors.

Marge Hurd, president of ACORN, said that the New York Times story should help put to rest the libel [6] that the Wall Street implosion was caused by laws intended to ensure people of color and people in lower-income neighborhoods had fair access to credit.

"For the last few weeks, Americans have been deluged with polemics from right-wing pundits blaming regulation enacted in 1977 for the financial crisis we find ourselves in today. As today's explosive New York Times article shows, however, the 2004 decision of the Securities and Exchange Commission to eliminate the capital requirements on the major investment houses played the pivotal role in exposing our entire economy to the enormous risk of over-leveraged debt on predatory loans. ... As today's revelations demonstrate, a new era of re-regulation and close scrutiny is urgently needed, especially as American taxpayers prepare to foot the bill for Wall Street's misdeeds while getting no help to escape predatory mortgages."

When Sen. John McCain sought to score political points by saying that he would fire Cox if he were president—notwithstanding that the president can't legally fire an SEC chairman over policy disagreements—Rep. Barney Frank, the chairman of the House Financial Services Committee, correctly noted that the root problem was not Cox [7] and his competence as an administrator. In fact, Cox did exactly what he was sent to the SEC to do: to take the chains off the dogs of Wall Street and let them run wild. Once again, it's not the man, it's the plan.

Now even many of the advocates of deregulation are now admitting that we have gone way too far. The question we must confront now is whether to trust the apparent deathbed conversions of those who now say that will curb the greed of Wall Street or will we now turn to those who we know were right all along.