S.E.C. Concedes Oversight Flaws Fueled Collapse

The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.

The S.E.C.’s oversight responsibilities will largely shift to the Federal Reserve, though the commission will continue to oversee the brokerage units of investment banks.

Also Friday, the S.E.C.’s inspector general released a report strongly criticizing the agency’s performance in monitoring Bear Stearns before it collapsed in March. Christopher Cox, the commission chairman, said he agreed that the oversight program was “fundamentally flawed from the beginning.”

“The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.

Mr. Cox and other regulators, including Ben S. Bernanke, the Federal Reserve chairman, and Henry M. Paulson Jr., the Treasury secretary, have acknowledged general regulatory failures over the last year. Mr. Cox’s statement on Friday, however, went beyond that by blaming a specific program for the financial crisis — and then ending it.

On one level, the commission’s decision to end the regulatory program was somewhat academic, because the five biggest independent Wall Street firms have all disappeared.

The Fed and Treasury Department forced Bear Stearns into a merger with JPMorgan Chase in March. And in the last month, Lehman Brothers went into bankruptcy, Merrill Lynch was acquired by Bank of America, and Morgan Stanley and Goldman Sachs changed their corporate structures to become bank holding companies, which the Federal Reserve regulates.

But the retreat on investment bank supervision is a heavy blow to a once-proud agency whose influence over Wall Street has steadily eroded as the financial crisis has exploded over the last year.

Because it is a relatively small agency, the S.E.C. tries to extend its reach over the vast financial services industry by relying heavily on self-regulation by stock exchanges, mutual funds, brokerage firms and publicly traded corporations.

The program Mr. Cox abolished was unanimously approved in 2004 by the commission under his predecessor, William H. Donaldson. Known by the clumsy title of “consolidated supervised entities,” the program allowed the S.E.C. to monitor the parent companies of major Wall Street firms, even though technically the agency had authority over only the firms’ brokerage firm components.

The commission created the program after heavy lobbying for the plan from all five big investment banks. At the time, Mr. Paulson was the head of Goldman Sachs. He left two years later to become the Treasury secretary and has been the architect of the administration’s bailout plan.

The investment banks favored the S.E.C. as their umbrella regulator because that let them avoid regulation of their fast-growing European operations by the European Union.

Facing the worst financial crisis since the Great Depression, Mr. Cox has begun in recent weeks to call for greater government involvement in the markets. He has imposed restraints on short-sellers, market speculators who borrow stock and then sell it in the hope that it will decline. On Tuesday, he asked Congress for the first time to regulate the market for credit-default swaps, financial instruments that insure the holder against losses from declines in bonds and other types of securities.

The commission will continue to be the primary regulator of the companies’ broker-dealer units, and it will work with the Fed to supervise holding companies even though the Fed is expected to take the lead role.

The Fed had already begun regulating Wall Street firms that borrowed money under a new Fed lending program, and the S.E.C. had entered into an agreement under which its examiners worked jointly with Fed examiners, an arrangement that is expected to continue.

The S.E.C. will still have primary responsibility for regulating securities brokers and dealers.

The announcement was the latest illustration of how the market turmoil was rapidly changing the regulatory landscape. In the coming months, Congress will consider overhauls to the regulatory structure, but the markets and the regulators are already transforming it in response to events.

Still, the inspector general’s report made a series of recommendations for the commission and the Federal Reserve that could ultimately reshape how the nation’s largest financial institutions are regulated. The report recommended, for instance, that the commission and the Fed consider tighter limits on borrowing by the companies to reduce their heavy debt loads and risky investing practices.

The report found that the S.E.C. division that oversees trading and markets had failed to update the rules of the program and was “not fulfilling its obligations.” It said that nearly one-third of the firms under supervision had failed to file the required documents. And it found that the division had not adequately reviewed many of the filings made by other firms.

The division’s “failure to carry out the purpose and goals of the broker-dealer risk assessment program hinders the commission’s ability to foresee or respond to weaknesses in the financial markets,” the report said.

The S.E.C. approved the consolidated supervised entities program in 2004 after several important developments in Congress and in Europe.

In 1999, the lawmakers adopted the Gramm-Leach-Bliley Act, which broke down the Depression-era restrictions between investment banks and commercial banks. As part of a political compromise, the law gave the commission the authority to regulate the securities and brokerage operations of the investment banks, but not their holding companies.

In 2002, the European Union threatened to impose its own rules on the foreign subsidiaries of the American investment banks. But there was a loophole: if the American companies were subject to the same kind of oversight as their European counterparts, then they would not be subject to the European rules. The loophole would require the commission to figure out a way to supervise the holding companies of the investment banks.

In 2004, at the urging of the investment banks, the commission adopted a voluntary program. In exchange for the relaxation of capital requirements by the commission, the banks agreed to submit to supervision of their holding companies by the agency.

Country First? No, McCain Puts McCain First

In a political shocker today, John McCain announced that he would suspend his campaign for president and head back to Washington to work on solving the economic crisis with Congress.

McCain also called for the postponement of Friday night’s debate between Obama and McCain.

When did he want it rescheduled? October 2, coincidentally, the very same day the Vice Presidential debate is scheduled between Sarah Palin and Joe Biden. McCain wants the VP debate to then be rescheduled for a later date.

As I wrote on Tuesday, John McCain thinks the American Public is stupid, and this is another excellent example of that.

Clearly this is a political ploy. It is a photo opp for John McCain, a chance for him to be seen "doing something" with Congress. And it is a desperate stab of an attempt to continue to keep Sarah Palin out of the public eye for as long as possible, a move that is looking more and more necessary for Team McCain as the days go by.

McCain’s sudden interest in his duties as a Senator is laughable.

Sure, any presidential candidate who happens to be a member of Congress is going to have a hard time making it back to Washington for every vote, but McCain has missed a staggering 64.1% of the votes during the 110^th Congress (2007 - 2008), almost 20% more than Obama’s 45.9% missed - and remember Obama was bogged down in a very lengthy Primary Campaign until June while McCain sat on the sidelines waiting for his opponent.

McCain’s whopping 412 missed votes over the past two years are the most missed in the U.S. Senate. Obama ranks number three in missed votes with 295.

So who is between them at number two? Democratic Senator Tim Johnson from South Dakota, who spent several months recovering from a brain hemorrhage which he suffered in late 2006. Johnson missed 48.4% of the votes, or almost 16% fewer than McCain missed. Fortunately, Johnson has returned to the Senate.

McCain hasn’t been there in five months.

For Obama’s part, he plans to leave Florida tomorrow, where he has been doing debate preparation, and head to Washington for a meeting with President Bush and John McCain at The White House.

Obama, however, seems quite confident that his time in Washington will not make it impossible for him to debate John McCain Friday night. As Obama himself said on Wednesday "Presidents have to deal with more than one thing at a time."

Senator McCain, however, is making an effort to capitalize on this crisis by running around and telling anyone who will listen that he cares more about America than winning an election. He and Palin love to say "Country First".

The truth is, John McCain is putting John McCain first, not the country.

He is in full panic mode and he understands that his golden opportunity to make up some ground on Obama was Friday night’s scheduled foreign policy debate, but now that the economic crisis has taken center stage the focus of the debate is likely to shift a great deal.

The economy is one of McCain’s weakest topics and dealing with it, rather than the topic of foreign policy, is something Sen. McCain just simply would prefer not to do. But, unfortunately, as president he will not be able to select when and what type of crisis hits. He’ll have to be prepared for all of them. He better get used to it if he wants to continue to be taken seriously as a candidate.

In addition to McCain’s debate problem, though, he is also beginning to figure out that his running mate, whom he met only once in his life prior to selecting her, has a debate problem of her own - she is completely unprepared for facing Joe Biden.

So the Senator from Arizona decided to gamble that this economic crisis was going to give him and Palin both a way to distract the public while the two of them slithered out of their debate commitments. There is nothing "country first" about that. In fact, when it comes down to it this is nothing more than a "McCain First" moment.

McCain Backs Out of Debate In California

With new polls showing his campaign dead in the water among California Republicans, Arizona Sen. John McCain has pulled out of a long-scheduled debate with Texas Gov. George Bush, set for Thursday in Los Angeles.

McCain campaign officials tried desperately yesterday to put the best face on their withdrawal, even as a new Field Poll showed Bush far ahead among likely Republican voters in the winner-take-all race for the state's 162 GOP delegates.

Top campaign officials attributed McCain's decision to Bush's earlier reluctance to appear at the debate.

``We had agreed to do this debate a long time ago, and Gov. Bush said he wasn't going to do it,'' McCain spokesman Howard Opinsky said yesterday. ``We aren't going to hold our schedule together forever.''

But Opinsky said McCain will debate Bush on NBC's ``Meet the Press'' Sunday, a national TV show that will reach millions of Americans.

Still, just last week, the McCain campaign was openly derisive of Bush's reluctance to commit to a California debate -- and promised its own candidate would be there.

``John McCain believes it's important for the people of California to see and hear the candidates talk about the issues,'' McCain communications director Dan Schnur told The Chronicle last week. ``Thirty- three million Californians are worth that attention . . . and we'll be there, either way.''

As recently as Thursday, when he was in California, McCain was talking about his plans to debate Bush; even last night, McCain's own Web site listed his California debate- watching parties. The CNN-Los Angeles Times debate was the only scheduled head-to-head meeting of the two candidates in California before the primary, a week from tomorrow.

McCain's campaign said the candidate confirmed to CNN on Thursday that he would not appear. But until yesterday afternoon, when rumors swirled about the pullout, McCain -- who has touted his ``straight talk'' politics -- gave no public indication that he intended to duck the nationally televised showdown.

The bait and switch on the debate left the Arizona senator -- whose favorite campaign line is ``I'll always tell you the truth'' -- wide open to blistering criticism from his rivals.

``Clearly, this is more double-talk from the McCain campaign,'' said Alixe Mattingly, a spokeswoman for Bush. ``Pulling out of this debate at the last minute is an indication that they're pulling out of California, where McCain's antagonistic message clearly isn't working.''

The decision to avoid debating Bush clearly upset some of McCain's top advisers.

``It's definitely a mistake, but hopefully, the people of California feel strongly enough about the McCain reform agenda . . . to overlook a staff error and come out and vote for John McCain,'' said Schnur, a longtime California political operative. ``John McCain is completely committed to California; unfortunately, our staff's position on this debate sends just the opposite message.''

California Republicans have been worried all along that the two leading GOP candidates are not giving the nation's most populous state the respect it deserves. Bush's campaign stop in Los Angeles last week, for example, was his first visit to the state since November.

Bush supporters quietly reveled in McCain's surprise announcement.

``From a distance, it seems like the `Straight Talk Express' is careening off the exit ramp in California,'' said Leslie Goodman, a Republican communications consultant and Bush backer, in a reference to McCain's campaign bus. ``They claimed they'd make California a priority because it was win or die, and now they don't care enough to debate.''

Although McCain's backers insisted that a devastating series of polls had no effect on the decision, the senator's chances of winning a Republicans-only primary in California have grown increasingly dim in recent days.

A Field Poll released today shows the state's Republicans backing Bush over McCain in the March 7 primary by a 48 percent to 28 percent margin in the contest for California's 162 convention delegates, a gap virtually unchanged from a Field Poll earlier this month. Other polls released over the weekend by the San Francisco Examiner and Time/CNN showed similar results.

Most of Bush's support comes from Republicans who identify themselves as strongly conservative. Among that group, Bush is favored by a 4-to-1 margin.

``That group seems galvanized and ready to vote for Bush,'' said Mark DiCamillo, director of the Field Poll. ``It's going to be hard for McCain to break into that group.''

Ironically, the rest of the poll is nothing but good news for McCain, a war hero who, in California at least, has extended his appeal beyond Republican voters.

In the state's open primary, where voters can choose from among all the presidential candidates regardless of party, McCain has seen his support among all likely voters surge from 10 percent in January and 15 percent earlier this month to 20 percent today, just 2 percentage points behind Bush and 8 points back of Democratic front-runner Al Gore's 28 percent. Democratic former Sen. Bill Bradley trailed with 10 percent.

It is becoming increasingly likely that McCain could beat Bush among all California voters, yet badly lose the Republican-only count that will determine who receives all the state's national convention delegates.

The new poll also bolsters McCain's claim that he would be a stronger candidate than Bush in November. In a head-to-head matchup, McCain beats Gore among likely voters in California by 48 percent to 41 percent, while Gore overruns Bush 51 percent to 41 percent. Bush also loses to Bradley, 47 percent to 43 percent, while McCain crushes Bradley, 52 percent to 35 percent.

McCain also has the best image of the top four candidates, with 57 percent of likely voters viewing him favorably, compared to 26 percent with an unfavorable impression. The new poll shows that for the first time, Bush's unfavorable rating is higher than his favorable rating, with 51 percent viewing him negatively, compared to 41 percent with a favorable impression.

``Everything in the polls seems to be going in McCain's direction, except the one that counts the most, which is the contest for the (Republican) delegates,'' DiCamillo said.

On the Democratic side, the poll shows Gore staying far ahead of Bradley, 54 percent to 16 percent, among likely Democratic voters.

``All the attention on McCain is siphoning any type of insurgent campaign momentum away from Bradley,'' DiCamillo said. ``Gore seems to be running out the clock and is in a very good position to do that.''

The poll is based on a telephone survey of 1,447 registered California voters conducted from Tuesday to noon yesterday. The margin of error is plus or minus 3.2 percentage points for the entire poll, 4.5 percentage points for the Democrat- only figures and 5 percent for the Republican-only figures, based on the size of the sample.

The poll represents a snapshot of voter opinion at the time it was taken and is not meant to predict the outcome of the vote.