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Thursday, September 18, 2008


Steve Benen may not be an economic expert, but you don't have to be to recognize when McCain is talking nonsense about economics. If he's talking on the subject, it's a pretty safe bet he has it wrong:

Fire Christopher Cox?, Political Animal: John McCain has apparently decided he has to say something different and/or unique about the crisis on Wall Street, so he's come up with a new line: he wants to see Securities and Exchange Commission Chairman Christopher Cox fired.

"The chairman of the SEC serves at the appointment of the president and has betrayed the public's trust. If I were president today, I would fire him," McCain says...

"The primary regulator of Wall Street, the Securities and Exchange Commission (SEC) kept in place trading rules that let speculators and hedge funds turn our markets into a casino," McCain says."They allowed naked short selling -- which simply means that you can sell stock without ever owning it. They eliminated last year the uptick rule that has protected investors for 70 years. Speculators pounded the shares of even good companies into the ground."

...First, the president cannot fire an SEC chair. It's procedurally impossible. As ABC News reported, "[W]hile the president appoints and the Senate confirms the SEC chair, a commissioner of an independent regulatory commissions cannot be removed by the president." That seems like the kind of thing McCain ought to know before spouting off on the subject.

Second, the SEC did allow all kinds of short selling, but that's legal under the federal regulatory system that John McCain -- and his advisor, Phil Gramm -- helped put in place. After more than a quarter of a century in Congress, has McCain ever proposed changing these laws and imposing stricter regulations? No. Has he ever, before today, criticized Cox's oversight of existing trading rules? Not as far as I can tell.

Third, I'm not an expert, but I'm fairly certain short selling is not the underlying cause of the current crisis. The sub-prime mortgage fiasco and over-leveraged banks are. If McCain wants to make a case for firing Cox, he should at least get the cause right.

When did we start requiring the presidents to follow the law? Didn't that change eight years ago?

On the short-selling point, Barry Ritholtz is direct:

I don't have much of a problem with the uptick rule -- its pointless, and is easily worked around by hedge funds... And, I agree that rules against naked short-selling -- already illegal -- should be enforced.

But if you think the current economic, credit and financial problems are caused by shorting, you are simply a smoking too much dope.

Paul Kedrosky doesn't hold back either:

Fire the SEC's Chris Cox? Sure, Then Fire John McCain: Oh, now John McCain is suddenly swinging with both fists on capital markets? He just said he thinks SEC Chair Chris Cox should be fired because he allowed naked short-selling and that is driving the current crisis? Un-be-frickin-believable.

First, it is the height of irresponsibility for a politician to grandstand so clumsily when the market is as fragile as it is right now. It shows a remarkable lack of financial sophistication and market smarts on the part of John McCain, and I didn't have much confidence in either from him in the first place (and that does not make this an Obama endorsement, because he has done diddly to convince me he gets this either).

Second, this has nothing to do with naked short-selling. Repeat after me: The trouble is not with short-sellers. The trouble is not with short-sellers. The trouble is with an over-levered financial system built on a house of cards comprised of under-collateralized toxic paper that was applauded all the way up by "housing is the American dream" nutters who couldn't see that vast expansions in thinly-traded credit are a path to economic ruin. Focusing on the short-sellers will lead to completely wrong and counter-productive non-solutions to the current crisis.

Unbelievable. Truly.

And, continuing with Barry, there may be reasons to question SEC actions, but they are not the reasons McCain cites:

How SEC Regulatory Exemptions Helped Lead to Collapse, The Big Picture:

The losses incurred by Bear Stearns and other large broker-dealers were not caused by "rumors" or a "crisis of confidence," but rather by inadequate net capital and the lack of constraints on the incurring of debt.

--Lee Pickard, former director, SEC trading and markets division.

...As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years -- as well as the massive current unwind

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

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.

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. 

As Mr. Pickard points out that "The proof is in the pudding — three of the five broker-dealers have blown up."

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. ...

Chalk up another win for excess deregulation.

Of course, John McCain is no friend of deregulation, at least not today. Or is he? With so many flip-flops, and so much double-talk, I'm losing track.


Steve Benen ... erroneously claims that “the president cannot fire an SEC chair. It’s procedurally impossible.”

The question is not one of the Constitution, but rather one of statute. “The creation, composition, and powers of the SEC are found in the Securities Exchange Act of 1934. The commission consists of five members who are appointed by the President with the advice and consent of the Senate. The terms of the commissioners are staggered and the basic length of each term is five years. No more than three of the commissioners may be members of the same political party. The statute does not provide for a chairman. Until 1950, the Chairman was elected annually. Following Reorganization Plan No. 10 of 1950 (see, Reorganization Act of 1949, 5 U.S.C. §§ 901-913), the President designates the chairman. Pursuant to this Reorganization Plan, the chairman succeeded to most of the executive and administrative functions of the commission.” S.E.C. v. Blinder, Robinson & Co., Inc., 855 F.2d 677, 681 (10th Cir. 1988).

An email cautions that we should not accept Bainbridge's argument since one 10th Circuit case may be of questionable precedential value. I'll update as I find out more.

Okay, here's more - the McCain camp seems to believe it can only request that the SEC chair resign and hope the request is honored, the president cannot fire the SEC chair:

Wright asked McCain spokesman Tucker Bounds to explain how the Republican nominee would fire Cox if he were elected. "Not only is there historical precedent for SEC Chairs to be removed, the President of the United States always reserves the right to request the resignation of an appointee and maintain the customary expectation that it will be delivered," Bounds responded. Wright says the McCain camp pointed to the example of former SEC chairman Harvey Pitt, "who resigned in 2002 when it was made clear to him that he had lost the confidence of the Bush administration."

So either McCain was wrong earlier when he said that he could fire the chair, Bounds now says he doesn't have that power and can only request a resignation, or Bainbridge is correct and the McCain camp reversal - Bounds' attempt to clean up after McCain’s earlier statement - is wrong. But whichever way it turns out, the McCain reversal shows that they are confused about the president’s powers in this area. [It does appear that the use of the word "fire" was incorrect.]

    Posted by on Thursday, September 18, 2008 at 12:42 PM in Economics, Financial System, Regulation | Permalink  TrackBack (0)  Comments (50)


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