Risk & Compliance

Angry Cox Expects SEC to Grow, Not Die

The commission chairman defends himself and the agency against Wall Street Journal criticism of its role in the Bear Stearns crisis.
Roy HarrisJune 26, 2008

Rarely in its 74-year history has the Securities and Exchange Commission been so squarely on the griddle, with new reforms seeming to target its very existence and Chairman Christopher Cox personally being criticized as “peripheral,” in the words of a critical Monday profile on the Wall Street Journal’s front page.

Cox has said little publicly about the criticism, much of which relates to his and the SEC’s role in dealing with the collapse of Bear Stearns and its later bailout managed by the Fed. But in internal memos made available to CFO.com, the chairman clearly seems to be simmering close to the boiling point.

In a 17-paragraph memo to the entire SEC staff that started with a note that he was “very disappointed” by the Journal story, Cox defended the SEC’s role in dealing with Bear as “one of a high degree of inter-agency cooperation.” And he noted that the SEC’s position in the case of the bailout was legally limited because the agency could not be “cast in the role of regulator of the merger and also potentially enforcer of the laws against fraud in connection with the transaction.”

The Journal also cited several comments that Cox had made earlier in the year about Bear Stearns’s financial position being strong. The story said that the SEC chairman defended those positions in the interview, saying it was a lack of confidence, rather than a lack of capital, that did in the investment bank. Asked by CFO.com about Cox’s earlier positions on Bear, SEC spokesman John Nester said that liquidity was not what did Bear in; rather, it was the short-term “sudden cessation of secured funding.”

A central point of dispute between Cox and the Journal’s account, however, related more to questions about the future of the SEC.

The newspaper story pictured Cox as having reacted weakly in an April 1 staff memo responding to a Treasury Department proposal that “called for dissolving the SEC and handing its Wall Street brief to another federal body.” Cox, according to the paper, told staffers the Treasury report was a “think piece,” and said they should “make up their own minds about whether it would lead to the SEC’s elimination.”

That April Cox memo, in response to Treasury Secretary Henry Paulson’s “Blueprint for a Modernized Financial Regulatory Structure,” was also made available to CFO.com. Far from eliminating the SEC, Cox wrote that he believed the blueprint “would significantly expand the role and responsibilities” of the commission.

His April memo continued: “Yet some press reports (notably a piece in yesterday’s Wall St. Journal) have characterized the proposed changes as an ‘elimination’ of the agency. Read the Blueprint yourself and make up your own mind; but most importantly, view it as a provocative think piece, not an actionable plan for legislative action.”

Cox, a 17-year Republican veteran of Congress and chairman of several committees, said that congressional committees and “the next President will soberly consider all of these issues, while taking deadly seriously their responsibilities to investors, the markets, and the public. And I am just as confident that in any modernization they might eventually undertake, they will keep inviolable the gold standard for investors that you and the SEC have set over the last 74 years.”

In his latest SEC staff memo, criticizing the Journal, he said, “Among the many problems with the [Monday] story, there is one inaccuracy that particularly troubles me.” He then described his position on the question of whether the SEC was marked for elimination, as expressed in the April memo.

The Washington, D.C.-based Journal reporter who interviewed Cox for the story, Kara Scannell, and the story’s New York-based co-author, Susanne Craig, referred CFO.com to a spokesman for comment. The spokesman said that the paper stood by its story.

Cox also appeared in the latest memo to be upset that the newspaper pictured him and the agency as weak during a crisis like Bear Stearns’s when strength was needed. The article pictured him as absent for key conference calls, attending a birthday party while Fed and Treasury officials were hammering out Bear’s bailout, and as later leaving town for a family vacation.

SEC spokesman Nester, while not commenting on Cox’s personal activities at the time, said that negotiating the bailout was not the SEC’s role. “It would be both inappropriate and unprecedented for the SEC to negotiate a commercial transaction and then pass judgment on it,” he said. Nester also would not comment on whether a direct response to the Journal was being prepared by the agency or by Cox.

In this week’s memo, Cox put it this way: “With the Fed assuming the role of liquidity provider…the SEC immediately was cast in the role of regulator of the merger and also potentially enforcer of the law against fraud in connection with the transaction. The Fed took the lead on this once it became fundamentally a question of funding a transaction by the end of the weekend. The SEC executed swiftly and professionally to support the Fed lending.”

Indeed, Cox said in the memo, “I believe that the U.S. handling of Bear was a model of cooperation among the Fed, the Treasury, and the SEC. Bear’s acquisition was financed exceptionally quickly with the SEC agreeing to smartly execute the necessary SEC regulatory approvals. Had we attempted simultaneously to lead the transactional negotiations, the deal might not have closed in time.”

Cox added: “This work involves just about every Division and Office of the SEC. You can be proud of this effort. I know I am.”