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F FINANCIAL CRISIS INQUIRY COMMISSION REPORTINANCIAL CRISIS INQUIRY COMMISSION REPORT
securities and derivatives. All in all, the SEC estimated that the proposed new re-
liance on proprietary VaR models would allow broker-dealers to reduce average cap-
ital charges by . The firms would be required to give the SEC an early-warning
notice if their tentative net capital (net capital minus hard-to-sell assets) fell below
billion at any time.
Meanwhile, the OTS was already supervising the thrifts owned by several securi-
ties firms and argued that it therefore was the natural supervisor of their holding
companies. In a letter to the SEC, the OTS was harshly critical of the agency’s pro-
posal, which it said had “the potential to duplicate or conflict with OTS’s supervisory
responsibilities” over savings and loan holding companies that would also be CSEs.
The OTS argued that the SEC was interfering with the intentions of Congress, which,
in the Gramm-Leach-Bliley Act, “carefully kept the responsibility for supervision of
the holding company itself with the OTS or the Federal Reserve Board, depending
upon whether the holding company was a [thrift holding company] or a bank hold-
ing company. This was in recognition of the expertise developed over the years by
these regulators in evaluating the risks posed to depository institutions and the fed-
eral deposit insurance funds by depository institution holding companies and their
affiliates.” The OTS declared: “We believe that the SEC’s proposed assertion of au-
thority over [savings and loan holding companies] is unfounded and could pose sig-
nificant risks to these entities, their insured deposit institution subsidiaries and the
federal deposit insurance funds.”
In contrast, the response from the financial services industry to the SEC proposal
was overwhelmingly positive, particularly with regard to the alternative net capital
computation. Lehman Brothers, for example, wrote that it “applauds and supports
the Commission.” JP Morgan was supportive of what it saw as an improvement over
the old net capital rule that still governed securities subsidiaries of the commercial
banks: “The existing capital rule overstates the amount of capital a broker-dealer
needs,” the company wrote. Deutsche Bank found it to be “a great stride towards con-
sistency with modern comprehensive risk management practices.” In FCIC inter-
views, SEC officials and executives at the investment banks stated that the firms
preferred the SEC because it was more familiar with their core securities-related
businesses.
In an April meeting, SEC commissioners voted to adopt the CSE program
and the new net capital calculations that went along with it. Over the following year
and a half, the five largest investment banks volunteered for this supervision, al-
though Merrill’s and Lehman’s thrifts continued to be supervised by the OTS. Several
firms delayed entry to the program in order to develop systems that could measure
their exposures to market price movements.
Harvey Goldschmid, SEC commissioner from to , told FCIC staff that
before the CSE program was created, SEC staff members were concerned about how
little authority they had over the Wall Street firms, including their hedge funds and
overseas subsidiaries. Once the CSE program was in place, the SEC had “the author-
ity to look at everything.” SEC commissioners discussed at the time the risks they
were taking by allowing firms to reduce their capital. “If anything goes wrong it’s go-
