Page 183 - untitled


 F FINANCIAL CRISIS INQUIRY COMMISSION REPORTINANCIAL CRISIS INQUIRY COMMISSION REPORT

that suggests that the program was not solely responsible for the changes.  In ,
Sirri noted that under the CSE program the investment banks’ net capital levels “re-
mained relatively stable . . . and, in some cases, increased significantly” over the pro-
gram.  Still, Goldschmid, who left the SEC in , argued that the SEC had the
power to do more to rein in the investment banks. He insisted, “There was much
more than enough moral suasion and kind of practical power that was involved. . . .
The SEC has the practical ability to do a lot if it uses its power.” 
Overall, the CSE program was widely viewed as a failure. From  until the fi-
nancial crisis, all five investment banks continued their spectacular growth, relying
heavily on short-term funding. Former SEC chairman Christopher Cox called the
CSE supervisory program “fundamentally flawed from the beginning.”  Mary
Schapiro, the current SEC chairman, concluded that the program “was not successful
in providing prudential supervision.”  And, as we will see in the chapters ahead, the
SEC’s inspector general would be quite critical, too. In September , in the midst
of the financial crisis, the CSE program was discontinued after all five of the largest
independent investment banks had either closed down (Lehman Brothers), merged
into other entities (Bear Stearns and Merrill Lynch), or converted to bank holding
companies to be supervised by the Federal Reserve (Goldman Sachs and Morgan
Stanley).
For the Fed, there would be a certain irony in that last development concerning
Goldman and Morgan Stanley. Fed officials had seen their agency’s regulatory
purview shrinking over the course of the decade, as JP Morgan switched the charter
of its banking subsidiary to the OCC  and as the OTS and SEC promoted their al-
ternatives for consolidated supervision. “The OTS and SEC were very aggressive in
trying to promote themselves as a regulator in that environment and wanted to be the
consolidated supervisor . . . to meet the requirements in Europe for a consolidated
supervisor,” said Mark Olson, a Fed governor from  to . “There was a lot of
competitiveness among the regulators.”  In January , Fed staff had prepared an
internal study to find out why none of the investment banks had chosen the Fed as its
consolidated supervisor. The staff interviewed five firms that already were supervised
by the Fed and four that had chosen the SEC. According to the report, the biggest
reason firms opted not to be supervised by the Fed was the “comprehensiveness” of
the Fed’s supervisory approach, “particularly when compared to alternatives such as
Office of Thrift Supervision (OTS) or Securities & Exchange Commission (SEC)
holding company supervision.” 