The credit crisis shows regulatory gaps need to be closed on credit default swaps and investment bank supervision, the chairman of the U.S. Securities and Exchange Commission said on Thursday.
“The lessons of the credit crisis all point to the need for strong and effective regulation, but without major holes and gaps,” Christopher Cox told the House of Representatives Oversight and Government Reform Committee.
Cox also said he “strongly” supported a merger between his agency and the Commodity Futures Trading Commission.
SEC Chairman Christopher Cox said a select committee on financial services regulatory reform should be appointed and should explore the merger of the two agencies.
“It could tackle the challenge of merging the SEC and the CFTC, which I strongly support,” Cox said. “This would bring futures within the same general framework that currently governs economically similar securities.”
But Cox’s pleas for more regulation did not satisfy some lawmakers who said he and other regulators should have done more to prevent the current financial turmoil.
“Where have you been all these years?” said Rep. Elijah Cummings, a Democrat from Maryland.
Committee Chairman Henry Waxman said he agreed with many of Cox’s suggestions, but said either Cox didn’t see any of the warning signs or was blinded by ideology. “The reality is Mr. Cox you weren’t doing that job,” said Waxman, a California Democrat.
Cox, who has headed the SEC since August of 2005, reiterated pleas to give the SEC authority to regulate the fast-growing $55 trillion credit default swap market, which has been blamed for exacerbating the financial meltdown.
Used to insure against bond default risk, swaps are so large and their terms are so poorly understood that they played a key role in freezing up the credit markets.
He said split legislative jurisdictions for the SEC and CFTC have created gaps among financial regulation, especially in the swaps market. “This long-running turf battle is one of the reasons that credit default swaps aren’t regulated,” he said.
Cox also urged Congress to assign a regulator to supervise investment bank holding companies, a business model that has largely disappeared in a brutal Wall Street shakeout.
“It was a fateful mistake in the Gramm-Leach-Bliley Act that neither the SEC nor any regulator was given the statutory authority to regulate investment bank holding companies other than on a voluntary basis,” Cox said. The 1999 act deregulated the banking industry.
The SEC ended its voluntary program to supervise the five largest investment banks earlier this year after Lehman Brothers Holdings Inc. filed for bankruptcy, Bear Stearns was sold to JPMorgan Chase & Co., Merrill Lynch & Co. Inc. was acquired by Bank of America Corp. and Goldman Sachs Group Inc. and Morgan Stanley reorganized into bank holding companies.
Cox said he would have done a number of things differently, knowing what he knows now, including working with Congress to close regulatory gaps in credit default swap oversight.
Cox said he would have wanted to question every one of the assumptions behind SEC’s investment bank supervisory program and said he would have worked even more aggressively for legislation requiring stronger disclosure to investors in municipal securities.
Cox suggested that Congress set up a committee on financial services regulatory reform that would cut across the existing jurisdictional boundaries.
Currently banking, insurance and securities fall under the purview of the banking and financial services committees in the Senate and the House. The agriculture committees have jurisdiction over futures.
“This jurisdictional split threatens to forever stand in the way of rationalizing the regulation of these products and markets,” Cox said.
(Additional reporting by Kim Dixon and Karey Wutkowski; Editing by Brian Moss and Tim Dobbyn)