SEC Audit Report on Bear Stearns

At the beginning of this week, the SEC released two reports of its Inspector General on the Bear Stearns failure and more generally the SEC’s supervision of the broker dealers. I am quite disappointed about this report which I approached with high expectations. This was a report requested by the US congress and the Inspector General had retained the services of one of the world’s leading authorities on market microstructure as an outside expert. The redactions in this report are not very large and I do not believe that the unredacted report would contain anything more useful.

The critical question in the SEC’s supervision of the broker dealers relates to the capital and liquidity regulations. On this the audit report states:

Bear Stearns was compliant with the CSE program’s capital and liquidity requirements; however, its collapse raises questions about the adequacy of these requirements;

One expects an audit report to go beyond such an inane statement.

I read the audit report once again in the light of the management response by the SEC’s Division of Trading and Markets. I found myself agreeing more with the management response than with the audit report.

I remember being quite critical of the UK FSA’s internal audit report on Northern Rock, but today I must confess that the FSA report was definitely superior to this SEC report. We are reconciled to regulators being reactive rather than proactive, but if a regulator cannot do even a proper post mortem, then it is a matter of serious concern.

Posted at 1:41 pm IST on Sat, 4 Oct 2008         permanent link

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