The nickname “Dr. No” has been applied to more than former presidential candidate Ron Paul and a certain James Bond villain. In 2005 that’s what Business Week called Paul Atkins, then halfway through his six-year stint on the Securities and Exchange Commission (SEC). This “fierce libertarian,” the magazine warned in its headline, “is slowing some key reforms” of hedge funds.
Three years later hedge funds have imploded, toxic mortgage-backed securities have brought financial giants to their knees, the economy is officially in recession, and Washington is in the early stages of what is already the largest economic bailout in U.S. history. How does Atkins plead? Guilty—of focusing on market transparency via a clearinghouse to track over-the-counter trades, while previous SEC Chairman William Donaldson was busy joining forces with the board’s two Democrats to pursue such distractions as forcing hedge funds to register as investment advisers. The SEC missed several crucial opportunities before the crisis hit, Atkins says, and partly as a result the federal government is throwing unprecedented amounts of money into the financial system. The commission, meanwhile, is being condemned as hopelessly, dangerously out of touch.
A graduate of Vanderbilt Law School, Atkins shuttled back and forth between corporate law and the government for most of his career, including a stint at the SEC from 1990 to 1994, serving on the staffs of former chairmen Richard Breeden and Arthur Levitt. His time on the commission board lasted from July 2002, when he was appointed to fill out the final months of Levitt’s five-year term, to June 2008.
“I would describe myself as having faith in the free markets,” he says. “To compare a few people in government making decisions based on limited information to millions and millions of people making decisions every second with their own hard-earned money, there’s just no comparison there.” Nonetheless, Atkins has supported federal intervention in managing a sale of the investment bank Bear Stearns and forestalling bankruptcies across the financial industry, on the grounds that the interconnectedness of global capital markets, combined with the complexity of securitized over-the-counter instruments, has created conditions in which the liquidation of companies such as Lehman Brothers can cause widespread bank runs and do lasting damage to the financial system.
Editor in Chief Matt Welch and reason.tv Editor Nick Gillespie spoke with Atkins in early December about the ongoing economic crisis. A video from this conversation can be seen at here.
reason: Earlier this year, you were explaining why it was good for the government to get involved with the Bear Stearns renegotiation. Looking back right now, do you still agree with that assessment, and what do you think of the bailouts that have rolled out since then?
Paul Atkins: We’ve been through a lot, obviously, over the past year. As far as whether it’s good or not to have gotten involved in the Bear Stearns thing the way it happened, leave that for the history books. But as far as not allowing Bear Stearns to go into a completely unstructured bankruptcy, I think that was the right motivation, because we saw with Lehman Brothers what exactly happened to the—
reason: So should Lehman Brothers have been bailed out or had a kind of government-brokered deal?
Atkins: Well, first of all, I don’t think Bear Stearns was bailed out.
reason: Explain the distinction.
Atkins: Well, there the shareholders got pretty much wiped out.
Lehman Brothers basically just failed, went bankrupt, and, of course, that then triggered a lot of the things that a number of us had been afraid of. Which was the seizing up of the credit markets: A lot of hedge funds and other clients of Lehman Brothers suddenly found themselves frozen, mainly in U.K. courts, as far as trying to get access to their capital that was being held by Lehman Brothers.
reason: What is the simplest way of talking about the root of the economic crisis in the financial sector? And how bad is it?
Atkins: The nut of the crisis, I think, still is lack of confidence: lack of confidence in what financial institutions hold and what the value is of the assets that they hold. That then translated into other financing type of functions for normal corporations, the commercial paper market and things like that. So underlying all of this is investors wondering just what it is that people have. These instruments had gotten very complex. Once people started questioning those, then they started questioning other categories of financial assets, and so that’s what created the underlying crisis of confidence.
reason: You were a big skeptic of hedge fund regulation, in particular, for the duration of your term. There’s a critique saying that the SEC or someone should have mandated a clearinghouse, for example, for credit default swaps and mortgage-backed securities, just so we know what people hold. Do you think that’s true in retrospect?