'I Think the SEC Was Distracted'

Outgoing Securities and Exchange Commissioner Paul Atkins talks about bailouts, hedge funds, and what he thinks the SEC should have been regulating.

Nick Gillespie & Matt Welch from the March 2009 issue

(Page 2 of 3)

Atkins: Oh, yeah. In fact, I was one of the ones who was calling for just this sort of transparency with these particular types of securities, going back now two years or more.

Part of the problem was that with a lot of these types of instruments, you have a lot of trading of them. They’re negotiable securities or contracts, basically,and so there are novations of these contracts, which means that you have two parties at the beginning who have agreed to do a swap or whatever it is and then one party decides to lay off that risk on somebody else who’s interested in taking it up. And so as this goes through a chain of numerous novations, sometimes the original parties aren’t quite sure who is the ultimate one on the other side.

reason: You were in favor of this clearinghouse regulation for a couple of years, but at the same time you were against the previous chairman’s regulation approach toward hedge funds. What were you objecting to and what were you supporting?

Atkins: I think that’s really the nub of the whole problem here. I think the problem was during the crucial time when these collateralized debt obligations and other types of instruments really built up, when you look at it, it’s almost like a hockey stick. They had been rocking along for a while, and then suddenly there’s a real market increase.

We were coming out of the post-9/11 recession, and that was right after the whole technology bubble burst. And so in about ’03 and ’04, things are starting to pick up, and new financial products are coming out—a lot of these collateralized debt obligations, collateralized mortgage obligations, those sorts of things. During this time, unfortunately, I think the SEC was distracted because of policy decisions that were made by the then-chairman—

reason: William Donaldson?

Atkins: Right. Looking at trying to force hedge funds to register as investment advisers. That rule was pushed through, but a court nullified that because it found that the SEC didn’t have the jurisdiction to do it. Congress had spoken years before and said, no, you can’t do it that way, and so there was a lot of effort spent by the staff to try to come up with that rule.

reason: What was the motivation for it?

Atkins: There was an attitude of, well, we didn’t know who hedge funds were, and that there ought to be some sort of examination of them. My objection to that was we could work with other government agencies to find out if we need a census. The CFTC [Commodity Futures Trading Commission] and others had other sorts of registration of hedge funds. We could have teamed with the CFTC, the Treasury and the Fed and others, and my fear was that it was going to dilute the resources of the SEC to try to look at hedge funds where we hadn’t really seen any problems before.

The people who invest in hedge funds are sophisticated investors; it’s not retail investors like in mutual funds, so it sort of went against what the whole SEC’s examination program was predicated on. And in fact, as we’ve seen, it’s not been the hedge funds that were the problem here. In fact, the hedge funds were the ones who provided liquidity throughout a lot of this crisis. It was the registered entities that were really the most heavily regulated institutions, the banks and the brokerage houses, where a lot of the problems were.

reason: So what did the SEC do wrong? It was spending time trying to register hedge funds. What should it have been doing?

Atkins: Well, that was only one aspect. There was a series of rules pushed through on very divisive votes, 3-to-2 votes, because there was basically no cost-benefit analysis done as to how should you effectively spend your resources and whether there really is even a problem that would be solved by that. One was the hedge fund registration issue.

Second, there was a rule that said that every mutual fund in the country would have had to have a nonexecutive chairman of the board and a 75 percent independent board. Again, there was no correlation between the threat to investors and that particular governance rule. Again, huge distraction. The courts threw that rule out, not once but twice.

The third and worst I would say was a “national market system,” so called, rule, which foisted on the securities trading markets and investment banks at that time a very costly re-do of their technology to the tune of well over $1 billion. The industry paid to try to develop a solution that was, I’d say, in search of a problem, to prevent what’s called “trade-throughs” [trades at below-market rates] in the marketplace. The facts show that there really were no trade-throughs, so this was a very expensive fix to a nonexistent problem.

These were huge distractions and huge costs right at a time when a lot of these other instruments that turned out to be the ones that were going to blow up needed to be focused upon.

Comments

|2.10.09 @ 12:06PM|#

I realize H&R is the All-Stimulus-All-the-Time blog now, but we might pause the "Oh shit, Socialism!"-fest to notice that Hopey McChange's administration is asserting the same state secrets privilege Bush's did to fend off extraordinary rendition lawsuits.

|2.10.09 @ 12:17PM|#

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|2.10.09 @ 12:18PM|#

raj | February 10, 2009, 12:17pm

Threadwinner.

|2.10.09 @ 12:22PM|#

Helping out Eric with threadjack, Panetta asserted during his confirmation hearing that the Obama approach to rendition would be to obtain assurances from the receiving government that the prisoner would not be tortured.

Oddly, this is exactly what the Bush administration did.

|2.10.09 @ 12:23PM|#

Oops, clicked too soon.

It would appear, then, that Obama represents no hope and change on issues like rendition, while fulfilling our direst predictions on taking the country hard left on issues of government control of the economy.

|2.10.09 @ 12:23PM|#

[Engages in primal yell, similar to Kirk's expression of displeasure towards Khan.]

Fade to Gray|2.10.09 @ 12:27PM|#

"Oddly, this is exactly what the Bush administration did."

True, but Bush did it with a malicious heart. Obama does it with love.

|2.10.09 @ 12:32PM|#

There's not a backbone left in DC, is there? It's going to be just like the last Democratic administration--bitch about the preceding GOP presidency, then do the same stuff or worse to avoid appearing "weak." Obama won't make radical changes in the WoT because he's afraid that he'll be toast if any terror attacks happen even arguably due to any such changes. I don't see why he bothers--he's already broadcasting "One Termer" on all frequencies--why not make the most of the situation? Oh, right, the only important thing is to ensure passage of this stupid non-stimulus bill.

Spoonman|2.10.09 @ 12:59PM|#

Helping out Eric with threadjack, Panetta asserted during his confirmation hearing that the Obama approach to rendition would be to obtain assurances from the receiving government that the prisoner would not be tortured.

Surprise, cockfags!

robc|2.10.09 @ 1:20PM|#

Three years later hedge funds have imploded

I thought hedge funds had exploded. At least the ones that hedged housing/banks/the market as a whole/etc.

|2.10.09 @ 1:22PM|#

"Implosion" is the new "explosion," rob. Didn't you get the memo?

VM|2.10.09 @ 2:09PM|#

ProGlib @ 12:32

+11

between that and "OBAAAAAAAAAAAAAAAAAAAMAAAAA", he summed it up perfectly...

Alan Vanneman|2.10.09 @ 2:10PM|#

Um, wasn't this post supposed to be about Paul Akins? I wanted to note that it's funny that this "fierce libertarian's" main complaint about the Bush folks is that they didn't bail out Lehman Brothers. Moral hazard, anyone? Funny that libertarians on Wall Street sound so much like, well, Paul Krugman with a shave.

As for Obama and state secrecy, I wasn't expecting much, so I thought, but I was expecting a lot more than this. Does the CIA have video of him giving Bill Clinton a Lewinsky? And I gave money to the guy! Stone me now! (But not too hard. McCain, after all, would have been worse. But not by much.)

Reason sucks|2.10.09 @ 2:26PM|#

Fuck reason, and fuck its evil anti-liberty benefactors. You motherfuckers are on the List.

|2.10.09 @ 3:09PM|#

It would appear, then, that Obama represents no hope and change on issues like rendition, while fulfilling our direst predictions on taking the country hard left on issues of government control of the economy.

I hope you didn't chafe anything while posting that, Dean.

The likes of Bush and McCain have already taken us "hard left".

|2.10.09 @ 3:19PM|#

Thank you, VM. My anger is righteous and not founded in disappointment, for I expected little from Obama. Or from McCain, for that matter.

I will say this. I feel for the libertarians who risked all to believe in the Obama miracle. It's okay, after Bush such delusions are forgivable. Please, a table is open near the window, where indignation and rejection of the major parties is not only permitted, but encouraged. Welcome back to the limited government fold.

|2.10.09 @ 3:25PM|#

The likes of Bush and McCain have already taken us "hard left".

Naw, I would say they were more in the "drifting left" category on economic/regulatory state issues. Obama appears to be in the process of cranking the steering wheel over and mashing the gas pedal.

|2.10.09 @ 3:28PM|#

Who can doubt that phase II (probably next year, or just after the 2010 midterms) will be a sudden, critical, must-hold-off-a-catastrophe need for higher taxes to carry all this new debt and radically increased baseline spending.

It'll be the old "fiscal responsibility" racket, conveniently forgotten for spending bills, but resurrected for taxing bills.

|2.10.09 @ 3:28PM|#

I feel for the libertarians who risked all to believe in the Obama miracle.

Me, too. Mostly what I feel for them is contempt, though.

|2.10.09 @ 3:47PM|#

Naw, I would say they were more in the "drifting left" category on economic/regulatory state issues.

Yes, you would give that line. That's how folks know you're not actually a libertarian.

|2.10.09 @ 4:31PM|#

That's how folks know you're not actually a libertarian.

(1) Och, mate, I think you min to seh "nawt a TREW libertarian."

(2) DRINK! (like you needed an excuse today).

|2.10.09 @ 5:28PM|#

you min to seh "nawt a TREW libertarian.

Get your mouth off from around the GOP's collective dick, and it'll be easier to talk.

|2.10.09 @ 6:15PM|#

Nice, Eric.

Do us a favor, and find the last post I wrote that said nice things about the Republicans.

Although I will admit that I have a really hard time capturing a Scottish accent in pixels.

|2.10.09 @ 7:47PM|#

Bite me, Dean. You've been around here for a long time, and you're no more a libertarian than Glenn Reynolds and Eric Dondero are. You're also beneath my future notice.

|2.11.09 @ 12:03AM|#

With all due respect, Mr. Atkins is wrong about the SEC's attempt to regulate hedge funds. First they should have been regulated because their leverage posed a systemic risk as well a san investor risk, as demonstrated back in 1998 by th efailuire of Long Term Capital Management. Second,the court of appeals decision striking down the SEC rule was based on the fallacy that general partners of llimited partnerships do not owe fiducitary duties to llimited partners. The court cited no authority for that proposition and it is contrary to state likmited partnership statutes . The SEC should have appealed the ruling to the Suprme Court but did not do so. It was a clear case for reversal . t the decisionj not to appeal was political and ideological, and has proved to have been most unwise.