April 9, 2010
I have no specific comments on the proposed rulemaking until I have had a chance to study it, but I have a comment on the broader situation.
This rulemaking is a perfect example of the Commission's working hard to clean up a mess after it successfully slept through the creation of the mess. The problems attendant to securitization, including the securitization of sub-prime mortgages, have been well known for more than a dozen years, at least. Back in the mid-1990s, there was a mini-boom on Wall Street of sub-prime mortgage originators, who securitized their loans through the same Wall Street firms that engorged themselves on the same paper ten years later and now are claiming that no one knew the risks. Huge losses were taken both by the shareholders of the sub-prime mortgage originators and by the investors in securitizations. The SEC did its part by permitting gain-on-sale accounting the mortgage companies, which allowed the originators to book as income what their aggressive models said they would receive on the residuals (the toxic last tranche) if the loss curves and pre-payment assumptions proved correct. Was any action taken to remedy the situation? Of course not.
The Commissioners need to be realistic about the task before them. The Commission has largely failed to perform its essential role, that of ensuring that the securities markets operate for the benefit of investors. The problems go far deeper than Enforcement or enforcement. The Commissioners must develop a firm understand why, on issue after issue over the last 10-15 years, the regulatory side of the Commission has failed to take action, letting problems fester until they explode or are dealt with by others. It appears that the culture of the regulatory branches has been to look after the interests of the particular segments of the industry under their regulation and let Enforcement be the tough guys. Even if Enforcement operated at maximum fairness and effectiveness -- as opposed to devoting much of their resources to playing the numbers game and engaging in the vigorous squashing of ants -- this is a dangerous state of affairs.
I speak as a former Staff attorney at the Division of Enforcement and an observer of the Commission for almost 30 years thereafter.
There is a need for a new Wells Commission for the entire Commission.