SEC's Cox Looks Back In Anger

No one seems to have liked that way SEC chief Christopher Cox handled his job during the financial crisis. Congress thought he should have done more to keep banks and investment houses from using tremendous leverage to make bets on paper like mortgage-backed securities. CEOs and banks wanted him to keep short sellers out of their stocks forever.

Looking back, the SEC may have spent too much time looking into stock option grants, digging around in the drawers of public company executives like Steve Jobs at Apple (AAPL).

Any fool can go over what the SEC, Treasury, and Federal Reserve have done during the last six months, or the years that proceeded them. If wishes were horses, all the beggars would ride. Analysts will be pinning blame on Cox, Greenspan, Paulson, and Bernanke for decades.

One of the actions Cox took which he now seems to regret is banning short selling for a number of financial stocks. According to Reuters, "While the actual effects of this temporary action will not be fully understood for many more months, if not years, knowing what we know now, I believe on balance the commission would not do it again," Cox said in an interview. "The costs appear to outweigh the benefits."

The heads of Morgan Stanley (MS) and Citigroup (C) may believe that the ban saved their companies. The opposite may be true. Morgan would argue that short sellers drove the price of its stock so low that Japanese bank Mitsubishi UFJ Financial Group might have walked away from its promise to buy part of the investment house. With the panic in the market in early October, it is just as likely that the deal for MUFJ to put up $9 billion for 21% of MS only closed because of revised terms brought on by the falling price of Morgan’s shares. The transaction became more affordable for the Japanese company.

Citigroup’s shares dropped to $3.05 in early November. Would short sellers have taken it lower? Maybe. But, the government did decide Citi was too big to fail. When the Treasury and the FDIC agreed to provide protection against the possibility of huge losses on a Citi asset pool of approximately $306 billion of loans and securities backed in part by residential real estate, the value of the bank’s stock was academic. Citi was bailed out on favorable terms. Citi traded below $7 today. A ban on short selling and subsequent government assistance have not done much to improve investor confidence in the bank.

Cox may have fumbled almost every ball handed to him. But, the stock markets are still open. Most of the financial firms are still public or have become part of other banks. The government is on the hook for hundreds of billions of dollars.

The SEC chief will get a footnote in the history books. That’s the extent of it.

Douglas A. McIntyre