A new government audit suggests the Securities and Exchange Commission (SEC) effectively dropped the ball in overseeing a voluntary program to keep an eye on the troubled Bear Stearns and other massive investment banks. Government auditors found "serious deficiencies" in SEC oversight of Bear Stearns prior to its collapse in March. The Inspector General of the SEC also found that in some cases, Bear Stearns did not comply "with the spirit" of the voluntary program designed to oversee it.
Leading up to its collapse, Bear Stearns was participating along with other major investment banks in a "voluntary" oversight program begun in 2004 designed to consolidate supervision. The idea was that voluntary regulation of these banks was the only way to effectively govern their behavior because of the peculiar complexity and their international structures.
In Bear Stearns' case, however, auditors found the company failed to comply with a number of the voluntary rules before its collapse, and that the SEC did little or nothing to pressure Bear Stearns into compliance.
The SEC also missed key warning signs of trouble, the report said. It cited "numerous potential red flags prior to Bear Stearns' collapse," and said the SEC "did not take actions to limit these risk factors."
SEC Chairman Christopher Cox responded to the report announcing the immediate end of the voluntary program. In a written statement, he said "The last six months have made it abundantly clear that voluntary regulation does not work." The voluntary "program was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily," Cox said.
Bear Stearns' collapse shook Wall Street. At one time, the 85-year old company was one of the largest investment banks in the United States. But heavy investing in the subprime mortgage market began to take a serious toll on the company in 2007. By the time its assets were taken over by JPMorgan Chase a year later, the company had lost more than 90% of its market value.
By Chris Scholl