September 19, 2008

McCain vs. Cox

Yesterday, Senator John McCain stated that he would fire SEC Chairman Cox if he were President. In response, Cox issued this press release in his defense.

Both of these actions are breathtaking. McCain obviously is looking for a scapegoat in his efforts to win the Presidency. And Cox looks wildly paranoid – and stooping low to engage in politics when he is supposed to be managing an independent federal agency in the midst of the biggest financial crisis of our lifetime.

I’ve blogged over six years and haven’t blogged a single item that could be considered partisan politics. But with McCain’s unbelievable flip-flopping of late, I can’t help it. I guess that means next week McCain will say that Cox will be named Treasurer if he gets elected. On Wednesday, McCain was saying that the government should let AIG fail – but by Thursday, he was touting the opposite (see this video).

Meanwhile, Paulson continues to socialize our economy. The US Treasury just set aside $50 billion to guarantee money market funds (see this press release). I could sit here and blog all day about the unbelievable string of events this week – by the end of next week, it looks likely that our entire financial system will be completely revamped before our very eyes. I’m sure glad people are taking their time to debate the course of action and closely consider all the long-term ramifications of these actions…

I do believe Cox could have done a whole lot more during this financial crisis – for starters, he should have been on the bully pulpit trying to maintain calm. I’m not the only one who thinks more could have been done: check out this blog that criticizes Cox for demoralizing the Enforcement staff – and listen to this story from Chicago public radio’s This American Life called “Now You SEC Me, Now You Don’t,” which talks about how noticeably absent SEC Chair Cox has been in the midst of the meltdown. This podcast is just free for this week – and the story starts at 36 minutes into the program. Minute 54 is particularly amusing.

Parsing the SEC’s Authority to Adopt Its Short-Selling Emergency Order

Yesterday, I noted in passing that Professor Jay Brown had analyzed in his “Race to the Bottom” blog, whether the SEC’s emergency order violates the Administrative Procedures Act.

Jack Katz, the SEC’s long-time former Secretary, saw that and noted there was something weird at first glance. Under Section 12(k)(2)(C), when the SEC takes emergency action, it’s exempt from the APA, including the Section 553 notice and comment period as well as the 30-day waiting period for effectiveness. However, the SEC’s press release explicitly says that the action is taken under the APA. In comparison, the SEC’s emergency order is silent on the APA.

For example, under the APA, a federal agency can skip both the notice and comment period and 30-day waiting period for effectiveness if it makes a finding that the action is unnecessary, impracticable or contrary to the public interest (for notice and comment) and a finding of good cause (30-day period for effectiveness). You may recall that the December 2006 executive compensation amendments were adopted under that standard as interim final rules.

I think the discrepancy can be explained – there likely was a shift in the SEC’s thinking between the time of issuance of the press release and the later issuance of the emergency order, when the SEC decided to issue its new rules in the form of an emergency order from interim final rules, probably due to the fact that they just didn’t have the time to crank out a full-blown release. The whole thing happened very quickly.

By the way, the SEC just banned all short selling in financial companies, similar to what the United Kingdom did yesterday.

The SEC’s Investor Education Efforts During the Crisis: Ummmm

On Tuesday – the day that AIG was being bought by the government and the world felt like it was ending – the SEC retooled its home page to provide much more information directed towards the retail investor. I got excited because I had already fielded four calls from my mom and several of her friends about the annuities they had bought from AIG. Naturally, they were freaking out. A quick search online showed that the same question was being asked by millions around the country. No surprise there.

So what does the SEC do? It devotes the top half of its home page to market its “3rd Annual Senior Summit,” an event to help seniors spot fraud (note that on Wednesday, nearly half of the SEC’s home page was devoted to this summit; now, it’s much less but it still is the top item). Normally that wouldn’t even give me pause. I wondered to myself – this is what the SEC focuses on in the face of the gravest financial crisis of our lifetime?

But wait, maybe I’m saved as I spot this link on the right side of the home page: “What to Know About Equity-Indexed Annuities.” You can read it for yourself to see if it would truly answer the types of questions being asked by those in distress right now. I guess this is what they mean by deregulation.

– Broc Romanek