How did Chris Cox wind up as the villain of the financial meltdown? He’s an unlikely candidate, given his limited role as the chairman of the Securities and Exchange Commission and the much chorus of more powerful clowns that populated the c-suites and regulatory offices when the Jenga-tower of modern finance was being built.
So why Cox?
The answer is: John McCain. McCain never liked Cox, who is a principled conservative. (Unlike McCain, who is a principled McCainiac.) He publicly called for Cox to be sacked, and only hours after the bailout bill was passed his campaign began to feed stories to journalists blaming Cox for our situation. What’s more, McCain’s campaign believes it needs scapegoat in government so that the public doesn’t just generally blame the Bush administration and Republicans, who controlled most branches of the government while the homeownership hysteria reigned.
Cox probably seemed especially vulnerable. Unlike Ben Bernanke and Hank Paulson, Cox seems to have little appetite for the pose of world-saviour . He hasn’t greatly expanded the powers of the bureaucracy under control. And what he has done—such as issuing short selling bans—has been rather small bore stuff. The wolves could probably sense he was the weakest member of the herd. So we have the strange spectacle of a longtime Republican lawmaker running for president blaming the financial mess on a longtime Republican lawmaker who runs the SEC.
What’s really strange about the immediate case against Cox is that Exhibit A was the decision to allow broker-dealers with at least $5 billion of capital to change the way they calculate their debt to net capital ratio. This effectively doubled the amount of leverage that the broker-dealers could use, with obviously disastrous effects.
Three points need to be raised here. First, Cox wasn’t chairman in 2004. William H. Donaldson, a veteran Wall Street executive, was.
Second, the SEC isn’t in the business of saving investment banks from their own folly. Until recently, no branch of government was charged with that duty. The SEC is supposed to protect investors and market integrity. That’s a lesson we’ve learned hard and one we might regret now—but back when we were under the illusion that we enjoyed something like a free market in these United States it was an orthodox article of faith.
Third, Cox may not have repealed the rule but he was hardly alone on this. The SEC commissioners voted for the new rule. Perhaps more strikingly, it was favoured by a gentleman named Henry Paulson Jr., then head of Goldman Sachs and now head of the increasingly powerful U.S. Treasury Department.
“In addition, we and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm,” Paulson told the SEC back in 2000.
Translation: Let us lever up and we’ll all be rich. If you don’t, all our business will flee offshore.” Which, actually, is strikingly similiar to Paulson’s current message: give us what we want, or face certain doom.
In the final analysis, we suppose one villian from Washington, DC is as good as any other on the grounds that each politician is pretty much as bad as all the others.