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Wednesday, September 24, 2008

"Bad Apples" and the Financial Meltdown - Does the SEC Have a Role Absent Fraud?

Financial meltdowns often seem to lead media and regulators to look for illegal activity, which is why I was not surprised to read that the FBI is investigating Fannie Mae, Freddie Mac, Lehman and AIG for potential fraud.  (New York Times story here).  This focus on illegal activity has happened elsewhere - in the wake of rising gas prices, for instance, the CFTC investigated price manipulation and fraud.  And here an anonymous government official told the Times that it was "logical to assume" that these companies would be investigated, given the questions surrounding their collapse. 

Two thoughts on this.  First, the danger of focusing on "bad apples" is that it excuses us from rethinking the system and potential regulation.  To date, the focus seems to have been on systemic problems and on greed, without linking that to illegal behavior.  Let's not get distracted by the FBI.

Second, what are the roles of the various government actors?  The FBI's actions seem like a reasonable expression of its responsibilities, although I'm willing to be told differently.  But where is the SEC?  In the context of the recent collapses and bailouts, the SEC's announcement of a "sweeping investigation ... into possible market manipulation in the securities of certain financial institutions" seems besides the point.  As David Zaring points out in excellent posts here and here, the SEC is MIA.  Does this mark a shift from looking to lawyers for expertise to looking to economists?  Is the SEC like the FBI in that prosecution is its main tool?  The SEC has been examining and reporting on credit rating agencies, which could be a hook for SEC action.  Or maybe just the basis for another critique....

Posted by Verity Winship on September 24, 2008 at 05:00 PM in Corporate, Current Affairs | Permalink

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