TEXT OF INTERVIEW
Kai Ryssdal: Fitch Ratings gave Merrill Lynch a poke in the eye today. Said it might cut the investment bank’s debt rating in the face of continuing subprime losses. Interestingly enough, it said the other big Wall Street banks seem to be doing just fine.
Fitch and its competitors Standard & Poor’s and Moody’s have gotten a good part of the blame for the ongoing credit squeeze, not least from the Securities and Exchange Commission.
Christopher Cox is the Chairman of the SEC.
Mr. Cox, welcome to the program.
Christopher Cox: Well, I’m happy to join you.
Ryssdal: I’d like to get your thoughts, sir, on the report you released yesterday about credit rating agencies and their role in the subprime collapse. Were you surprised at all at how lightly those agencies seemed to be taking their responsibilities?
Cox: Well, certainly disappointed. What we discovered, as you now know because this report is public, is that there were serious shortcomings at these firms in the management of conflicts of interest, in the adequacy of their disclosures and in their ability to police abusive behavior in their rating practices, so the very extensive and elaborate new rules that the SEC has proposed to change this from a completely unregulated to now a completely regulated industry I think are well-justified and much needed.
Ryssdal: Let’s talk about some of those rules for a second. The Chairman of the Federal Reserve Ben Bernanke said yesterday that he’s made it pretty clear, he’d like the Fed to have more power in regulating some parts of the financial industry. Would you say the same thing for the Securities and Exchange Commission? Do you want more authority?
Cox: I think that’s exactly right. Both the SEC and the Fed are filling a greater regulatory space now that the credit crunch and the subprime crisis and the market turmoil attending it have laid bare some of the regulatory gaps. The SEC’s going to be looking for the first time at information on bank holding companies that have broker-dealer subsidiaries and the Fed is going to be looking for the first time at investment bank holding companies that have broker-dealer subsidiaries. We’re both going to be able to see much more of the picture. Both the Fed and the SEC already possess the regulatory powers that we’re using, but what we’re doing now is sharing information in better ways — confidentially, of course — so that we can do our jobs better.
Ryssdal: What do you say to investors who are now rightfully leery of putting their money into these devices and markets that they don’t really understand. How can the SEC make it safer for everyday investors?
Cox: Well, the lesson that seems to be learned over and over again in every financial scandal is that when things are too good to be true and when information doesn’t really explain itself, there could be a very serious underlying problem and what we saw with the opacity in some of the stylized securitized products was that ultimately there wasn’t enough transparency there for people to know what really was going on. People needed to find out where the risk was located. They had a great deal of difficulty doing that and so they fled the entire asset class.
Ryssdal: Seems fair to ask then a year or so into the credit crisis with billions of dollars lost and Mr. Bernanke said yesterday it’s not going to end anytime soon — where were the regulators when Wall Street was being so opaque and creative?
Cox: We now know some things as regulators that we didn’t know before. We know, for example, that with respect to the credit rating agencies, it’s very important that they become a regulated industry. Congress recently changed the law, gave the SEC authority to regulate the credit rating agencies. We’re now doing that. We also know that lending standards were allowed to become so lax. The most important constant here is that there’s got to be clarity and transparency so that investors can understand the risks, so that investors can make sound choices and by focusing on the basics, applying those longstanding principles to these new facts and circumstances, I think regulators can help right this ship.
Ryssdal: Christopher Cox is the Chairman of the Securities and Exchange Commission. Mr. Cox, thanks for your time.
Cox: Happy to join you.
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