The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States Page: 154
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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
that suggests that the program was not solely responsible for the changes.159 In 2009,
Sirri noted that under the CSE program the investment banks' net capital levels "re-
mained relatively stable ... and, in some cases, increased significantly" over the pro-
gram.16o Still, Goldschmid, who left the SEC in 2oo5, argued that the SEC had the
power to do more to rein in the investment banks. He insisted, "There was much
more than enough moral suasion and kind of practical power that was involved....
The SEC has the practical ability to do a lot if it uses its power.''161
Overall, the CSE program was widely viewed as a failure. From 2oo4 until the fi-
nancial crisis, all five investment banks continued their spectacular growth, relying
heavily on short-term funding. Former SEC chairman Christopher Cox called the
CSE supervisory program "fundamentally flawed from the beginning."''62 Mary
Schapiro, the current SEC chairman, concluded that the program "was not successful
in providing prudential supervision.''63 And, as we will see in the chapters ahead, the
SEC's inspector general would be quite critical, too. In September 2oo8, in the midst
of the financial crisis, the CSE program was discontinued after all five of the largest
independent investment banks had either closed down (Lehman Brothers), merged
into other entities (Bear Stearns and Merrill Lynch), or converted to bank holding
companies to be supervised by the Federal Reserve (Goldman Sachs and Morgan
Stanley).
For the Fed, there would be a certain irony in that last development concerning
Goldman and Morgan Stanley. Fed officials had seen their agency's regulatory
purview shrinking over the course of the decade, as JP Morgan switched the charter
of its banking subsidiary to the OCC164 and as the OTS and SEC promoted their al-
ternatives for consolidated supervision. "The OTS and SEC were very aggressive in
trying to promote themselves as a regulator in that environment and wanted to be the
consolidated supervisor . . . to meet the requirements in Europe for a consolidated
supervisor," said Mark Olson, a Fed governor from 2001 to 2006. "There was a lot of
competitiveness among the regulators."'65 In January 2oo8, Fed staff had prepared an
internal study to find out why none of the investment banks had chosen the Fed as its
consolidated supervisor. The staff interviewed five firms that already were supervised
by the Fed and four that had chosen the SEC. According to the report, the biggest
reason firms opted not to be supervised by the Fed was the "comprehensiveness" of
the Fed's supervisory approach, "particularly when compared to alternatives such as
Office of Thrift Supervision (OTS) or Securities & Exchange Commission (SEC)
holding company supervision.''66154
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United States. Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, book, January 2011; Washington, D.C.. (https://digital.library.unt.edu/ark:/67531/metadc123532/m1/182/: accessed April 27, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.