(Adds criticism from lawmakers, further comment from Cox)
By Rachelle Younglai
WASHINGTON Oct 23 The credit crisis shows
regulatory gaps need to be closed on credit default swaps and
investment bank supervision, the chairman of the U.S.
Securities and Exchange Commission said on Thursday.
"The lessons of the credit crisis all point to the need for
strong and effective regulation, but without major holes and
gaps," Christopher Cox told the House of Representatives
Oversight and Government Reform Committee.
Cox also said he "strongly" supported a merger between his
agency and the Commodity Futures Trading Commission.
SEC Chairman Christopher Cox said a select committee on
financial services regulatory reform should be appointed and
should explore the merger of the two agencies.
"It could tackle the challenge of merging the SEC and the
CFTC, which I strongly support," Cox said. "This would bring
futures within the same general framework that currently
governs economically similar securities."
But Cox's pleas for more regulation did not satisfy some
lawmakers who said he and other regulators should have done
more to prevent the current financial turmoil.
"Where have you been all these years?" said Rep. Elijah
Cummings, a Democrat from Maryland.
Committee Chairman Henry Waxman said he agreed with many of
Cox's suggestions, but said either Cox didn't see any of the
warning signs or was blinded by ideology. "The reality is Mr.
Cox you weren't doing that job," said Waxman, a California
Cox, who has headed the SEC since August of 2005,
reiterated pleas to give the SEC authority to regulate the
fast-growing $55 trillion credit default swap market, which has
been blamed for exacerbating the financial meltdown.
Used to insure against bond default risk, swaps are so
large and their terms are so poorly understood that they played
a key role in freezing up the credit markets.
He said split legislative jurisdictions for the SEC and
CFTC have created gaps among financial regulation, especially
in the swaps market. "This long-running turf battle is one of
the reasons that credit default swaps aren't regulated," he
Cox also urged Congress to assign a regulator to supervise
investment bank holding companies, a business model that has
largely disappeared in a brutal Wall Street shakeout.
"It was a fateful mistake in the Gramm-Leach-Bliley Act
that neither the SEC nor any regulator was given the statutory
authority to regulate investment bank holding companies other
than on a voluntary basis," Cox said. The 1999 act deregulated
the banking industry.
The SEC ended its voluntary program to supervise the five
largest investment banks earlier this year after Lehman
Brothers Holdings Inc LEHMQ.PK filed for bankruptcy, Bear
Stearns was sold to JPMorgan Chase & Co (JPM.N), Merrill Lynch
& Co Inc MER.N was acquired by Bank of America Corp (BAC.N)
and Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N)
reorganized into bank holding companies.
Cox said he would have done a number of things differently,
knowing what he knows now, including working with Congress to
close regulatory gaps in credit default swap oversight.
Cox said he would have wanted to question every one of the
assumptions behind SEC's investment bank supervisory program
and said he would have worked even more aggressively for
legislation requiring stronger disclosure to investors in
Cox suggested that Congress set up a committee on financial
services regulatory reform that would cut across the existing
Currently banking, insurance and securities fall under the
purview of the banking and financial services committees in the
Senate and the House. The agriculture committees have
jurisdiction over futures.
"This jurisdictional split threatens to forever stand in
the way of rationalizing the regulation of these products and
markets," Cox said.
(Additional reporting by Kim Dixon and Karey Wutkowski;
Editing by Brian Moss and Tim Dobbyn)