Streetcar Line

Cox Exchange

Replacing smears with the truth about former SEC head Christopher Cox, the left's scapegoat for the credit crisis if not the entire recession.

By 3.6.09

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Time magazine last week aimed an utterly counterfactual and intellectually dishonest hit piece against Chris Cox, the conservative former chairman of the Securities and Exchange Commission. It's time to set the record straight -- and, in doing so, to help correct the overall narrative about the current economic crisis. It's a narrative in which conservatives have received short shrift.

For some odd reason, Cox increasingly has become a scapegoat for the credit crisis, and indeed for the whole recession. Simple logic and basic facts refute this blame-casting, as we shall see momentarily. But to get a sense of the general level of unfairness of the attacks against Cox, consider just a few of the flagrant falsehoods in Time's article co-written by Michael Weisskopf, whose general leanings are captured in the title of his 1996 book called Tell Newt to Shut Up. (Please bear with the length of the first example below: It serves as a good case study for how dishonest the Time piece was, with the Time article in turn serving as a perfect microcosm for overall media misinformation about the current crisis.)

The false narrative that has been taking shape about Cox is that he let the SEC's enforcement efforts wither, with supposedly disastrous consequences for the whole economy. The added falsehood is that he further hobbled enforcement efforts through a new rule, as Time tells it, "requiring SEC staff to get authorization from commissioners for financial penalties before settling a case."

In the key passages that serve as the hinge of the whole rest of the article blaming Cox for, well, everything, Time continued:

In fact, [the new rule] quickly created delays and obstacles, so much so that SEC officials often stopped seeking penalties. "It wasn't worth it," a former commissioner says. "All they got was abuse every time they went before the commission and asked for penalties." Some investigations didn't get even that far. Gary Aguirre, a senior SEC lawyer, sought to question the chairman of Morgan Stanley in a fraud investigation but was denied permission before Cox arrived. He later told Congress that his superiors, fearing the banker's "very powerful political connections" in Washington, had delayed the probe, dooming any chance of making a case--allegations that a Republican Senate report later found credible.

Eventually, enforcers at the SEC grew demoralized. One by one, key officials left the agency; Aguirre was fired under Cox. Sensitive cases seemed to lag. Cox has admitted that his staff brushed off "credible and specific" reports of fraud committed by Madoff over the past 10 years and did not seek subpoena power or bring tips to the attention of commissioners.

The clear implication of the Time account is of a deleterious series of causes and effects: as if the rules change by Cox precipitated abuse of honest enforcement staff, which precipitated a Cox-led cabal to fire Aguirre, and in turn to a demoralized staff that caused the failure to catch Ponzi-scheme king Bernard Madoff. Step by step, Cox is presented as the bad guy who kept investigators from unearthing the information that would, by golly, have stopped the whole financial crisis from happening.

That's balderdash.

The dishonesties in Time's account are legion. First, the rules change at issue came two years after Aguirre left the agency, so they couldn't have helped cause him to leave. Second, the rules change, far from causing frequent obstacles, was a minor pilot program used in only nine cases out of hundreds handled by the SEC, and the commissioners actually backed the staff -- rather than "abused" them -- all nine times. Third, Cox had nothing to do with firing the troublesome Aguirre, who announced he was quitting, rescinded his resignation, and then came under full disciplinary review before Cox even joined the agency. Yes, it was a few weeks after Cox arrived that Aguirre finally was fired, but Cox didn't even know Aguirre was there in the first place, much less cause his firing.

A later Senate investigation of Aguirre's firing not only found no fault with Cox, but actually praised him: "We commend SEC Chairman Christopher Cox for his full and complete cooperation…. By making documents and witnesses available, Chairman Cox demonstrated a commitment to accountability and transparency." And: "We also commend the SEC for increased enforcement efforts regarding insider trading, and specifically insider trading by hedge funds, following our investigation."

Finally, what any of this has to do with Madoff is anybody's guess. Madoff's subterfuge had been going on, undiscovered, for nearly 40 years, with the SEC staff fumbling specific allegations against Madoff for six full years before Cox even came on board. Why is Cox, at the SEC for just three years, being blamed for 40 years of investors and SEC staff being fooled by Madoff's fraud? And why was Madoff suddenly shoehorned into the article just then? To even mention Madoff in the same paragraph with Aguirre and an SEC staff supposedly newly demoralized by Cox (and his new rule) is to raise falsely syllogistic innuendo to a scurrilous new journalistic art form.

Now -- why is all this important?

Because only by such misdirection, by finding a convenient conservative scapegoat to feed the narrative of conservative neglect and/or ideologically based obstruction, can the establishment media shift the blame for today's mess onto the whole idea of free markets and onto its advocates. What's at stake here isn't just Chris Cox's reputation, but the popular history that could shape economic decision-making for decades to come.

Time's misuse of the Aguirre incident -- a gentle zephyr, not a tempest nor a Teapot Dome -- was just one example of how the magazine accomplished its smear. The whole Weisskopf article was rife with similar flagrant dishonesties. Cox was blamed for not being at meetings to which he wasn't invited and wasn't needed (or even was wise to avoid). Cox was blamed for allowing Bear Stearns to have a "yawning ratio of debt to capital," even though in the three months leading up to Bear's collapse the firm's capital ratio was between 13. 5 percent and 14.4 percent -- well above the 10 percent cushion required by the internationally accepted "Basel II" standards and by the Federal Reserve's rule for being "well capitalized."

Time further blamed Cox's SEC because it supposedly "didn't urge the bank to improve most of its practices," even though the SEC had worked closely with Bear for a full year to raise its pool of liquid assets from $5.5 billion in February of 2007 to $17.3 billion in February of 2008 and $18.1 billion on March 10 of that year, just four days before Bear collapsed. Again, that was well above, nearly double, the expected cushion -- and it tracked the SEC's treatment under Cox of all five major investment banks, which at the SECs urging had raised their total liquidity pools from $158 billion to $232 billion.

Likewise, where Time said Cox left a demoralized agency that people left in droves, the statistics show record-low staff turnover (6.4 percent) under Cox and (in an annual independent survey by the Partnership for Public Service) show the SEC's work force under Cox the third happiest of those in all federal agencies -- the SEC's best ever showing in the survey.

And so on and on, with actual, demonstrable facts demolishing Time's slants and innuendoes.

Meanwhile, in the real world, Cox earned virtually universal plaudits for efforts to modernize technology, transparency, and understandability of corporate reports, and to provide for apples-to-apples comparisons (for the first time ever) of corporate executive compensation. Enforcement actions actually grew in number under Cox. Penalties against scofflaws (especially Fannie Mae, two full years before the crisis) grew to record amounts. Cyber fraud was successfully attacked. Again, all of this is not opinion, but documentable fact.

***

As to how any of this supposedly had anything to do with the financial crisis, it's a mystery. Many media outlets blame Cox for a "lack of regulation," but they don't say exactly what he was supposed to have done differently.

Forget the dominant narrative that blames free markets for today's poor economy. Consider some of the real causes of today's problems:

Cox had nothing to do with the housing bubble and its subsequent collapse -- but he did repeatedly ask Congress, to no avail, for greater authority to stop abusive practices by Fannie Mad and Freddie Mac.

Cox had nothing to do with the explosion of unregulated credit default option swaps, and no authority over those practices. But he did urge Congress, to no avail, to regulate them.

Cox had nothing to do with the April 28, 2004 meeting at which Henry Paulson and others worked out an exemption allowing big investment banks to pile previously unimagined amounts of debt at their brokerage houses. He wasn't even at the SEC yet. And he had no statutory authority, no enforcement teeth, over those practices.

Cox had nothing to do with the monetary policies of Alan Greenspan and Ben Bernanke that catalyzed the housing bubble and destabilized the currency.

Cox had nothing to do with the dual panics that hit the economy late last summer. He had nothing to do with the statements indicating a "crisis mentality" by Paulson, Bernanke, Tim Geithner, and President Bush that created an atmosphere of panic on Wall Street. And Cox had nothing to do -- indeed, for years in Congress he fought -- the lefty policies that hampered domestic energy exploration and refining while adding costly subsidies, mandates and restrictions for energy use, all of which led to the panic on Main Street about gas prices that peaked late last summer. Gasoline prices always have an outsized psychological effect, and they added to the panic mentality that led to consumer spending retrenchment -- drying up the velocity of spending and borrowing just when banks were feeling the financial pinch from the housing price collapse, etcetera.

Cox bears no blame for incompetence (or worse) at the credit ratings agencies -- although Cox almost headed this off at the pass. Under Cox, for the first time ever, the SEC launched a 10-month examination of the practices of those agencies -- an examination that was well underway before Bear Stearns collapsed.

Cox had nothing to do with, and indeed always had fought against, the American corporate income taxes that were among the very highest in the industrialized world. Likewise, while in Congress Cox always fought against the prevailing spend-spend-spend ethos that has held sway ever since late 1998 in both congressional parties and in the Clinton and Bush White Houses. As a result, the exploding government debt burdened the overall economy and created an internationally pancaked house of cards: As the U.S. economy tanked under all that debt, the foreign debtors suffered as well, and the contagion flattened economies worldwide.

Okay, okay…. There are two actions for which Cox largely was responsible that some say exacerbated the crisis: so-called "mark-to-market" accounting rules and the elimination of something called the "uptick" rule governing short sales of securities. Both accusations are debatable, and at worst secondary factors in the financial collapse/panic last fall. Conservatives may want to stick with Cox on both; he has been strongly defended on the uptick rule by none other than the Wall Street Journal editorial page, and on mark-to-market both by an extensive post-panic SEC staff review and by the Manhattan Institute's brilliant analyst Nicole Gelinas, among others. ()

In short, rarely has anybody been blamed for so many things over which he had no authority, no responsibility, or with which he had no remote connection -- all while providing exemplary service at all measurable levels for the things that are his responsibility.

Here is what the SEC actually is responsible for, according to its official mission statement: maintaining fair, orderly, and efficient securities markets. Throughout all the upheavals of the 51 weeks since Bear Stearns collapsed on March 14, 2008, the one constant has been that the securities markets -- not the financial markets governed by the Federal Reserve, or the insurance markets governed by state entities, but the securities markets -- have operated efficiently and fairly. Under Chris Cox's superb technological and management upgrades, the stock markets also have operated with a transparency never achieved before -- a transparency that will help the market recover in the long run by giving investors the information they value and need.

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About the Author
Quin Hillyer is a senior editor of The American Spectator and a senior fellow at the Center for Individual Freedom. Follow him on Twitter @QuinHillyer.