Streetcar Line

Exceptional Leadership in a Difficult Time

Amidst underwater bears, SEC Chairman Chris Cox steers a steady boat.

By 7.3.08

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So you're a conservative, temperamentally and intellectually skeptical of government officials who exceed their authority, throw their weight around, hog glory, and run to the microphones. In a situation that looks an awful lot like a crisis, one in which the nation's entire financial system seems to be on the verge of a panic-driven collapse, how do you want a top regulator to act? Should he rush in, guns blazing -- or should he keep his cool, keep on top of things, remember both the scope and the limits of his authority, and work well as part of a team effort to defuse the crisis?

It sure would seem as if the latter type, the cool-under-fire type, would be exactly the right person for that situation -- or, for that matter, for even greater responsibilities.

'Twas surpassingly odd, then, to see a June 23 Wall Street Journal news story report in its headline that Securities and Exchange Commission Chairman Chris Cox "Draws Criticism for Low-Key Leadership During Bear Crisis." In what actually was the second such story in recent months by reporter Kara Scannell -- just about the only reporter who seems to have found this particular angle amidst copious reports to the contrary -- paragraph after paragraph goes to great, albeit context-free, lengths to push what sounds like a reporter's agenda rather than a straight news report. The gist of the story: Supposedly, during the week that the Bear Stearns investment bank collapsed, "critics say America's top securities regulator didn't act boldly enough to restore confidence when the financial world shuddered."

Skillfully crafted to push the idea of Cox's over-passivity -- with apparent prompting by Clinton-era SEC Chief Arthur Levitt with an axe to grind -- the story buries one short passage explaining Cox's own point of view:

In a two-hour interview in his office overlooking the Capitol building, the 55-year-old Mr. Cox said he was deeply involved the week of the Bear Stearns meltdown. He has since asked Congress to mandate the SEC's oversight of investment banks and says SEC staff immediately began working with the Fed to strengthen investment banks' risk-assessment models. He said he supported moves by the Treasury and Fed to find a buyer for Bear Stearns but then stepped back, saying his agency should oversee the industry, not orchestrate its deals. "We are the regulator," he said. "It would have been difficult to regulate one's own transaction."

Well. Uh...exactly. In truth, the whole story could have begun and ended right there. Cox knew his role and performed it precisely. Talk to Treasury Department or Federal Reserve officials on "deep background" (departmental practices keep them from officially discussing the performance of other agencies), and they'll tell you repeatedly that the SEC and Cox were Johnny-on-the-spot, but without getting in the way.

BUT PERHAPS THE MOST pointed response to the Journal article came the day the article was published, at the prestigious "Director's College" hosted by Stanford Law School for executives of publicly traded corporations. Event host and College founder Joseph Grundfest, a distinguished professor of law and business and himself a former SEC commissioner, began his remarks with a lengthy, impromptu excoriation of the entire WSJ piece, calling the article "quite an easy elephant to shoot."

With regard to the article's main focus, namely the SEC's supposed under-involvement with the buy-out of Bear Stearns by J.P Morgan, arranged and backed financially by the Federal Reserve Board and the U.S. Treasury, Grundfest's remarks were withering.

"I submit to you very humbly," he said, " that the only thing worse than having the chairman of the SEC not deeply involved with that is having him involved with it at all.... It would be viewed as a major conflict of interest, something that would probably have his butt in hearings until the next millennium." It was precisely the job, he said, of Treasury and the Fed, but not the SEC, to conduct the negotiations. "The rational thing for the chairman to do," Grundfest said approvingly of Cox's performance, "is to stay away from it and let other people drive that bus."

The WSJ article, though, also faulted Cox for not working ahead of time to "have exerted more pressure on Bear Stearns or its board." Specifically,

"The SEC could have told them to go out and raise capital," says Lynn Turner, a former chief accountant at the SEC and a frequent critic of the agency. "If Bear Stearns had had enough capital there never would have been a run on the bank -- because there would have been confidence in the system."

The article did mention "daily" official SEC contact with Bear Stearns all the way back to last summer, but made it sound as if all the agency did was "privately urged Bear Stearns to raise cash." Not mentioned was that those contacts and urgings were phenomenally successful: Bear's reserves, its "liquidity pool," grew from $8.4 billion on Jan. 31 (and from $5.5 billion the year before) to $21 billion in the first week of March. By all accounts, including that of Fed Chairman Ben Bernanke, Bear's holdings were substantially above the required minimums for the safety of its customers. And, as Cox himself has noted repeatedly, customer cash remained safe throughout -- and, for that matter, the collateral held by Bear for its investors was, to a particularly large degree, of "high-quality" types such as "agency securities." Moving forward, Bernanke and other Fed officials in April 3 congressional testimony credited the SEC for its careful oversight after the Bear buyout, and Bernanke noted that the collateral offered is good, "investment grade."

In his testimony, New York Federal Reserve Bank President Timothy Geithner included Cox in his short list of people specifically named as having provided "really exceptional leadership in a difficult time." And one can search in vain for criticism of Cox even by liberal Senate Banking Committee Chairman Chris Dodd (D-CT), or by liberal committee member Chuck Schumer (D-NY). Indeed, reading between the lines of their comments at the April 3 hearing, one can see Dodd and Schumer no less than the Republicans showing respect for Cox's performance throughout.

ALL OF WHICH leads...well, where? Why should we care?

We should care because conservatives too often search in vain for leaders of principle who know their roles, do their jobs well, maintain a calm control, and enhance teamwork rather than trying to feed their own egos or reputations.

In the case of the Bear Stearns buyout, conservatives will long question the various risks and rewards, the wisdom of recklessness, of the actions taken by the Federal Reserve and the Treasury. For now, the energy and industry of Fed and Treasury officials looks very good in short-term retrospect, as does the steadiness of the SEC. There is no question whatsoever that not only was a broader crisis averted in the short term, but that the SEC has moved strongly to do its part to stabilize the system for the long haul. This performance by Cox is the stuff of competent and quiet heroism. As he has been on many other occasions in public life, Cox was the right man at the right time for the job.

National Review's Jay Nordlinger once called Cox "omnicompetent." Such competence, combined with principled action, deserves not sniping but instead a promotion.

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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.