Friday, April 4, 2008

SEC support to Basel Committee.

In the light of the recent financial market turmoil, the Basel Committee's Working Group on Liquidity has planned some key updates to their liquidity management guidelines for banks.

Mr. Christopher Cox, chairman of the SEC recently wrote to Dr. Wellink, chairman of the Basel Committee on Banking Supervision. Although the objective of the letter was to express support for upcoming updates in the guidance for liquidity management, yet the bulk of the letter addressed the Bear Stearns collapse. It attributed the collapse to rumours and a 'self fulfilling prophecy' than inadequate liquidity management.

Mr. Cox provided the capital and liquidity position of Bear Stearns prior to and up to the days leading to the take over by J P Morgan Chase. It showed the liquidity pool on Jan 31 up until March 13th. Mr.Cox remarks how the liquidity pool of Bear Stearns diminished from $18 billion on Mar 10th to $2 billion on March 13th which resulted in Bear's collapse.
Interestingly, towards the beginning of the year (Jan 31st) the liquidity pool stood at only $8 billion.

According to Mr.Cox, although Bear Stearns' holding company and the bank's 2 SEC registered brokerage dealers had adequate capital to fulfill the Basel II standards, yet "evaporation of market confidence" led to liquidity being impaired.

An obvious question that comes to mind is: how did the current regulatory structure at SEC miss this impending debacle? By reassuring the Basel Committee about the adequacy of Bear's capital structure, the SEC has failed to answer a very important question which is how did the bank crumble in spite of such an apparently strong capital position? Does the SEC truly believe that rumor mongers and market whispers were the sole reason for Bear's downfall?
Innovative financial products fared very well in an unregulated market. But their failure also meant the crumbling failure of the biggest financial markets and consequently a weakening in the economy.

It will be interesting to see how Treasury Secretary Mr.Paulson's plans to overhaul the financial regulatory environment actually plays out in the coming months.

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