The article outlines how, in 2004, the big investment companies petitioned the SEC for the right to place the capital from their safety nets into play on the marketplace.
One commissioner, Harvey Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.
"We've said these are the big guys," Goldschmid said, provoking nervous laughter, "but that means if anything goes wrong, it's going to be an awfully big mess."
Part of the quid pro quo was that the SEC would have increased visibility into the activities of these firms to make sure that they were not abusing their new freedom.
The 2004 decision for the first time gave the SEC a window on the banks' increasingly risky investments in mortgage-related securities.
But the agency never took true advantage of that part of the bargain. The supervisory program under Cox, who arrived at the agency a year later, was a low priority.
The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Cox more than a year and a half ago.
"It's a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs," said Roderick Hills, a Republican who was chairman of the SEC under President Gerald Ford. "The problem with such voluntary programs is that, as we've seen throughout history, they often don't work."
If you can't trust the big boys to regulate themselves, whom can you trust?
"We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing," said Professor James Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).
Finally, there has been a recognition that this plan is not working:
Last Friday, the commission formally ended the 2004 program, acknowledging that it had failed to anticipate the problems at Bear Stearns and the four other major investment banks.
"The last six months have made it abundantly clear that voluntary regulation does not work," Cox said.
The decision to shutter the program came after Cox was blamed by Senator John McCain, the Republican presidential candidate, for the crisis. McCain has demanded Cox's resignation.
You would think that we would have learned this lesson from the past. Unfortunately, politicians are blinded by the large political contributions they receive from the "Masters of the Universe" on Wall Street.