Washington’s recent decision to permit the Federal Reserve to advance loans to Wall Street banks may have the unintended effect of undermining the SEC’s ability to regulate and protect the investment markets. Simply stated, different agencies of the U.S. government now have an inherent conflict among themselves. On the one hand, the SEC, which is the U.S. agency charged with regulating and protecting the investment markets, has a duty and obligation to take appropriate action to protect those markets, enforce violations of the rules of those markets, and, where appropriate, to take action that would have adverse financial consequences for Wall Street investment banks. On the other hand, the U.S. government is now among the largest creditors, if not the largest creditor, of the very investment banks that the SEC is obligated to regulate. Clearly the question must be posed as to whether the SEC will be willing and able to take appropriate action in situations where its very actions could have a negative impact on the financial wherewithal of the Wall Street banks which, in turn, would adversely impact the U.S. government’s ability to collect on obligations that are owed to it by the Wall Street banks.
SEC Chairman Christopher Cox recently said that the SEC was pursuing more than four dozen cases involving the subprime mortgage crisis, focusing, among other things, on whether investors were misled as the crisis evolved. This underscores the very essence of the potential conflict that exists within the U.S. government. Can the SEC take action (in cases where action is warranted) against the very Wall Street banks which currently owe billions of dollars to the U.S. government? It is well known that most, if not all, Wall Street banks are reeling from financial setbacks that are attributable to the ongoing subprime and credit crisis. Is the SEC willing and able to take appropriate action knowing that such actions would further diminish the financial resources of the Wall Street banks and make repayment of debt to the U.S. government less likely?
The decision to bail out major Wall Street banks and other large financial institutions is fraught with danger because it is impossible to consider all of the potential ramifications of such bailouts. It would indeed be unfortunate if Washington’s attempts to salvage the U.S capital markets had the unintended effect of causing investors worldwide to lose confidence in the integrity of those markets.
Investors need to be aware of these conflicts. At the end of the day, investors need to be prepared to protect themselves and their individual rights.