The SEC Blew the Bubble?

Ms Drucker wrote 'The SEC Killed Wall Street On April 28, 2004', which is an extraordinary piece of work. The five SEC commissioners anonymously voted a program which took away the supervision on the Wall Street back in 2004. The SEC deregulation let Big Five Banks leverage up on their methodology:

The broker dealers – Bear Stearns, Merrill Lynch, Goldman Sachs, Morgan Stanley and Lehman Brothers – were all keen to see their holding companies monitored by the SEC under a new Consolidated Supervised Entities (CSE) program.

... Once more, we return to the climber who is scaling the building without the safety net. To what extent did the added leverage directly lead to the end of the five giant banks? Bear Stearns sold its decimated stock to JP Morgan in March, on September 15, Lehman Brothers filed for bankruptcy and Merrill Lynch sold itself to Bank of America, and on September 22 Goldman Sachs and Morgan Stanley converted themselves into commercial banks. “I’d call it res ipsa loquitur – in other words the thing speaks for itself,” Ritholtz comments. “It’s no coincidence that since the SEC created the exemption, all five are now gone.”

... Cox himself admitted on September 26, 2008, that the CSE experiment had been “an utter failure”, as the SEC ended the program. Meanwhile, the remaining investment banks were flailing. The Chairman attributed the breakdown to the voluntary aspect of the arrangement, whereby the banks could opt in and out of supervision at will. He said, “The fact that the investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate of the CSE program, and weakened its effectiveness.” In ending the program, Cox was plainly stating that self regulation had fallen far short. “He was implicitly saying that the oversight of the regulators had failed,” says Daugherty.

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