PAUL B. FARRELL
20 reasons new megabubble pops in 2011

Greed blinded us to subprime meltdown, it'll blind us next time too
By Paul B. Farrell, MarketWatch

Last update: 7:31 p.m. EDT June 2, 2008ARROYO GRANDE, Calif. (MarketWatch) -- You think I'm drinking that famous Beltway Kool-Aid, maybe because I'm predicting another meltdown coming in 2011? Well, you're being served from the same punch bowl, my friends.

Wall Street, Washington and the Fed are all praying the credit crisis is under control. Unfortunately, all their happy-talking is just a lot of hype, to hide their next bubble.

World markets are headed into another meltdown by the end of the first term of the next president ... and you won't even hear it coming under all the happy-talk.

Cycles happen. Bubbles blow, pop, meltdowns happen. Significantly, they're getting bigger and more frequent. Think 1987, 2000, 2007 -- the next in 2011. All the happy-talk from Washington and Wall Street gurus can't start the bull before it's time.

Nor will a lot of non-happy-talker warnings make a bubble burst early.
For example, two years ago I analyzed the 2000-2002 bear phase of "The Cycle." We reported on 16 reasons why all the happy-talk failed to restart the bull market during that 30-month recession, while investors slowly lost $8 trillion.

Now you'll see how all the warnings of a housing bubble and a coming meltdown also had no effect on the 2004-2007 bull phase of "The Cycle."

Why? Because bull/bear, bubble/bust, expansion/recession cycles have a natural pattern that ebbs and flows on their own time, making fools of all gurus predictions. And all the happy-talk and not-so-happy-talk in the world has no effect: Happy-talk won't restart a bull. Nor can not-so-happy-talk warnings puncture a bubble. Cycles have lives of their own, they mature and die unpredictable, age and pop when they feel like it.

Another will happen, soon. A busted bubble and a new meltdown coming by the end of the next presidential term. Why then? Because the last few occurred with increasing frequency, separated by thirteen years then seven, and the next will come within four years. These trends are obvious from studying the works of masters like former Commerce Department chief economist Ed Dewey's classics, including his Cycles, the Mysterious Forces that Trigger Events.

Here's my list of warnings from 20 not-so-happy-talkers. Notice how they were as unable to pop the 2004-2007 bubble before its time, as the happy-talkers were unable to restart a bull during the 2000-2002 recession:

2000: Fed governor warns Greenspan. Former Federal Reserve governor Ed Gramlich served 1997-2005. He was warning Alan Greenspan as early as 2000 about the coming subprime crisis. See his book "Subprime Mortgages: America's Latest Boom & Bust."
2004: Nixon's secretary of commerce. In "Running on Empty," Peter Peterson says: "This administration and the Republican Congress have presided over the biggest, most reckless deterioration of America's finances in history" creating a "bankrupt nation."

June 2005: The Economist. Cover story two years before collapse: "The worldwide rise in house prices is the biggest bubble in history. ... Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000." Values increased 75% worldwide in five short years. "Never before have real house prices risen so fast, for so long, in so many countries ... This is the biggest bubble in history."

January 2006: Fortune. Interview with Richard Rainwater. "This is the first scenario I've seen where I question the survivability of mankind." He's 112th on the Forbes 400, worth $2.3 billion: "Most people invest and then sit around worrying what the next blowup will be. I do the opposite. I wait for the blowup, then invest." He waited with a half-billion-dollar war chest.

February 2006: Faber's Market Newsletter. "Correction Time is Here!" was Faber's headline: "If we combine the overbought condition of the stock market, investors' sentiment high optimism, equity mutual funds' low cash positions, and also heavy foreign buying, we have all the ingredients for a stock market correction in the US getting underway very shortly."

March 2006: Forbes. Economist Gary Shilling wrote: "The current housing weakness will develop into a full-scale rout ... It's clearly a bubble and is nationwide ... The house-price collapse will induce a painful recession that will send U.S. stocks into a tailspin ... China will suffer a hard landing ... and weakness in the U.S. and China will spread worldwide."

March 2006: "Sell Now." Former Goldman Sachs investment banker John Talbott's book: "Sell Now! The End of the Housing Bubble." His statistics covered America's top 130 metropolitan areas. The top 40 were facing an average 47.2% decline.

March 2006: Pimco Investment Outlook. In the quarterly newsletter, "The Gang That Couldn't Shoot Straight," Pimco's boss Bill Gross took a big swipe at a presidential economic report: "It's not so much that the report was a compilation of untruths or even half-truths. It's just that it failed to tell the truth," and hid the fact that Washington's "borrowed from the future to pay for today's party."

March 2006: Buffett in Fortune. Remember Warren Buffett's famous farmer story: "Our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4% more than they produce -- that's the trade deficit -- we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own."

May 2006: Harper's magazine. Michael Hudson wrote an article, "Guide to the Coming Real Estate Collapse," analyzing 20 trends: "Taken together, these factors will further shrink the 'real' economy, drive down those already declining real wages, and push our debt-ridden economy into Japan-style stagflation or worse."

August 2006: Wall Street Journal. Countrywide's CEO Angelo Mozilo: "I've never seen a 'soft-landing' in 53 years, so we have a ways to go before this levels out. I have to prepare the company for the worst that can happen." He did little. A year later, he was in full denial mode.

November 2006: Fortune. Cover story asks: "Can the Economy Survive the Housing Bust?" They said "the correlation between current builder confidence and future stock market returns over the past 10 years is downright unnerving." The NAHB confidence index is a leading indicator because the stock market inevitably follows in lockstep a year later. The index had "plummeted 54%."

November 2006: The Economist. In a cover story: "The Dark Side of Debt," Timothy Geithner, president of the Federal Reserve Bank of New York, said in a Hong Kong speech: "The same factors that have reduced the probability of future systemic events, however, may amplify the damage caused by, and complicate the management of, very severe financial shocks. The changes that have reduced the vulnerability of the system to smaller shocks may increase the severity of the larger ones." Geithner later negotiated the Bear Sterns collapse.

January 2007: Los Angeles Times. Schwab "averaged 242,300 trades a day the first nine months of 2006. That was up 29% from the same period a year earlier, and a click above its 242,000 peak in 2000"and the last collapse.

April 2007. GMO Quarterly Newsletter. GMO manages $145 billion. CEO Jeremy Grantham wrote: "The First Truly Global Bubble: From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it's bubble time. ... Everyone, everywhere is reinforcing one another. ... The bursting of the bubble will be across all countries and all assets ... no similar global event has occurred before."

June 2007: Shilling's Insight Newsletter. "Just as the U.S. housing bubble is bursting, speculation elsewhere will come to a violent end if history is any guide. ... Richard Bookstaber, who designed various derivative-laden strategies over the years, now fears that financial derivatives and hedge funds, focal points of today's huge leverage, will trigger a financial meltdown."

June 2007: Pop! Then it happened! And Dan Gross had a well-timed book: "Pop! Why Bubbles are Great for the Economy." He says bubbles work miracles, so just let them pop, Pop, POP!

July 2007: Fortune. As the contagion spread, Treasury Secretary and former Goldman Sachs CEO Henry Paulson tells Fortune "this is far and away the strongest global economy I've seen in my business lifetime." He's repeated the same remark often since. Earlier, he and Fed Chairman Ben Bernanke said the subprime crisis was "contained." Clueless, Bernanke assembled hedge fund managers, asking them to explain the global derivatives market.

August 2007. Wall Street Journal. Former SEC Chairman Arthur Levitt wrote on the Journal's Op-Ed page: "In terms of market meltdowns and the degree of pain inflicted on the financial system, the subprime mortgage crisis has the potential to rival just about anything in recent financial history, from the savings and loan crisis of the late 1980s to the post-Enron turndown in the beginning of this decade."

August 2007: 60 Minutes. While Paulson and Bernanke were claiming the subprime crisis was "contained," the chief architect of the subprime-housing meltdown, Alan Greenspan, was on tour, making millions, hustling his new book, "The Age of Turbulence."

On 60 Minutes he made a totally incredulous denial that he "really didn't get it until very late." He "didn't get it?" Yes, and to this day Greenspan rigidly maintains his blind faith in the free-market myth.

His latest argument: Bubbles are a function of innovation, like the dot-coms and subprime derivatives. Regulators should trust the free markets, never micromanage innovation.

But what blinded Greenspan? His ideology? A brain quirk? Genetics? The president's reelection? It doesn't matter why: Whatever it was, it's bad news for America. Why? Because if the leader of America's monetary system for 18 years "doesn't get" that he was also the chief architect of the biggest economic blunder in American history since the 1929 Crash, can we ever trust any future leaders?

Scary, isn't it! How can we have faith in the next guy? Are our leaders the problem? Or is the system broken? Is capitalism itself at risk when the best and brightest are "blinded," unable to see disasters until it's too late?

But that is our "system," and in this system our leaders inevitably morph into bulls, ideologically blinded by their power. And like real bulls, all they see is red. So eventually ... they must run onto a sword, and self-destruct!

Toxic Corporate Real Estate

This occurred in 2007?

Morgan Stanley Real Estate announced today that it has completed the previously announced acquisition of Crescent Real Estate Equities Company (CEI) for $6.5 billion.

All of Crescent’s outstanding shares of common stock have been converted to the right to receive $22.80 per share in cash without interest and less any applicable withholding for each share of common stock.

“We are excited to acquire the unique portfolio of properties that Crescent put together,” said Michael Franco, Managing Director, Morgan Stanley Real Estate. “We believe that the depth and breadth of our real estate investing platform will enable us to maximize the value of the diverse holdings of office, destination resorts and resort residential.”

With the acquisition of Crescent, Morgan Stanley Real Estate adds to its portfolio 54premier office buildings totaling 23 million square feet located in select markets across the United States with major concentrations in Dallas, Houston, Denver, Miami, and Las Vegas. In addition, it gains investments in resort residential developments in locations such as Scottsdale, AZ; Vail Valley, CO; and Lake Tahoe, CA and in the wellness lifestyle leader, Canyon Ranch®.

Morgan Stanley acted as financial advisor to Morgan Stanley Real Estate with Goodwin Procter LLP and Jones Day acting as legal counsel. Greenhill & Co., LLC acted as the financial advisor to Crescent with Pillsbury Winthrop Shaw Pittman LLP acting as legal counsel.

Morgan Stanley Real Estate is comprised of three major global businesses: Investing, Banking and Lending. Since 1991, Morgan Stanley Real Estate has acquired $121.5 billion of real estate assets worldwide and currently manages $55.6 billion in real estate assets on behalf of its clients. A complete range of market-leading investment banking services for real estate clients include advice on strategy, mergers, acquisitions and restructurings, as well as underwriting public and private debt and equity financings. As a global leader in real estate lending, Morgan Stanley has offered approximately $156.0 billion of CMBS through the capital markets since 1997, including $35.5 billion in 2006. For more information about Morgan Stanley Real Estate, please visit www.morganstanley.com/realestate.

Morgan Stanley (MS) is a leading global financial services firm providing a wide range of investment banking, securities, investment management and wealth management services. The Firm's employees serve clients worldwide including corporations, governments, institutions and individuals from more than 600 offices in 32 countries. For further information about Morgan Stanley, please visit

www.morganstanley.com.

Contacts:

For Morgan Stanley Real Estate

Media Relations:
Alyson D’Ambrisi, 212-762-7006

Rainwater's 'Single Worst Investment' Toxic Real Estate

Renowned investor Richard Rainwater saw 70% of the value drain out of his $100 million investment in Thornburg Mortgage

by Christopher Palmeri

Sometimes even billionaires make bone-headed moves. Richard Rainwater, the legendary Fort Worth investor, has seen a 70% decline in just two months on some $100 million he put into troubled home lender Thornburg Mortgage (TMA). Rainwater calls it the "the single worst investment of my career."

The 65-year-old-financier, with a fortune estimated at $3 billion by Forbes magazine, told BusinessWeek.com he was watching TV last year when he saw Thornburg's chief executive, Larry Goldstone, speaking about the mortgage crisis. "He seemed like a bright guy," Rainwater recalls. Rainwater says he then checked with some of his investment industry sources who said they considered Thornburg a "capable group."

Buying into the Jumbo MarketIn January Rainwater plunked down about $100 million to buy roughly 5 million shares of the Santa Fe (N.M.) company's preferred stock. Rainwater bought shares both in a public offering that Thornburg had arranged and on the open market. He says his average cost was 21.45 a share. The preferred stock trades today at 6.25 per share; Thornburg common shares closed Mar. 13 at 2.26, down from 28 in May.

Filings with the Securities & Exchange Commission show that Rainwater and his wife, Darla Moore, own preferred stock convertible into 9.3 million shares of Thornburg's common stock, about 6% of the company's shares outstanding. By the time Rainwater invested, Thornburg was already in trouble. That was reflected in the fact that Thornburg was offering a dividend on the preferred shares of 10%. The company declined to comment on the issue.

Founded in 1993 by the current chairman, Garrett Thornburg, the company specializes in making "jumbo" single-family home loans to what it calls "superprime" customers. Those are individuals with credit scores of 744 or higher. Some 97% of its investments are in loans rated AA or higher by ratings agencies. Thornburg says just 0.4% of its loans are delinquent, compared to an industry average of more than 4%.

Rainwater says it was the high-end nature of Thornburg's business that attracted him to the company. "Housing values are suffering everywhere," he says. "But at the high end things are holding up better." On its Web site Thornburg is offering mortgage rates as low as 7.9%.

Crumbling Credit Markets
Last summer Thornburg averted greater financial difficulties by selling $20 billion of its assets. In recent weeks, though, its problems have escalated as lenders began requiring the company to put up more capital to back its mortgage investments. The company says it is presently negotiating with creditors who want $600 million in additional financing.

The problem, says Keefe, Bruyette & Woods (KBW) analyst Bose George, is that Thornburg has been funding its business with short-term loans. That worked when capital was easy to find. "They have one of the best balance sheets on the asset side," George says. "The problem is in the market—it's hard to borrow money." George says he sees the market shifting away from independent lenders such as Countrywide Financial (CFC) and Thornburg. In the future, "mortgage lending is going to be done by banks," he says. "Nonbanks have turned out to be extremely vulnerable to this kind of downturn."

Win Some, Lose Some
Rainwater is famous for scooping up assets in troubled companies. As a chief adviser to Fort Worth's billionaire Bass brothers in the 1980s, he directed the family to invest in then-floundering Walt Disney (DIS). That company went on to great success under Chief Executive Michael Eisner. In the 1990s, Rainwater plunged into oil and gas companies then struggling with low commodities prices. He invested in the Hunt brothers' bankrupt Penrod Drilling, since merged into Ensco International (ESV), and T. Boone Pickens' Mesa Petroleum, now a part of Pioneer Natural Resources (PXD). "Oil I understand," Rainwater says. "Interest rates…?"

Last August Rainwater sold Crescent Real Estate Equities to Morgan Stanley (MS) for $6.5 billion. Crescent was a big owner of office buildings. Rainwater sold at what now looks to have been the peak of the recent commercial real estate cycle. "It just seemed like the right time to do it," he says, with the prices paid for office property working out to yield just 4% to 5% for buyers.

Rainwater says his portfolio is still up for the year thanks to his energy holdings, which include blue chip oil and gas companies such as Chevron (CVX) and ConocoPhillips (COP).

Nonetheless, he says, the losses so far on Thornburg "still don't feel good."

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau

Here come the Real Estate Toxic Mortgages...

Crescent Real Estate Equities Co. (NYSE: CEI) has finally found a buyer, and one that seems to like its mixed-use approach. Morgan Stanley Real Estate has agreed to acquire the Fort Worth, Texas-based REIT for a deal that totals $6.5 billion, including the assumption of debt.

Crescent, a mixed-use REIT owned by Texas billionaire Richard Rainwater, was in the midst of morphing itself into a pure-play office REIT. After evaluating its strategic options, the company came to the conclusion that it could "take advantage of the void left by rabid industry consolidation" as a remade office REIT. More likely, it was positioning itself better for an outright sale.

The Crescent deal just underscores the notion that the private equity boom is still in full swing. According to a New York Times article citing data from Thomson Financial, there have been $281 billion worth of private equity deals in the U.S. so far this year -- that's triple the amount compared to the same period last year, which ended up breaking all sorts of records.

There seems to be plenty of momentum left for REIT take-private deals, too. Year to date, 12 REITs have gone private for a total of $16.2 billion. But, there's still a ways to go to catch up to the lofty levels of 2006, when 23 deals totaling $64.3 billion, including the mammoth EOP buyout, took place, according to SNL Financial data listed in an article by The Wall Street Journal.

Greenhill & Co. LLC served as Crescent's financial advisor and Pillsbury Winthrop Shaw Pittman LLP provided legal

Prior to the deal with Morgan Stanley, Crescent had set into motion a series of deals, including the $550 million sale of its six hotels plus the 343,664-square-foot Austin Centre office building for $75.5 million to Walton Street Capital LLC in March. It also struck a deal recently to sell a portfolio of Dallas-area office assets to a venture between Trimarchi Management and UBS for about $420 million, according to published reports. Crescent also sold the historic Exchange Building in Seattle for $80.6 million to a joint venture between GE Asset Management and The Ashforth Co.

The REIT was preparing to shop its resort and residential development business through JP Morgan and was still evaluating plans for Canyon Ranch, a wellness lifestyle company owned in partnership with Mel Zuckerman and Jerry Cohen.

It's not clear what Morgan Stanley will do with the various pieces of Crescent going forward. The financial services firm considers Crescent's "unique" platform complimentary to its own wide range of business lines.

Morgan Stanley has certainly cast a wide net for real estate acquisitions, gobbling up properties and real estate companies in all sectors of the industry, and has been a major force in the take-private deals that have fueled the hot investment sales market over the past two years.
Last year, it acquired Town and Country Trust, an apartment REIT, through a venture with Onex Real Estate and Sawyer Realty Holdings LLC, in a deal valued at $1.5 billion. Also in 2006, it paid $1.9 billion to acquire Glenborough Realty Trust, a San Mateo, CA-based office REIT. It recently acquired CNL Hotels & Resorts for about $6.6 billion, including the sale of a portion of the properties to Ashford Hospitality Trust.

The financial firm has also reached into its deep pockets for a plethora of property acquisitions lately. It recently paid about $2.43 billion to buy a portfolio of former EOP assets in San Francisco from Blackstone. It also acquired a 28-story office tower at 2 Park Ave. in Manhattan for $519 million. On the retail side, Morgan Stanley recently formed a joint venture with Inland Western Retail Real Estate Trust Inc. to acquire and manage retail properties in target markets across the U.S. with a goal of building a billion-dollar portfolio.

The Crescent deal just underscores the notion that the private equity boom is still in full swing. According to a New York Times article citing data from Thomson Financial, there have been $281 billion worth of private equity deals in the U.S. so far this year -- that's triple the amount compared to the same period last year, which ended up breaking all sorts of records.

There seems to be plenty of momentum left for REIT take-private deals, too. Year to date, 12 REITs have gone private for a total of $16.2 billion. But, there's still a ways to go to catch up to the lofty levels of 2006, when 23 deals totaling $64.3 billion, including the mammoth EOP buyout, took place, according to SNL Financial data listed in an article by The Wall Street Journal.

Greenhill & Co. LLC served as Crescent's financial advisor and Pillsbury Winthrop Shaw Pittman LLP provided legal counsel. Morgan Stanley acted as financial advisor to Morgan Stanley Real Estate with Goodwin Procter LLP and Jones Day providing legal counsel.

Morgan Stanley Real Estate - Corporate Real Estate Toxic Mortgages

January 2006: Fortune. Interview with Richard Rainwater. "This is the first scenario I've seen where I question the survivability of mankind." He's 112th on the Forbes 400, worth $2.3 billion: "Most people invest and then sit around worrying what the next blowup will be. I do the opposite. I wait for the blowup, then invest." He waited with a half-billion-dollar war chest.

One year later- look at the deal Morgan closed on May 22, 2007

Morgan Stanley Real Estate Acquires Crescent Real Estate Equities (CEI) for $22.80/Sh
Crescent Real Estate Equities Company (NYSE: CEI) entered into a definitive agreement pursuant to which funds managed by Morgan Stanley Real Estate will acquire Crescent in an all cash transaction for $22.80 per share and the assumption of liabilities for total consideration of approximately $6.5 billion. Shares of Crescent Real Estate Equities closed at $21.62 today.

Crescent Real Estate Equities Co. (NYSE: CEI) has finally found a buyer, and one that seems to like its mixed-use approach. Morgan Stanley Real Estate has agreed to acquire the Fort Worth, Texas-based REIT for a deal that totals $6.5 billion, including the assumption of debt.

Crescent, a mixed-use REIT owned by Texas billionaire Richard Rainwater, was in the midst of morphing itself into a pure-play office REIT. After evaluating its strategic options, the company came to the conclusion that it could "take advantage of the void left by rabid industry consolidation" as a remade office REIT. More likely, it was positioning itself better for an outright sale.

The Crescent deal just underscores the notion that the private equity boom is still in full swing. According to a New York Times article citing data from Thomson Financial, there have been $281 billion worth of private equity deals in the U.S. so far this year -- that's triple the amount compared to the same period last year, which ended up breaking all sorts of records.

There seems to be plenty of momentum left for REIT take-private deals, too. Year to date, 12 REITs have gone private for a total of $16.2 billion. But, there's still a ways to go to catch up to the lofty levels of 2006, when 23 deals totaling $64.3 billion, including the mammoth EOP buyout, took place, according to SNL Financial data listed in an article by The Wall Street Journal.

Greenhill & Co. LLC served as Crescent's financial advisor and Pillsbury Winthrop Shaw Pittman LLP provided legal

Goldman Sachs and Morgan Stanley decided—while fearing for their own existence—to transform themselves into bank holding companies in September (bringing with it the ability to access the Federal Reserve's discount window), they essentially brought to an end the era of the standalone investment bank.

Bank of America said it couldn't even close its Merrill Lynch acquisition without substantial extra government help, and is likely to get billions of dollars in federal guarantees.

Comprehensive regulatory reform is critical to these efforts

March 26, 2009 10:00 AM EDT

Below is Treasury Secretary Tim Geithner's Written Testimony to the House Financial Services Committee Hearing on financial regulatory reform:

Thank you Chairman Frank, Ranking Member Bachus, and other members of the Committee. I appreciate the opportunity to testify about the critical topic of financial regulatory reform.

Over the past 18 months, we have faced the most severe global financial crisis in generations. Some of the world’s largest financial institutions have failed. Equity and real estate prices have fallen sharply, eroding the value of our savings. The supply of credit has tightened dramatically. Confidence in the overall financial system, in the protections it is supposed to afford for investors and consumers, has eroded. These financial pressures have intensified the recession now underway around the world.

And as in any financial crisis, the damage falls on Main Street. It affects the vulnerable. It affects those who were conservative and responsible, not just those who took too much risk.

Our system is wrapped today in extraordinary complexity, but beneath all that, financial systems serve an essential and basic function. Financial institutions and markets transform the earnings and savings of American workers into the loans that finance a home, a new car or a college education. They exist to allocate savings and investment to their most productive uses.

Our financial system does this better than any other financial system in the world, but our system failed in basic fundamental ways. The system proved too unstable and fragile, subject to significant crises every few years, periodic booms in real estate markets and in credit, followed by busts and contraction. Innovation and complexity overwhelmed the checks and balances in the system. Compensation practices rewarded short-term profits over long-term return. We saw huge gains in increased access to credit for large parts of the American economy, but those gains were overshadowed by pervasive failures in consumer protection, leaving many Americans with obligations they did not understand and could not sustain. The huge apparent returns to financial activity attracted fraud on a dramatic scale. Large amounts of leverage and risk were created both within and outside the regulated part of the financial system.

These failures have caused a great loss of confidence in the basic fabric of our financial system, a system that over time has been a tremendous asset for the American economy.

To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game. The new rules must be simpler and more effectively enforced and produce a more stable system, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market.

On February 25, after meeting with the banking and financial services leadership from Congress, President Obama directed his economic team to develop recommendations for financial regulatory reform and to begin the process of working with the Congress on new legislation. The Treasury Department has been working with the President’s Working Group on Financial Markets (PWG) to develop a comprehensive plan of reform. This effort has been and will be guided by principles the President set forth earlier this year and in his speech as a candidate at Cooper Union in March 2008.

Financial institutions and markets that are critical to the functioning of the financial system and that could pose serious risks to the stability of the financial system need to be subject to strong oversight by the government. Our financial system and the major centralized markets must be strong and resilient enough to withstand very severe shocks and the failure of one or more large institutions. We need much stronger standards for openness, transparency, and plain, common sense language throughout the financial system. And we need strong and uniform supervision for all financial products marketed to consumers and investors, and tough enforcement of the rules to ensure full accountability for those who violate the public trust.

Financial products and institutions should be regulated for the economic function they provide and the risks they present, not the legal form they take. We can’t allow institutions to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints.

And we need to recognize that risk does not respect national borders. We need to prevent national competition to reduce standards and encourage a race to higher standards. Markets are global and high standards at home need to be complemented by strong international standards enforced more evenly and fairly. These are global markets and challenges. Building on these principles, we want to work with Congress to put in place fundamental reforms that create a stronger, more stable system, with much stronger protections for consumers and investors, and a more streamlined, consolidated, and simple oversight framework.

I want to begin that process today by focusing on proposals that are essential to creating a more stable system, with stronger tools to prevent and manage future crises. In this context, my objective is to concentrate on the substance of the reform agenda, rather than the complex and sensitive questions of who should be responsible for what.

Over the next few weeks we will outline proposals in the areas of consumer and investor protection and for reform of regulatory oversight arrangements.

We start with systemic risk, not just because of its obvious importance to our future economic performance, but also because these issues require more cooperation globally, and they will be at the center of the agenda at the upcoming Leaders’ Summit of the G-20 in London on April 2.

These proposals reflect a range of complex and consequential policy choices. They will require careful work and drafting. It is important that we get this right. We recognize there will be many alternative models put forth to achieve the objective we all share of creating a more stable system. And we look forward to working with the Federal Reserve, with the agencies that make up the President’s Working Group on Financial Markets, and with the Congress on a package of reforms that we can all support.

The Crisis and Its Fundamental Causes

The current crisis had many causes.

Two decades of sustained economic growth bred widespread complacency among financial intermediaries and investors, lowering borrowing costs and weakening lending standards.

A global boom in savings resulted in large flows of capital into the United States and other markets, pushing down long-term interest rates and pushing up asset prices. The rising market hid Ponzi schemes and other flagrant abuses that should have been detected and eliminated.

In that environment, institutions and investors looked for higher returns by taking on greater exposure to the risk of infrequent but severe losses.

A long period of home price appreciation encouraged borrowers, lenders, and investors to make choices that could only succeed if home prices continued to appreciate. We had a system under which firms encouraged people to take unwise risks on complicated products, with ruinous results for them and for our financial system.

Market discipline failed to constrain dangerous levels of risk-taking throughout the financial system. New financial products were created to meet demand from investors, and the complexity outmatched the risk-management capabilities of even the most sophisticated financial institutions. Financial activity migrated outside the banking system, relying on the assumption that liquidity would always be available.

Regulated institutions held too little capital relative to the risks to which they were exposed. And the combined effects of the requirements for capital, reserves and liquidity amplified rather than dampened financial cycles. This worked to intensify the boom and magnify the bust.

Supervision and regulation failed to prevent these problems. There were failures where regulation was extensive and failures where it was absent.

Regulators were aware that a large share of loans made by banks and other lenders were being originated for distribution to investors through securitizations, but they did not identify the risks caused by explosive growth in complex products based on these products.

Investment banks, large insurance companies, finance companies, and the GSEs were subject to only limited oversight on a consolidated basis, despite the fact that many of those companies owned federally insured depository institutions or had other access to explicit or implicit forms of support from the government. Federal law allowed many institutions to choose among regulatory regimes for consolidated supervision and, not surprisingly, they avoided the stronger regulatory authority applicable to bank holding companies. Those companies and others were highly leveraged or used short-term borrowing to buy long-term assets, yet lacked strong federal prudential regulation and routine access to central bank liquidity.

And while supervision and regulation failed to constrain the build up of leverage and risk, the United States came into this crisis without adequate tools to manage it effectively. Until the Housing and Economic Recovery Act and the Emergency Economic Stabilization Act were passed in the summer and fall of 2008, the executive branch had effectively no ability to provide the capital or guarantees necessary to contain the damage caused by the crisis.

And as I discussed before this committee on Tuesday, U.S. law left regulators without good options for managing failures of systemically important non-bank financial institutions.

Regulation of a financial system as complex and dynamic as our system is inherently difficult and challenging. But that difficulty has been compounded by a U.S. regulatory structure that is unnecessarily complex and fragmented. The complexity has sometimes resulted in a failure to assign clear responsibility for achievement of some public policy objectives, notably for financial stability.

Toward a More Stable and Resilient Financial System

Our comprehensive framework for regulatory reform will cover four broad areas: systemic risk, consumer and investor protection, eliminating gaps in our regulatory structure; and international coordination.

In the coming weeks, I will present detailed frameworks for each of these areas. Today, I will discuss in greater detail the need to create tools to identify and mitigate systemic risk, including tools to protect the financial system from the failure of systemically important financial institutions.

Second, weaknesses in our consumer and investor protections harm individuals, undermine trust in our financial system, and can contribute to systemic crises that shake the very foundations of our financial system. The choice of what home mortgage to get or how to save for retirement are some of the most important financial decisions that households make. It is crucial that when households make choices we have clear rules of the road that prevent manipulation and abuse. We must restore integrity to our financial system and strengthen these protections. Consumer and investor protection is a critical component of the President’s regulatory reform plan. We are developing a strong, comprehensive plan for consumer and investor regulation to simplify financial decisions for households and to protect people from unfair and deceptive practices.

We must end the practice of allowing banks and other financial companies to choose their regulator simply by changing their charters; regulators must choose who to regulate. Moreover, our regulatory system must be comprehensive and eliminate gaps in coverage. Our regulatory structure must assign clear regulatory authority, resources, and accountability for each of the key regulatory functions. We must not let turf wars or concerns about the shape of organizational charts prevent us from establishing a substantive system of regulation that meets the needs of the American people.

To match the increasing global markets, we must ensure that global standards for financial regulation are consistent with the high standards we will be implementing in the United States.

The Financial Stability Forum (FSF) has played an essential role in the effort, working with the world’s standard - setting bodies to study the underlying causes of the crises and address these weaknesses. Much progress is being made to enhance sound regulation, strengthen transparency, and reinforce international collaboration.

We have begun to work with international colleagues to reform and strengthen the FSF so that it can play a more effective role alongside the original Bretton Woods institutions in strengthening the financial system. We have already gotten agreement to expand the membership to include all G-20 countries, giving it a stronger mandate for promoting more robust standards consistent with the principles above, and working with the IMF and the World Bank to monitor the implementation of those standards.

In addition, we will launch a new, initiative to address prudential supervision, tax havens, and money laundering issues in weakly regulated jurisdictions. President Obama will underscore in London on April 2 at the Leaders’ Summit the imperative of raising standards across the globe and encouraging a race to the top rather than a race to the bottom.

Reducing Systemic Risk

The crisis of the past 18 months has exposed critical gaps and weaknesses in our regulatory system. As risks built up, internal risk management systems, rating agencies and regulators simply did not understand or address critical behaviors until they had already resulted in catastrophic losses.

This crisis has made clear that certain large, interconnected firms and markets need to be under a more consistent, and more conservative regulatory regime. These standards cannot simply address the soundness of individual institutions, but must also ensure the stability of the system itself. We need to strengthen our system of prudential supervision across the financial sector. We must require that firms build up capital during good economic times so that they have a more robust protection against losses in down times – and can continue to lend to America’s households and businesses big and small. We need to examine our accounting rules to see whether, consistent with investor protection, we can require firms to build up loan loss reserves that look forward and account for losses in downturns.

In addition, regulators must issue standards for executive compensation practices across all financial firms. These guidelines should encourage prudent risk-taking, incent a focus on long-term performance of the firm rather than short-term profits, and should not otherwise create incentives that overwhelm risk management frameworks.

The key elements of our plan to address systemic risk are:

First, we need to establish a single entity with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities.

Second, we need to establish and enforce substantially more conservative capital requirements for institutions that pose potential risk to the stability of the financial system, that are designed to dampen rather than amplify financial cycles.

Third, we should require that leveraged private investment funds with assets under management over a certain threshold register with the SEC to provide greater capacity for protecting investors and market integrity.

Fourth, we should establish a comprehensive framework of oversight, protections and disclosure for the OTC derivatives market, moving the standardized parts of those markets to central clearinghouse, and encouraging further use of exchange-traded instruments.

Fifth, the SEC should develop strong requirements for money market funds to reduce the risk of rapid withdrawals of funds that could pose greater risks to market functioning.

And sixth, we need to establish a stronger resolution mechanism that gives the government tools to protect the financial system and the broader economy from the potential failure of large complex financial institutions.

Systemically Important Financial Firms and Markets

To ensure appropriate focus and accountability for financial stability we need to establish a single entity with responsibility for consolidated supervision of systemically important firms and for systemically important payment and settlement systems and activities.

We can no longer allow major financial institutions to choose among consolidated supervision regimes and regulators or to avoid consolidated supervision entirely. That means we must create higher standards for all systemically important financial firms regardless of whether they own a depository institution, to account for the risk that the distress or failure of such a firm could impose on the financial system and the economy. We will work with Congress to enact legislation that defines the characteristics of covered firms, sets objectives and principles for their oversight, and assigns responsibility for regulating these firms.

In identifying systemically important firms, we believe that the characteristics to be considered should include: the financial system’s interdependence with the firm, the firm’s size, leverage (including off-balance sheet exposures), and degree of reliance on short-term funding, and the firm’s the importance of the firm as a source of credit for households, businesses, and governments and as a source of liquidity for the financial system.

In general, the design and degree of conservatism of the prudential requirements applicable to such firms should take into account the inherent inability of regulators to predict future outcomes.

Capital requirements for these firms must be sufficiently robust to be effective farther into the tails of potential outcomes than capital requirements for other financial firms. And they must be less pro-cyclical, requiring firms to build up substantial capital buffers in good economic times so that they can avoid deleveraging in cyclical downturns.

The single systemic regulator will also need to impose liquidity, counterparty, and credit risk management requirements that are more stringent than for other financial firms. For instance, supervisors should apply more demanding liquidity constraints; and require that these firms are able to aggregate counterparty risk exposures on an enterprise basis within a matter of hours.

The regulator of these entities will also need a prompt, corrective action regime that would allow the regulator to force protective actions as regulatory capital levels decline, similar to that of the FDIC with respect to its covered agencies.

Payment and Settlement Activities

Weaknesses in the settlement systems for key funding and risk transfer markets, notably overnight and short-term lending markets (such as those for tri-party repurchase agreements) and OTC derivatives, have been highlighted as a key mechanism that could spread financial distress between institutions and across borders. While some progress was made in the markets for CDS and other OTC derivatives while I was at the New York Fed, federal authority over such arrangements is incomplete and fragmented, and we have been forced to rely heavily on moral suasion to encourage market participants to strengthen these markets.

We need to give a single entity broad and clear authority over systemically important payment and settlement systems and activities. Where such systems or their participants are already federally regulated, the authority of those federal regulators should be preserved and the single entity should consult and coordinate with those regulators.

Hedge Funds and Other Private Pools of Capital

U. S. law generally does not require hedge funds or other private pools of capital to register with a federal financial regulator, although some funds that trade commodity derivatives must register with the CFTC and many funds register voluntarily with the SEC. As a result, there are no reliable, comprehensive data available to assess whether such funds individually or collectively pose a threat to financial stability. However, in the wake of the Madoff episode it is clear that, in order to protect investors, we must close gaps and weaknesses in regulation of investment advisors and the funds they manage.

Accordingly, we recommend that all advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) with assets under management over a certain threshold be required to register with the SEC. All such funds advised by an SEC-registered investment adviser should be subject to investor and counterparty disclosure requirements and regulatory reporting requirements. The regulatory reporting requirements for such funds should require reporting, on a confidential basis, information necessary to assess whether the fund or fund family is so large or highly leveraged that it poses a threat to financial stability. The SEC should share the reports that it receives from the funds with the entity responsible for oversight of systemically important firms, which would then determine whether any hedge funds could pose a systemic threat and should be subjected to the prudential standards outlined above.

Credit Default Swaps and Other OTC Derivatives

The current financial crisis has been amplified by excessive risk-taking by certain insurance companies and poor counterparty credit risk management by many banks trading Credit Default Swaps (CDS) on asset-backed securities. These complex instruments were poorly understood by counterparties, and the implication that they could threaten the entire financial system or bring down a company of the size and scope of AIG was not identified by regulators, in part because the CDS markets lacked transparency.

Let me be clear: the days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end.

In our proposed regulatory system, the government will regulate the markets for credit default swaps and over-the-counter derivatives for the first time.

We will subject all dealers in OTC derivative markets and any other firms whose activities in those markets pose a systemic threat to a strong regulatory and supervisory regime as systemically important firms.

We will force all standardized OTC derivative contracts to be cleared through appropriately designed central counterparties (CCPs). We will also encourage greater use of exchange-traded instruments.

The CCPs will be subject to comprehensive settlement systems supervision and oversight, consistent with the authority outlined above.

We will require that all non-standardized derivatives contracts be reported to trade repositories and be subject to robust standards for documentation and confirmation of trades, netting, collateral and margin practices, and close-out practices.

We will bring unparalleled transparency to the OTC derivatives markets by requiring CCPs and trade repositories to make aggregate data on trading volumes and positions available to the public and make individual counterparty trade and position data available on a confidential basis to federal regulators, including those with responsibilities for market integrity.

Finally, we will strengthen participant eligibility requirements and, where appropriate, introduce disclosure or suitability requirements, and we will require all market participants to meet recordkeeping and reporting requirements.

Money Market Mutual Funds (MMFs)

In the wake of Lehman Brothers’ bankruptcy, we learned that even one of the most stable and least risky investment vehicles - money market mutual funds - was not safe from the failure of a systemically important institution. These funds are subject to strict regulation by the SEC and are billed as having a stable asset value - a dollar invested will always return the same amount. But when a major prime MMF “broke the buck” - lost money - the event sparked sharp withdrawals across the entire prime MMF industry. Those withdrawals resulted in severe liquidity pressures, not only on prime MMFs but also on financial and non-financial companies that relied significantly on MMFs for funding. The vulnerability of MMFs to breaking the buck and the susceptibility of the entire prime MMF industry to sharp withdrawals in such circumstances remains a significant source of systemic risk.

We believe that the SEC should strengthen the regulatory framework around MMFs in order to reduce the credit and liquidity risk profile of individual MMFs and to make the MMF industry as a whole is less susceptible to runs.

Resolution Authority

As I discussed on Tuesday, we must create a resolution regime that provides authority to avoid the disorderly liquidation of any nonbank financial firm whose disorderly liquidation would have serious adverse effects on the financial system or the U.S. economy.

Please note that the draft resolution legislation we have submitted is a first step intended to address a significant void in today's regulatory structure. This mechanism is intended to be a permanent authority and therefore, will also be a critical element of Treasury's broader regulatory reform proposals. As we move forward on those proposals, we will need to align the draft legislation with the broader regulatory reform effort as it develops. At this point, however, I will focus on how the authority and mechanism would work within our current regulatory framework.

We must cover financial institutions that have the potential to pose systemic risks to our economy but that are not currently subject to the resolution authority of the FDIC. This would include bank and thrift holding companies and holding companies that control broker-dealers, insurance companies, and futures commission merchants, or any other financial firm posing substantial risk to our economy.

Before any of the emergency measures specified could be taken, the Secretary of the Treasury, upon the positive recommendations of both the Federal Reserve Board and the FDIC and in consultation with the President, would have to make a triggering determination that (1) the financial institution in question is in danger of becoming insolvent; (2) its insolvency would have serious adverse effects on economic conditions or financial stability in the United States; and (3) taking emergency action as provided for in the law would avoid or mitigate those adverse effects.

The Treasury and the FDIC would decide whether to provide financial assistance to the institution or to put it into conservatorship/receivership. This decision will be informed by the recommendations of the Federal Reserve Board and the appropriate federal regulatory agency (if different from the FDIC). The U.S. government would be permitted to utilize a number of different forms of financial assistance in order to stabilize the institution in question. These include making loans to the financial institution in question, purchasing its obligations or assets, assuming or guaranteeing its liabilities, and purchasing an equity interest in the institution.

This authority is modeled on the resolution authority that the FDIC has under current law with respect to banks and that the Federal Housing Finance Agency has with regard to the GSEs. Here, conservatorships or receiverships aim to minimize the impact of the potential failure of the financial institution on the financial system and consumers as a whole, rather than simply addressing the rights of the institution’s creditors as in bankruptcy.

Depending on the circumstances, the FDIC and the Treasury would place the firm into conservatorship with the aim of returning it to private hands or a receivership that would manage the process of winding down the firm. The trustee of the conservatorship or receivership would have broad powers, including to sell or transfer the assets or liabilities of the institution in question, to renegotiate or repudiate the institution’s contracts (including with its employees), and to deal with a derivatives book. A conservator would also have the power to fundamentally restructure the institution by, for example, replacing its board of directors and its senior officers. None of these actions would be subject to the approval of the institution’s creditors or other stakeholders.

The proposed legislation would create an appropriate mechanism to fund the appropriately limited exercise of the resolution authorities it confers. This could take the form of a mandatory appropriation to the FDIC out of the general fund of the Treasury (subject to all the restrictions on the use of appropriated funds, including apportionments under the Anti-Deficiency Act), and/or through a scheme of assessments, ex ante or ex post, on the financial institutions covered by the legislation. The government would also receive repayment from the redemption of any loans made to the financial institution in question, and from the ultimate sale of any equity interest taken by the government in the institution. The Deposit Insurance Fund will not be used to fund such assistance.

Conclusion

The President has made clear that we will do what is necessary to stabilize the financial system and restore the conditions for economic growth. Working closely with the Congress, we have moved quickly and with forceful action to help get people back to work and the economy growing again. With your help we are also moving to repair the financial system so that it works for, rather than against, recovery.

Comprehensive regulatory reform is critical to these efforts. In the coming days and weeks, we will continue to lay out the steps we must take to protect against systemic risk. We will also lay out a detailed framework for stronger rules to protect consumers and investors against fraud and abuse.

Next week I will join President Obama in London for the G-20 leaders meeting to build support - with the help of other interested nations and strengthened international bodies -for higher global standards for financial regulation.

We are a strong and resilient country. We came into the current crisis without the authority and tools we needed to contain the damage to the economy from the financial crisis. We are moving to ensure that we are equipped with both in the future, and in the process, that we modernize our 20th century regulatory system meet 21st century financial challenges.

The only true statement in this AP article is

Almost $400,000 seized in Ohio fraud case
By ANDREW WELSH-HUGGINS – 21 hours ago

This is misleaduing and WRONG!COLUMBUS, Ohio (AP) — A fugitive convicted in a $1.9 billion corporate fraud scheme put aside almost $400,000 in a bank account before she disappeared, money her trial attorney said he knew nothing about.

Rebecca Parrett, who has been on the lam nearly a year, gave the money to another attorney after removing it from an escrow account, according to federal court documents. But on Friday, U.S. District Court Judge Algenon Marbley said the funds should be seized from an Arizona bank account used by Parrett, 60, a former executive with National Century Financial Enterprises.

The government could use the money to provide restitution to investors who lost money.

Parrett, who will be sentenced Friday in absentia, faces up to 60 years in prison. She disappeared last March after her conviction on 13 counts of securities and wire fraud and money laundering while she worked for National Century in suburban Columbus. Prosecutors likened the fraud, which involved misleading investors and fabricating data, to the Enron or WorldCom scandals.

Arizona attorney Seymour Sacks told the U.S. marshals that Parrett had given him $350,000 from an escrow account, the warrant said. Sacks said he refused to turn the money over to Parrett's husband and son when they requested it after she disappeared, according to the warrant.

Gregory Peterson, who represented Parrett at trial, said he only learned of the money's existence after his client disappeared.

"I was not aware of any money she had anywhere," Peterson said Monday, repeating that he didn't know where his client was.

Parrett's sentencing in absentia will come a few hours before Marbley sentences Lance Poulsen, National Century's founder and former chief executive.

The sentencings are the latest chapter in the downfall of what was once the country's largest health care financing company. Since the FBI raided its offices in 2002, at least nine former executives have been convicted of corporate fraud.

At its height the company employed more than 300 people, most of them in the Columbus area. Executives made millions, with Poulsen alone earning more than $9.1 million between 1996 and 2002, according to the government.

National Century offered financing to small hospitals, nursing homes and other health care providers by purchasing their accounts receivable, usually for 80 or 90 cents on the dollar, so they wouldn't have to wait for insurance payments. National Century then collected the full amount of the payments.

The company raised the money to fund its business by selling bonds to investors. It declared bankruptcy in 2002 after the FBI raid.

Copyright © 2009 The Associated Press. All rights reserved.

AIG POLITICAL CONTRIBUTIONS

March 8, 2004

AIG, Citigroup Battle Unions on Political Donation Disclosure

http://www.bloomberg.com/apps/news?pid=10000103&sid=arBbK7iUfgPM&refer=us

Merrill Backs Bush

Bush derives much of his campaign donations from executives at publicly traded companies, with employees at Merrill Lynch & Co., UBS AG and MBNA Corp. among those making up 13 of his top 20 donors last year, contributing $2.9 million.

Six of the top 20 donors to Senator John Kerry, who has clinched the Democratic Party's presidential nomination, were employees of listed companies, and they gave $275,000 since he began campaigning in January 2003, according to the Center for Responsive Politics.

The shareholder resolutions were filed in December and January by the Service Employees International Union and other affiliates of the AFL-CIO, a federation of 64 unions representing 13 million people. They seek annual reports about corporate donations and ``an accounting of the company's resources, including property and personnel, contributed or donated to'' political parties or candidates.

General Electric

Shareholder proposals included in proxy ballots seldom garner a majority of votes, though a high percentage of favorable returns can send a message to the board, said Sabato at the University of Virginia.

Many of the companies targeted by the proposal asked the SEC to let them exclude the information from their proxies on the grounds that political involvement is part of ordinary business. Warren, New Jersey-based Chubb Corp., which was denied its request to omit the proposal, said in letters to the SEC that the measure would constitute micro-management by shareholders.

``Providing detailed information regarding which members of management influence which decisions about political contributions extends deeply into the company's daily decision- making procedures,'' Chubb wrote.

The SEC denied a request by Wells Fargo & Co. to omit the resolutions from its proxy. Wells Fargo, based in San Francisco, will post its policy on political contributions on its Web site in accordance with the unions' request, said spokeswoman Julia Tunis.

General Electric Co., whose chairman and chief executive officer, Jeffrey Immelt, 48, donated $2,000 to the Bush campaign, included the resolution in its proxy -- along with a recommendation to shareholders to vote against it.
``Because GE is committed to complying with applicable campaign finance laws, including all reporting requirements, we do not believe the report requested in this proposal is necessary,'' the Fairfield, Connecticut-based company said in its proxy.
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/18/AR2009031803201.html?wpisrc=newsletter

From 1987 to 2004, the company's financial products unit contributed more than $5 billion to AIG's pretax income. In spring 2005, after I left the company, AIG's credit rating was downgraded. It would have been logical for AIG's new management to end or reduce its business of writing credit default swaps because of the risk it faced of having to post billions of dollars in additional collateral in connection with certain credit default protection. Yet AIG ramped up its credit default swaps business; significantly, the quality of the securities AIG wrote credit protection for deteriorated, and the company plunged into subprime mortgages. The results were disastrous.

Charles Krauthammer-Bigger than Enron

I AM SO CONFUSED!

Did this happen Januaray 20, 2009?

I am guessing NOT!

I say before 1999 even....but let us look:

Ready?

2004

AIG

2004

MERRILL

March 8, 2004

AIG, Citigroup Battle Unions on Political
Donation Disclosure

http://www.bloomberg.com/apps/news?pid=10000103&sid=arBbK7iUfgPM&refer=us

Merrill Backs Bush

Bush derives much of his campaign donations from executives at publicly traded companies, with employees at Merrill Lynch & Co., UBS AG and MBNA Corp. among those making up 13 of his top 20 donors last year, contributing $2.9 million.

Six of the top 20 donors to Senator John Kerry, who has clinched the Democratic Party's presidential nomination, were employees of listed companies, and they gave $275,000 since he began campaigning in January 2003, according to the Center for Responsive Politics.

WHO HAD ACCESS IN 2004? AIG or me?

Bigger then Enron- Credit Suisse

Credit Suisse Loses Bid To Toss Nat'l Century Suit

Law360, New York (March 19, 2009) -- A federal judge has refused to dismiss a suit against Credit Suisse Securities LLC alleging that it helped National Century Financial Enterprises Inc. run the enormous Ponzi scheme that eventually drove it into bankruptcy.

Judge James L. Graham of the U.S. District Court for the Southern District of Ohio ruled Wednesday that nearly all claims of the lawsuit, which was filed by a trust...

My comment to Tom Daschle's Op-Ed in WaPO

OBAMA says: The epitome of Fraud Waste and Abuse….

I SAY: Root that out and we can afford much more to spend!

PAY ATTENTION PEOPLE

Are you aware of the largest private financial fraud in our country's history that ended December 2008?

WHY?

It was not 'low income housing' mortgages; it was HEALTHCARE FINANCIAL FRAUD; the largest private "FINANCIAL INSTITUTION“in our country.

JULY 10, 2007 - SUPERSEDING INDICTMENT CHARGES EIGHT FORMER EXECUTIVES OF HEALTH CARE FINANCING COMPANY WITH CONSPIRACY, FRAUD, MONEY LAUNDERING

"This case is one of the largest corporate fraud investigations involving a privately held company headquartered in small town America," said FBI Criminal Investigative Division. (Because it was private, no one has ever heard of this case, cried one prosecutor)

A reminder relating to the NEED for ‘healthcare financial service’ i.e. (NCFE) National Century Financial Enterprises; home health - which was struggling under the Balanced Budget Act of 1997; about 1,400 agencies closed nationwide in 1998.

Recall in 1998: On Sept 8, 1998 Standard and Poors downgraded the bonds of Charter/HCA …

The following is an excerpt from a 10-K SEC Filing, filed by J P MORGAN CHASE & CO on 3/9/2006:
the three current or former Firm employees are sued in their roles as former members of NCFE's (National Century Financial Enterprises) board of directors

2002 FBI Raids NCFE headquarters in Dublin Ohio

Prior to the exposure of ‘some’ of the fraud at NCFE, the same entities were also involved in the "LARGEST PRIVATE" Bankruptcy Court in Memphis, TN in 1999. (Another “private’ company; remember, home health - which was struggling under the Balanced Budget Act of 1997)

Guess what this LARGEST PRIVATE Company filing bankruptcy in Tennessee was--- HOME HEALTHCARE!

The SEC NEVER received documentation of the publicly traded companies allegedly selling or divesting their home health units to this private company.
Six months or so later after the acquisition of all the losers, this private healthcare company filing bankruptcy in Tennessee held much of if not ALL of Columbia/HCA Homecare’s losing' assets, home health- financed by the largest fraudulent private "FINANCIAL INSTITUTION “in our country, NCFE.

Tennessee Bankruptcy court transcripts reveal lawyers crying Fraud only to be reprimanded by the appointed corporate bankruptcy judge. She forbade the lawyers from using the ‘F’ (fraud) word in her court. (Got to love those appointed judges) Guess what tool was used in this corporate bankruptcy court in TN? DIP FINANCE TOOL.


March 26, 2008; By Jodi Andes; THE COLUMBUS DISPATCH
Nine other executives have been convicted or pleaded guilty in National Century's collapse. Only Poulsen and executive James Happ still await trial.

Only CEO and ONE EXECUTIVE –JAMES K HAPP await trial? JAMES K HAPP –LAST PERSON ON TRIAL—

WHY?
Who is James K Happ? Where was James K Happ when Richard Scott was at Columbia in 1997?

In 1997 James K Happ was the CFO of the Dallas-based Columbia Homecare Group, Inc. “In this role, he directed the company through the challenging reimbursement climate, known as the interim payment system, and participated in the divestiture of all of Columbia/HCA's home care operations” (SEC Form)


Let me remind you the size and TOO BIG TO FAIL mentality for HCA-Hospital Corporation of America is in Nashville, TN. Remember Senator Bill Frist- Leader of the Senate- HOLY COW!

December 9, 2008. James K. Happ, 48, is charged with conspiracy, money-laundering conspiracy and three counts of wire fraud; the 11th National Century executive to be tried or admit guilt. , Also today, a former friend of Happ's testified that, while working at National Century, Happ boasted that he never could be charged with any fraud because he didn't sign anything.

(Just like Madoff’s sons never signed anything therefore they are not involved.)

December 18, 2008 - The ONE AND ONLY acquittal; James K Happ!

By Jodi Andes THE COLUMBUS DISPATCH
Prosecutors' case fell short, juror says National Century fraud case produces 1st acquittal; The "not guilty" verdicts that came in federal court yesterday were not so much a vindication of the last National Century Financial Enterprises executive to stand trial, a juror said.

Instead, they were more a belief that federal prosecutors had not done their job, the juror said after he and his fellow jurors acquitted James K. Happ of five counts after 12 hours of deliberation. "He very well may have been guilty. A lot of us thought he was," said the juror who wouldn't give his name. "But if he was, you gotta have the evidence."

“Federal prosecutors had not done their job” in 2008?

To be continued…..

Economic Pear Harbor

CNBC great show? Well let us look at John Stewart's clip showing us how GREAT CNBC is!
IDIOTS!


N.Y. Times, 'CNBC Thrives as Hosts Deliver News With Attitude,' by Brian Stelter and Tim Arango: 'One month shy of its 20th anniversary, CNBC is being jokingly called 'the recession network' within the halls of its headquarters in New Jersey. After it achieved record ratings last fall, the network's audience remains above its annual average. But CNBC's executives and hosts seem well aware that their ratings have traditionally stagnated in down times for the Dow. 'People do not want to come to a show each night and hear how poor they are,' ['Mad Money' host Jim] Cramer said. But in a change from previous downturns, CNBC is now a place for politics, to borrow a phrase from its sister channel MSNBC. The network's journalists have been encouraged to speak their minds, making the line between reporter and commentator almost indistinguishable at times. ... With economic attention focused on Washington, the network is spending less time on bullish stock picks and more time assessing the government's actions. In recent weeks some have perceived the network to be leading the campaign against President Obama's economic agenda. ... Just as the first cable news channel, CNN, rose to prominence during the gulf war in 1991, and another one, the Fox News Channel, became a ratings leader in the period before the Iraq war in 2002 and 2003, CNBC is on a war footing. ... CNBC is a boon to NBC Universal's bottom line; it has posted record profits for at least the last three years.'

John Stewart, where are you?

Morgan Stanley private incarnation

Another PUBLIC goes PRIVATE SCAM....PONZI SCHEME

Morgan Stanley hasn't said yet if Crescent's top executives will stay with its new, private incarnation.

"...despite four shareholder lawsuits in Tarrant County, Texas, contesting it. "


This spring, Crescent said it intended to sell off its non-office holdings. A deal to sell the whole company to Morgan Stanley came up in May.

Financial adviser Richard Rainwater of Fort Worth, who formerly worked with Texas' wealthy Bass brothers, co-founded Crescent in 1994 with CEO John Goff.
Wednesday, August 1, 2007
REIT with extensive Colo. holdings to be soldDenver Business Journal


Shareholders in Crescent Real Estate Equities Co. of Fort Worth, Texas, OK'd the company's sale on Wednesday to Morgan Stanley for roughly $6 billion.

As of mid-July, Crescent owned 2.5 million square feet of office properties in Colorado and several residential developments in downtown Denver and mountain ski towns.

Nearly 74 percent of holders of Crescent's outstanding shares favored the sale.

The transaction includes a $22.80 per-share offering, valued at $2.3 billion, plus the assumption of $3.1 billion in Crescent debt.

The sale is expected to close Aug. 3, despite four shareholder lawsuits in Tarrant County, Texas, contesting it. Publicly traded Crescent (NYSE: CEI) will merge into an affiliate of New York-based Morgan Stanley's (NYSE: MS) real estate group. The existing Crescent company will cease to operate.

Crescent, a real estate investment trust (REIT), currently has 23 million square feet of office space nationwide, as well as residential and resort holdings.

The Texas company sold its 613-room Marriott City Center hotel in downtown Denver -- one of the metro area's largest hotels -- in a package deal in March. Walton TCC Hotel Investors V LLC bought the Marriott and Crescent's 190-room Park Hyatt Beaver Creek Resort for $550 million.

Crescent's current Denver-area office holdings include:

Johns Manville Plaza -- 675,400 square feet at 717 17th St., Denver, one of downtown Denver's largest office buildings;
707 17th Street (also called MCI Tower) -- 550,805 square feet in downtown Denver;
Regency Plaza One -- 309,862 square feet at 4643 S. Ulster St. in the Denver Tech Center;
Peakview Tower -- 264,149 square feet at 6465 S. Greenwood Plaza Blvd. in Centennial;
44 Cook -- 124,174 square feet at 44 Cook St. in Denver;
55 Madison -- 137,176 square feet at 55 Madison St. in Denver;
The Citadel -- 130,652 square feet at 3200 Cherry Creek South Drive in Denver.
Crescent's Denver residential developments that have not yet sold out include One Riverfront and The Park at One Riverfront. The company has another 310 acres in metro Denver for future housing development, including nearly seven acres downtown.

The Fort Worth company's mountain residential holdings range from Eagle Ranch in Eagle to Three Peaks in Silverthorne and Riverfront Village in Beaver Creek. Crescent has 170 acres for future projects.

This spring, Crescent said it intended to sell off its non-office holdings. A deal to sell the whole company to Morgan Stanley came up in May.

Financial adviser Richard Rainwater of Fort Worth, who formerly worked with Texas' wealthy Bass brothers, co-founded Crescent in 1994 with CEO John Goff.

Rainwater currently sits on company boards, and owns or controls more than 4 percent of the company's shares, according to GlobeSt.com. He also has more than 5 million partnership units. Goff and company president Dennis Alberts recently forfeited their $10.3 million worth of partnership units as part of the Morgan Stanley deal.

Morgan Stanley hasn't said yet if Crescent's top executives will stay with its new, private incarnation.

WAKE UP AMERICA! Credit Suisse Securities LLC investigates NCFE...

THIS NEEDS TO END! WAKE UP AMERICA! MORE PONZI SCHEMES?
JPMorgan and CITI were found GUILTY of contributing to the ENRON PONSI SCHEME. Both JPMORGAN CHASE and CITI PAID GOVERNMENT SETTLED AGREEMENTS FOR FRAUD in our nation's “LARGEST ‘PRIVATE’ FINANACIAL FRAUD CASE “ in our history! National Century Financial Enterprises, Inc. (NCFE) Federal prosecutors proclaimed “no one has ever heard of”. I believe that was intentional.
In the trial in Columbus, ALL executives ECCEPT ONE, was acquitted. Who was this one and only executive acquitted? James K Happ. Mr. James K Happ was the CFO at Richard Rainwater's Columbia Homecare Group before arriving at National Century Financial Enterprises, Inc. NCFE.
BUT HOLD ON......Now, FEBRUARY 2009, even though NCFE case was supposedly CLOSED by the DOJ in the BUSH ADMINISTRAION, in 2008, is now back in the INVESTIGATIN OF :
Credit Suisse Seeks Sanctions against Lloyds
Law360, New York (February 03, 2009) -- Credit Suisse Securities LLC has asked the court overseeing litigation over the collapse of health care lender National Century Financial Enterprises Inc. to sanction Lloyds TSB Bank PLC for allegedly hiding a deal with Moody's Investor Services Inc. in order to manipulate a deposition in its favor.Credit Suisse, which is accused by Lloyds and others of committing fraud as an agent for National Century's note offerings, said in a motion filed Friday that Lloyds concealed an...

Ask, "What Healthcare companies"? Maybe HCA & IHS ?

"National Century had overfunded certain health-care providers by $50 million to $200 million."
Ask, "What Healthcare companies"? Maybe HCA & IHS ? The two largest healthcare companies in our nation in 1996.

Ooops...1997 HealthCare Reform passed! Had to get rid of the industry known losing entities of thesse giants, Homehealth care.

Take a look at DIP Financing Tool that was used in the largest case in the history of Western Tennessee Bankruptcy Court. In that case, one would view the "Queen of Bankruptcy", Darla Moore and her bankruptcy tool, DIP FInance at its best.

This case would ultimatley benefit her husband's losing assets Columbia Homecare Group financed by NCFE.

Rainwater's aka HCA/TN aka Columbia Homecare Group was dumped into a private company financed by the largest private finance company.
Both of which aer no longer in existence.
But once again, the case in Tennessee was also 'unheard of' just like NCFE.

of HCA/TN,,Columbia Homecare Group---(Ricard Rainwater's Baby)



National Century was once the nation’s largest financier of physician practices and other health-care firms. It specialized in buying doctors’ receivables at discounts so the physicians could quickly secure they cash they needed for their businesses


Thursday, October 2, 2008
NCFE money exec put little stock in Poulsen, company claimsBusiness First of Columbus - by Kevin Kemper

After less than three months on the job, a former National Century Financial Enterprises Inc. executive wrote in his notes that he couldn’t trust statements made by his boss, CEO Lance Poulsen.

William Parizek, once the Dublin company’s director of corporate finance, testified Thursday as the government’s first witness in the fraud trial of Poulsen that he began to question financial decisions of National Century just weeks into his job at the business.

An accountant by training, Parizek started at National Century on Oct. 31, 1996 and left Jan. 16, 1997. Parizek testified Poulsen, who co-founded National Century, hired him to raise capital from investors who were interested in becoming part-owners of the company.

The government has accused Poulsen, 65, on conspiracy, wire fraud, money laundering and securities fraud charges for which he is standing trial in Columbus. Poulsen has pleaded not guilty to all the charges.

Parizek said he moved his family from Wichita, Kan., to join National Century because he had a chance to eventually make nearly $1 million a year if he met all of his job goals.

In order to pitch National Century to investors, Parizek testified he needed a full understanding of the company. A few weeks into his financial education, Parizek told jurors he discovered National Century had overfunded certain health-care providers by $50 million to $200 million.

National Century was once the nation’s largest financier of physician practices and other health-care firms. It specialized in buying doctors’ receivables at discounts so the physicians could quickly secure they cash they needed for their businesses. National Century then packaged the receivables as asset-backed bonds and sold them to investors.

The company collapsed into bankruptcy in 2002, allegedly forcing other medical businesses to fail and prompting the Justice Department to begin looking into the company’s failure. The government has alleged Poulsen and other executives at the company overfunded health-care companies owned by Poulsen and National Century’s other principles in a ploy to enrich themselves.

As Parizek asked more executives about the company, he became convinced the company was not operating legally, he told the jury. It was around that time that Parizek wrote in his notes: “Attribute no value to LKP (Lance K. Poulsen) statements.”

Parizek also wrote: “Attribute little value to internally generated documentation and data.”

On the day he resigned, more than two months after he joined the business, Parizek said Poulsen called him on his office phone. Poulsen started off friendly, Parizek told the jury, and then became angry and vulgar.

In his notes, Parizek wrote that Poulsen said: “I don’t know what your agenda is, but the only ... agenda in this company is mine.” Parizek also wrote in his notes that Poulsen said he didn’t need Parizek’s morality.

Under questioning by William Terpening, Poulsen’s attorney, Parizek sparred over whether he was fired or resigned from his job. Parizek maintained he resigned.

“You were fired by Mr. Poulsen,” Terpening said.

“That was not the case,” Parizek replied.

When Terpening asked Parizek about many of National Century’s financial inner workings, the witness said he couldn’t recall details. Terpening asked why Parizek’s detailed notes should then be considered accurate.

Terpening also asked why Parizek didn’t go to the government if he was concerned about National Century. Parizek answered he wanted to move on and didn’t think about National Century until the government contacted him in 2002 after the company went bankrupt.

Bush, Rainwater, Moore, Poulsen, Happ, Fraud, Healthcare Fraud, Bankruptcy Fraud, Financial Fraud

Columbia Homecare Group was also involved with the largest Bankruptcy in Western Tennessee . Medshares, Inc. which was also connected to the largest ‘private’ fraud case in Columbus Ohio, National Cantury Finanacial Enterprises, Inc. (NCFE).

Funny, the only executive to be acquitted was the ex-CFO of Columbia Homecare Group out of Dallas Ft Worth, Mr. Richard Rainwater’s losing assets of HCA/TN.
James K Happ, the ex-CFO, dumped all the homecares into Medshares, financed by, you guessed it, NCFE!!

Guess it pays to be the ex-partner of the worst President in our modern history.
Rainwater & Bush----go TEXAS RANGERS!!!!
I woncder if BUSH & RAINWATER will have dinner at the White House or maybe at the "WESTERN" White HOUSE. Oh and don't forget, Rainwater's wife, the Queen of Bankruptcy,Darla Moore. Remember, she was the inventor of 'DIP FINANCE' while at CHASE BANK for CORPORATE BANKRUPTCY.

By Dennis Jay
Jan 2, 2009, 4:18 PM EST

Let’s make 2009 the year we finally turn the corner on insurance fraud and truly make a difference in curbing this crime — and in the process, helping to keep insurance affordable and making the insurance system fairer for everyone.

To that end, here are a few New Year’s resolutions for the fraud-fighting community:

Insurers: Resolve to adopt a zero-tolerance attitude towards fraud. Provide adequate resources to your SIUs and recognize that a down economy is exactly the wrong time to cut back on anti-fraud activities;

Fraud bureaus: Resolve to become more efficient and adopt more strategies to deter fraud, including publicizing arrests and convictions;

Regulators: Resolve to seek greater uniformity in anti-fraud regulations from state to state, and ensure all insurers comply with anti-fraud requirements;

Prosecutors: Resolve to find creative ways to accept more fraud cases, especially the difficult ones.

State legislators: Resolve to give fraud-fighters more tools by enacting needed fraud legislation, and that goes double for lawmakers in Oregon, Virginia and Alabama, the last states that lack even a basic insurance fraud statutue;

President-elect Obama and Congress: Resolve to include strong anti-fraud provisions in any new healthcare initiatives;

Consumers: Resolve to resist the temptation to inflate insurance claims; encourage your friends, family and co-workers to stay honest.

And lastly, the coalition: Resolve to strengthen partnerships with all constituents groups, including other anti-fraud organizations, and to have a measurable impact on reducing insurance fraud.

May you stick to all of your resolutions and have a successful 2009!

In In re National Century Financial Enterprises, Inc. Investment Litigation, Lieff Cabraser serves as Lead Counsel for the New York City Employees' Retirement System, Teachers' Retirement System for the City of New York, New York City Police Pension Fund, and New York City Fire Department Pension Fund in a securities fraud and breach of fiduciary duties lawsuit against Bank One, JPMorgan Chase Bank, Credit Suisse First Boston LLC, and additional defendants.

The complaint charges that plaintiffs suffered $89 million in losses as a result of a massive Ponzi scheme orchestrated and implemented by National Century Financial Enterprises and defendants. To date, the funds have recovered approximately 60% of their losses through settlements and bankruptcy recoveries. Lieff Cabraser continues to prosecute the case against the non-settling defendants.

Likewise, Lieff Cabraser represented Kofuku Bank, Namihaya Bank and Kita Hyogo Shinyo-Kumiai (a credit union) in individual lawsuits against, among others, Martin A. Armstrong and HSBC, Inc., the successor-in-interest to Republic New York Corporation, Republic New York Bank and Republic New York Securities Corporation for alleged violations of federal securities and racketeering laws.

http://www.lieffcabrasersecurities.com/cases/madoff.htm

MISSED THE BIGGER PICTURE FOLKS!!!!

"Happ’s trial is expected to last most of December..."
The ONLY EXECUTIVE TO WALK AWAY....hmmm.....

Really? Funny how that LAST trial went to fast? Did not matter that Happ came from HCA ---RICHARD RAINWATER'S 'pet' Columbia Homecare Group...he dumped those into the Bankruptcy Court 6 mos prior in Western Tennessee's Medshares PONZI SCHEME!!!

What a bunch of CRAP!!!


Monday, December 1, 2008
NCFE’s Happ starts his day in courtBusiness First of Columbus - by Kevin Kemper




The fourth and final criminal trial involving a former executive of National Century Financial Enterprises Inc. began Monday at U.S. District Court in Columbus as lawyers picked jurors to decide the fate of James Happ.

The government has accused Happ of a count each of conspiracy and money laundering conspiracy plus three counts of wire fraud.

He has pleaded not guilty to all of the charges.

The former executive vice president of Dublin-based National Century is standing trial on accusations he was part of an executive-level cabal at the medical financing company that defrauded investors out of $2.84 billion.

Happ’s trial began at 9 a.m. with jury selection, which was expected to last the day. It will be followed by opening arguments from government attorneys and then defense lawyers, likely to begin Tuesday.

Happ becomes the seventh National Century executive to stand trial on fraud charges and the 11th to be charged with crimes. Six other former executives, including company founders Lance Poulsen, Rebecca Parrett and her ex-husband Donald Ayers, were found guilty by juries earlier in the year.

A financier for health-care providers like doctors’ offices and hospitals, National Century’s bread and butter was buying accounts receivable from care providers at a discount, then securitizing the receivables into AAA-rated bonds for sale to investors. At its peak, the company employed more than 350 workers at its office campus in Dublin while recording annual revenue of more than $250 million.

The government has alleged the company collapsed into bankruptcy in 2002 after running a sophisticated pyramid scheme that fell apart.

In addition to purchasing legitimate accounts receivable, the government alleged National Century funded companies owned by its founders without getting receivables in return, effectively making risky unsecured loans with investor cash. The company charged its clients for those advances, the government has said, which inflated National Century’s revenue and generated bonuses for senior executives.

Happ’s trial is expected to last most of December.

Go back to Grasso ....

SEC Chief Defends His Restraint
Cox Rebuffs Criticism of Leadership During Crisis

By Amit R. Paley and David S. Hilzenrath
Washington Post Staff Writers
Wednesday, December 24, 2008; Page A01

Christopher Cox, the embattled chairman of the Securities and Exchange Commission, is defending his restrained approach to the financial crisis, saying he has provided steady leadership as Wall Street's main regulator at a time when other federal regulators have responded precipitously to upheaval in the markets.

During his tenure, the SEC has watched as all the investment banks it oversaw collapsed, were swallowed up or got out of their traditional line of business. The agency, meanwhile, was on the sidelines while the Treasury Department and Federal Reserve worked to bail out the financial sector. And the SEC, by its own admission, failed to detect an alleged $50 billion fraud by Bernard L. Madoff that may be the largest Ponzi scheme in history.

But in his first interview since the Madoff scandal broke, Cox said he was not responsible for the agency's failure to detect the alleged fraud and that he had responded properly to the broader financial crisis given the information he had. Confronted with a barrage of criticism from lawmakers, former officials and even some of his staff, Cox said he took pride in his measured response to the market turmoil.

"What we have done in this current turmoil is stay calm, which has been our greatest contribution -- not being impulsive, not changing the rules willy-nilly, but going through a very professional and orderly process that takes into account unintended consequences and gives ample notice to market participants," Cox said. This caution, he added, "has really been a signal achievement for the SEC."

Taking a swipe at the shifting response of the Treasury and Fed in addressing the financial crisis, he said: "When these gale-force winds hit our markets, there were panicked cries to change any and every rule of the marketplace: 'Let's try this. Let's try that.' What was needed was a steady hand."

Cox said the biggest mistake of his tenure was agreeing in September to an extraordinary three-week ban on short selling of financial company stocks. But in publicly acknowledging for the first time that this ban was not productive, Cox said he had been under intense pressure from Treasury Secretary Henry M. Paulson Jr. and Fed Chairman Ben S. Bernanke to take this action and did so reluctantly. They "were of the view that if we did not act and act at that instant, these financial institutions could fail as a result and there would be nothing left to save," Cox said.

Although Cox speaks of staying calm in the face of financial turmoil, lawmakers across the political spectrum counter that this is actually another way of saying that his agency remained passive during the worst global financial crisis in decades. And they say that Cox's stewardship before this year -- focusing on deregulation as the agency's staff shrank -- laid the groundwork for the meltdown.

"The commission in recent years has handcuffed the inspection and enforcement division," said Arthur Levitt, SEC chairman during the Clinton administration. "The environment was not conducive to proactive enforcement activity."

Cox, 56, a former Republican congressman from California, became chairman in mid-2005 and plans to step down early next year before his full five-year term expires. President-elect Barack Obama has nominated Mary L. Schapiro, a former SEC commissioner, to replace him.

In a 90-minute conversation in his 10th-floor corner office last week, Cox said the SEC's emphasis on enforcement is as strong as ever. "We've done everything we can during the last several years in the agency to make sure that people understand there's a strong market cop on the beat," he said.

"That's why Madoff is such a big asterisk," he added. "The case is very troubling for that reason. It's what the SEC's good at. And it's inexplicable."

Cox argued that the agency has carefully defined responsibilities and that it was unfair to blame it for every problem on Wall Street.

"The public might not understand that that wasn't the SEC's job," he said, adding that the agency was not responsible for preventing investment banks from collapsing but rather for sheltering their securities trading units from problems in the broader corporation. "The SEC is not a safety and soundness regulator," he said.

Cox said that when he first took office he emphasized the importance of simplifying the rulemaking process and increasing transparency. Outside experts say he has succeeded.

"He's made it lot easier for the public to get information and made strong attempts at better disclosure," said Lee A. Pickard, a former director of the SEC's division of market regulation. "He unfortunately has had a couple of hurricanes that have evolved on this watch, like the credit crisis and the Bernie Madoff situation. But I'm not sure you can point to him as responsible for either one of those."

But former officials said enforcement has suffered during his tenure. A pilot program begun last year required enforcement staff to meet with the commissioners before beginning settlement talks in certain cases involving non-financial firms. Some former officials said the change was just one example of new bureaucratic impediments that slowed enforcement work. The commissioners also made clear that they thought staff members were being too aggressive in some cases, the officials said.

"I think there has been a sentiment communicated to rank-and-file staff, lawyers and accountants that you don't go after the establishment," said Ross Albert, a former special counsel in the enforcement division.

Another staffing shift was underway at the Office of Risk Assessment, formed by Cox's predecessor, William H. Donaldson, to spot emerging problems in the financial markets. But under Cox, the office, which once had slots for seven people, eventually dwindled to just one. "That office withered away," said Bruce Carton, a former SEC enforcement lawyer. "It died on the vine under Cox."

The agency's overall staff also began to drop during Cox's tenure, to 3,442 full-time employees in fiscal 2008 from 3,773 in fiscal 2005, according to agency data. The agency's budget over that time has increased 2 percent, to $906 million from $888 million, an amount that the National Treasury Employees Union, which represents SEC staff, says is far too small.

"There just hasn't been enough resources or staffing over the years for the SEC to oversee the number of companies it is responsible for," said Colleen M. Kelley, the union's president. "Cox needs to take responsibility that he failed as the leader of the agency to ask for what was needed."

SEC officials said the staffing cuts were required to stay within the constraints of the budgets approved by Congress.

Cox defended his record on enforcement and risk assessment. His aides said that risk assessment is done by staff spread throughout the agency and that the total number focused on it over Cox's tenure has increased from 26 to 37 people. He also said that the 671 enforcement actions brought last year was the second-highest number in the agency's history.

While the statistics look good, former SEC general counsel Ralph Ferrara said, "they put a huge bottleneck in the ability of that enforcement division to function. Cases would linger for months or years because they didn't have the guidance to get the cases done." Ferrara, now a partner with Dewey & LeBouef, added that the enforcement division "was roped to the ground like Gulliver by the Lilliputians."

An analysis by law firm Morgan, Lewis & Bockius, however, showed that the SEC's actions against broker-dealers, who serve as middlemen in financial trades, actually dropped about 33 percent, to 60 cases in fiscal 2008 from about 89 cases in fiscal 2007.

"In one of its core areas -- regulation of Wall Street firms -- its caseload was down significantly," said Ben A. Indek, a securities lawyer at the firm.
Under Cox, the SEC has taken particular heat for its oversight of the five major investment banks -- all finance titans synonymous with Wall Street.

It became the agency's responsibility to monitor them for financial and operational weaknesses under a program set up before Cox's tenure, but under his watch they got into such trouble that today they no longer exist as investment banks. Bear Stearns and Lehman Brothers failed, Merrill Lynch had to be taken over, and Goldman Sachs and Morgan Stanley converted themselves into bank holding companies.

The March collapse of Bear Stearns illustrated an array of agency shortcomings, according to a review by the SEC's inspector general. He concluded that agency officials had been aware of "numerous potential red flags" at Bear Stearns "but did not take actions to limit these risk factors."

"It is undisputable," the inspector general concluded, that the "program failed to carry out its mission in its oversight of Bear Stearns."

The SEC was aware that the firm's exposure to mortgage securities exceeded its internal limits and represented a significant risk, but the agency made no effort to reduce that exposure, the report found. The agency also knew about but failed to adequately address various weaknesses in Bear Stearns's management of mortgage risk, such as a lack of expertise, persistent understaffing and an apparent lack of independence between risk managers and traders. In violation of an SEC rule, agency officials also allowed Bear Stearns and other investment banks to entrust critical checks and balances to internal, rather than outside auditors, the report found.

Cox shut down the oversight program this year. "This voluntary regulation of investment bank holding companies was flawed from the inception," he said. Instead, he went to Congress and asked for the explicit authority to regulate investment bank holding companies. In the interview, he said he wished he had gone to Congress earlier to get the authority.

Outside securities experts and government officials said they were surprised this year to see the SEC and Cox on the sidelines after Bear Stearns collapsed in March and Lehman Brothers failed in September.

Treasury and Fed officials viewed Cox and his staff as nonplayers who had failed to foresee the brewing problems, according to people who were involved in those efforts but spoke on condition of anonymity because of the sensitivity of the matter. They said Cox was often brought in for consultation only after major decisions had been made by Treasury and Fed officials.

Cox said it was natural that the SEC would have less of a role once it became necessary to bail out the firms. "We don't have macroeconomic levers," he said. "That's not what we do."

At the moment, the agency's biggest problem is the Madoff scandal, Cox said. Last week, Cox ordered an internal investigation into the agency's failures to uncover fraud at Madoff's investment advisory firm despite multiple warnings.

Cox has declined to talk about the specifics of the investigation. He has said that concerns about Madoff's activities were never presented to the commissioners.

When Cox was asked whether he should be blamed for a culture of lax enforcement that allowed multiple warnings about the fraud to go undetected, he said: "Absolutely not. In fact, it's in the DNA here that people thrive on bringing big cases."

Staff writers Binyamin Appelbaum and Neil Irwin contributed to this report.