Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

SEC Audit Report on Bear Stearns

At the beginning of this week, the SEC released two reports
of its Inspector General on the Bear Stearns failure and more
generally the SEC’s supervision of the broker dealers. I am
quite disappointed about this report which I approached with high
expectations. This was a report requested by the US congress and the
Inspector General had retained the services of one of the
world’s leading authorities on market microstructure as an
outside expert. The redactions in this report are not very large and I
do not believe that the unredacted report would contain anything more

The critical question in the SEC’s supervision of the
broker dealers relates to the capital and liquidity regulations. On
this the audit report states:

Bear Stearns was compliant with the CSE program’s capital and
liquidity requirements; however, its collapse raises questions about
the adequacy of these requirements;

One expects an audit report to go beyond such an inane

I read the audit report once again in the light of the management
response by the SEC’s Division of Trading and Markets. I found
myself agreeing more with the management response than with the audit

I remember being quite critical
of the UK FSA’s internal audit report on Northern Rock, but
today I must confess that the FSA report was definitely superior to
this SEC report. We are reconciled to regulators being reactive rather
than proactive, but if a regulator cannot do even a proper post
mortem, then it is a matter of serious concern.


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