INTERESTING SEC INSPECTOR GENERAL REPORT

The Inspector General of the Securities and Exchange Commission looked into the agencies handling of Bear Stearns and concludes that the SEC could've been much more effective, according to CNBC:

Audit Report Blasts SEC's Oversight of Bear Stearns
By Scott Cohn Senior Correspondent, CNBC 26 Sep 2008 04:10 PM ET

The SEC's Office of Inspector General says the agency missed "numerous potential red flags" in the March collapse of Bear Stearns and in some cases ignored its own procedures.

In particular, according to the report, SEC staffers knew about Bear Stearns' high level of leverage and its heavy bets on the mortgage market, but failed to take action. The report also says the SEC allowed Bear Stearns to use internal auditors to manage its risk, even though SEC rules require outside auditors.

SEC delays in reviewing Bear Stearns' 2007 annual report deprived investors of critical information that may have helped head off the run on the bank that ultimately spread to other institutions, the report says.

The SEC had launched an investigation of Bear Stearns' mortgage-backed securities business in 2005, even informing the company of its intention to bring civil charges. But the investigation was later dropped with no charges filed.

What I found especially interesting is this statement by Chris Cox, the head of the SEC:

"The last six months have made it abundantly clear that voluntary regulation does not work," Cox said in a statement.

This is an echo of what Alan Greenspan said back in 2002 about the accounting scandal behind the collapse of Enron and other firms. To the converted, the belief in the Free Market Fairy is almost unshakable, kinda like Linus and the Great Pumpkin.

The full report comes in 2 pdf files, Part A and Part B.