Sometime in the next decade, an economic historian will write the definitive account of the 2008 credit crisis. Possessing better data and greater distance from the still current turmoil, this author will do a far better job than anyone can hope to do today. A critical issue that such a history must face will be the extent to which there was a regulatory failure. Indeed, this issue is sufficiently pressing that even at this early point columnists need to address it. Little doubt exists that there were private market failures, as some CEOs (O’Neal at Merrill, Lynch, Cayne at Bear Stearns, and Fuld at Lehman) recklessly increased leverage and concentrated their firm’s assets in illiquid real estate investments. But what responsibility does the SEC bear for not resisting the steady slide of the major investment banks into insolvency?
Here, views predictably differ. Some journalists view the SEC as simply having been “captured” by the industry, particularly with regard to the SEC’s 2004 decision to relax its traditional “net capital” rule.[FOOTNOTE 1] Apologists for the investment banking industry, in turn, view the crisis as the result of a bubble in the real estate sector, which sank investment banks when the public panicked. Under this interpretation, the crisis was like the 1,000-year flood for which no one could prepare and for which no level of precautions would suffice. Both interpretations oversimplify.
