Jackson Jambalaya

Mr. Chris Cox, Chairman of the SEC and a Bush appointee, called for an "Exit Strategy" on the bailouts:
"Financial markets, of course, are not perfect. In particular, they are susceptible to boom-and-bust cycles. Cycles of this sort have been a hardy perennial over the past 400 years of experience with organized markets. Addressing the results of these cycles is why we have protective mechanisms such as the Federal Reserve System and federal deposit insurance.
But clearly these mechanisms proved inadequate to prevent the current crisis.
As the Congress and the new administration consider what improvements are necessary, they should take exceptional care to preserve the premise of well-ordered markets that underlies our enforcement and regulatory regime....
Focusing on exit strategies now is of vital importance to ensure that we do not stumble along a dangerous path of confusion that may end in far greater financial exposure for the American people, and a far worse situation for America's taxpayers and investors...."

What was conspicuous was what Mr. Cox did NOT call for: reinstating the leverage limits his SEC removed on 2004. The major cause of this financial meltdown was the removal of the limits on how much financial institutions could leverage their assets. For years the limit was 12:1, for every dollar in reserves/assets, the institution can use twelve dollars, whether it is through lending, investing, or other financial activities. The limits were in place to keep some protection for the markets and institutions in case they made bad decisions. As the leverage ratio increases, the exposure increases as well.

For years Goldman Sachs and others lobbied the SEC to remove the limits so they could make "more efficient uses of capital" in the words of one banker. Paulson lobbied for the removal in 2000 and again in 2004. In 2004, Mr. Cox and his agency agreed to the proposed changes and removed the limits. Pretty soon Fannie, Freddie, Lehman, Bear, and others went from 12:1 to 20,30, even 80 to 1. The result of this was to take what would have been a serious crisis for the markets and economy and turn it into a meltdown of global proportions. This rule change is probably the largest single factor responsible for this disaster and it happened under Mr. Cox's watch.

However, while reading Mr. Cox's exit strategy proposal, did anyone notice what was NOT in his cute little essay while he wrote about not "increasing financial exposure"? A proposal to put the leverage limits back in place. Heaven forbid we should rein in the ability of Wall Street to have fun with their spending binges with no money in the bank. Once this crisis is resolved, they'll be seeking more "efficient uses of capital" again while their cheerleaders on the WSJ editorial page create an economic theory to justify it. If Mr. Cox and Congress are truly serious about stopping the carnage and making sure it won't happen again, put the guardrails back on the financial services industry before they blow up our economy again. Unfortunately, Mr. Cox's exit strategy shows how clueless he is and why we need an exit strategy for him.