SEC’s Cox: Regulatory Gaps Worsened Subprime Crisis

Gaps in the regulatory process and structure enabled much of the subprime mortgage crisis to grip financial markets with force in the back half of 2007, Securities and Exchange Commission chairman Christopher Cox said in an interview with the Financial Times on Friday.

Saying that the SEC is parsing “regulatory lessons” from the market mess that has yet to resolve itself, Cox suggested that stronger oversight of underwriting and issuance standards would be needed going forward:

“Subprime only leached into the securities markets after it was already a horrible problem. There was complete breakdown in lending standards, a complete breakdown, one can infer from that fact, in supervisory standards for lending or at least the application of those standards.

“We’ve also found other regulatory gaps, not just statutory regulatory gaps for investment banks, but also for mortgage brokers, and we have discovered a host of perverse incentives in the securitisation process, only a small portion of which are the responsibility of securities regulators.”

His remarks come ahead of a global regulatory conference this weekend, the International Organisation of Securities Commissions. The IOSC is expected to release new research this weekend on the subprime mess and financial reporting standards, the FT reported.

For its part, the SEC is set to unveil new regulations next month, Cox said.