SEC may require banks to hold more cash during market turmoil

Thursday, April 24, 2008 at 1:15am

The U.S. Securities and Exchange Commission, responding to the collapse of Bear Stearns Cos., may require Wall Street banks to keep more cash on hand during periods of market stress.

The SEC is meeting with investment banks that have lost money on mortgage holdings to discuss raising capital, SEC Chairman Christopher Cox said in an April 16 letter to U.S. Senator Charles Grassley obtained by Bloomberg News. The agency is also reviewing whether securities firms should seek new loans to support their “less-liquid positions,” Cox said.

“A likely outcome of this process will be the articulation of additional supervisory expectations related to liquidity,” Cox said in the letter to Grassley, an Iowa Republican who is reviewing Bear Stearns’s forced sale to JPMorgan Chase & Co.

The SEC is focused on “requirements that will increase resiliency” when investment banks can't easily secure funding, Cox said. Any change may crimp Wall Street profits, because firms would have to hold more cash and low-yielding securities instead of lending money or making investments.

The SEC monitors Bear Stearns, Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Morgan Stanley to make sure they have adequate capital and liquidity.

Capital standards

The agency currently requires that those firms have enough funding to meet expected obligations for at least one year during periods of market turmoil, according to the agency's Web site. The mandate assumes securities firms will still be able to get new loans by putting up assets such as U.S. Treasuries as collateral.

That requirement failed to protect against the “unprecedented” situation at New York-based Bear Stearns, which couldn't secure loans even if it offered to put up “high-quality collateral,” Cox said in April 3 testimony before the Senate Banking Committee.

JPMorgan agreed last month to buy Bear Stearns for $10 a share after a run on the company by clients and lenders put it on the verge of bankruptcy. The Federal Reserve orchestrated the sale to prevent a market panic.

Cox declined to tell Grassley why the SEC dropped an investigation into Bear Stearns’s pricing of debt securities, saying the agency pursues “inquiries on a confidential basis.”

The probe focused on whether Bear Stearns improperly valued $63 million of collateralized debt obligations that it sold to a Puerto Rican Bank. The SEC told Bear Stearns in 2005 that it may be sued over sales, people familiar with the matter said at the time.

The Wall Street Journal reported Cox’s refusal to discuss the investigation earlier today.

SEC spokesman John Nester declined to comment when contacted by Bloomberg News.

— Bloomberg News

Filed under: City Business
Tagged: