Over the past decade, the Securities and Exchange Commission has been bumbling at best and grossly negligent at worst. But when Floyd Norris' Friday column suggested that a new SEC regulation (.pdf) would force investment bank CEOs to bless the mortgage-backed securities their firm underwrites, that seemed a little far fetched -- even for the SEC. Luckily, his description isn't quite right.
Here's the key excerpt from Floyd Norris' New York Times column:
The investment banks that put together mortgage securities told regulators that they should not be required to evaluate the credit quality of the mortgages they package and sell. And then they argued that they had no ability to do that.
The Securities and Exchange Commission has proposed a new set of rules for such mortgage-backed securities. For some of them -- the ones that are sold publicly and in an expedited way that does not require the commission to carefully review the offering -- the proposal included a requirement that the chief executive of the firm that put the deal together provide a certification of the deal's quality.
That certification would include a statement that the C.E.O. had reviewed the deal and believed the mortgage assets had "characteristics that provide a reasonable basis to believe" the securities would pay off. The commission said it believed the attention the executive would have to give each deal "should lead to enhanced quality of the securitization."
First, this is all very complicated, so let me try to simplify. Imagine there was a mortgage company called Nationwide. It originates a billion dollars worth of mortgages and wants to securitize them. So it hires an investment bank called Silverman to slice up the pool into bonds and sell the new securities to investors. Silverman "puts the deal together." Whose CEO would be responsible to vouch for the loans?