SEC puts sub-prime loans under the microscope

It seems the SEC is having a closer look at the packaging and sales of securitzed mortgage products such as CDO's which contain sub-prime mortgages.

However regardless of what they find the problem stems from a complete lack of regulation across all financial markets. Today the only limitation on the types of financial products available is the imagination of the wannabe alchemists who invent them. Somebody might get a rap across the knuckles but you can bet they'll be at it again as soon as they can think of another way to spin straw into gold.

It's like leaving an alcoholic alone in your house with a fridge full of beer. You come home from work and chastise him for drinking all the ale, fill the fridge up again and leave him alone the next day. What do you think is going to happen? Anyway here is the full article from marketwatch.com


SEC opens probes into subprime loans
By Rex Nutting & Greg Morcroft, MarketWatch
Last Update: 6:45 PM ET Jun 26, 2007

WASHINGTON (MarketWatch) -- The Securities and Exchange Commission is actively looking into possible securities fraud in the packaging and sales of securitized subprime mortgages, Chairman Christopher Cox told lawmakers Tuesday.

Cox said the SEC had opened 12 investigations into "issues" similar to the meltdown of two Bear Stearns Cos. Inc. hedge funds that were invested in collateralized debt obligations that included subprime loans.Cox said the SEC's enforcement division has formed a working group and is "actively on the lookout for possible securities fraud."

Last week, Cox revealed in an interview that the SEC was looking into the problems at the two Bear hedge funds. Bear said last week that it would provide up to $3.2 billion in financing for one of the funds after the investment bank discovered that the underlying value of the assets was much less than it had believed.

There is little "systemic risk" to the financial system from the two Bear funds, Cox said.
Collateralized debt obligations are extremely illiquid and have no true market price. The sellers value the securities based on models that use ratings from the credit agencies to judge the risk that they will go sour. Buyers have little idea what the underlying assets are, or what they should be valued at.

In a wide-ranging oversight hearing before the House Financial Services Committee, Cox and the other four SEC commissioners defended the agency on a host of issues ranging from reform of the Sarbanes-Oxley corporate governance law to the approval of a public offering by Blackstone Group.

Despite strong criticism from several Republicans on the committee that Sarbanes-Oxley is a hindrance to U.S. capital formation, all five commissioners said they didn't believe Congress should amend the law. The SEC is wrapping up a rule that would exempt most small businesses from the most cumbersome requirements of the law.

Cox said the SEC staff had examined and rejected arguments that Blackstone was an investment company under the law and should be regulated as a mutual fund. Blackstone shares dipped below the initial offering price on Tuesday.

In remarks prepared ahead of the hearing, the commission defended its policing of corporate America under Cox's watch, saying it has fined nine companies in the first half of 2007, approaching its record high of 11 in a full year.

Since the five-member commission unanimously agreed last year on policies for fining companies, the agency has levied eight fines of $25 million or more, including a $400 million fine on Fannie Mae, the SEC also noted in testimony prepared for delivery to the House Financial Services Committee.

"No other two-year period in commission history is higher," according to the prepared remarks.

The House panel called all five SEC commissioners to appear at an oversight hearing Tuesday, an unusual move. The commission provided a single written statement to the House committee on Tuesday that highlighted the agency's enforcement efforts and rulemaking projects, and stressed consensus. During Cox's tenure, 98% of SEC decisions have been unanimous, a spirit the SEC said "we intend to continue" in tackling future challenges.


For an interesting look at who may be left holding the bag when the music stops check out the article below from THE BIG PICTURE

Who owns troublesome CDO's/CMO's?