SEC Chief Wants More Power Over Brokerages : Securities: Breeden says taxpayers have escaped fallout from Drexel’s collapse, but he wants wider investigative authority in the future.
The Securities and Exchange Commission managed the collapse of Drexel Burnham Lambert without any cost so far to taxpayers even though the regulatory agency was severely hampered by a lack of crucial information, the SEC chairman said Friday.
In his first public comments on the Drexel debacle, Chairman Richard C. Breeden told the Senate Banking Committee that financial markets rode out the storm with only minor disruptions. But he warned that things may not work out so well next time unless the SEC has more powers to demand information from holding companies and their unregulated affiliates as well as from brokerages under direct SEC jurisdiction.
Breeden cautioned that such authority would not have prevented the crash of Drexel’s parent company, which had built up massive short-term debt financed by the interest income from its portfolio of long-term junk bonds.
“In a sense, this is an old and all-too-familiar story,” Breeden told senators. “Drexel’s parent borrowed billions short in order to lend long. Such a strategy exposes the firm to failure if total confidence in the firm is not continuously maintained.”
Confidence in Drexel eroded steadily last year as the firm ran into legal problems over alleged insider trading and as the junk bond market deteriorated. Breeden added, in an exchange with reporters after his testimony, “Drexel’s fate was entirely of its own making.”
Securities regulators were watching Drexel carefully after its legal problems became known early in 1989 and still more closely as junk bond values plummeted last fall. But it was not until Feb. 2, just 11 days before the firm declared bankruptcy, that the SEC learned that the parent holding company had siphoned some $400 million in capital from its still-solvent brokerage subsidiary, Breeden said.
The SEC supports legislation, now working its way through the Senate, that would slap financial disclosure requirements on brokerages’ holding companies as well as the brokerages themselves.
“We think we get good voluntary information,” Breeden said. “But we can’t guarantee what is going on in an unregulated affiliate of a broker-dealer.” He said the SEC needs a guarantee of a “fire alarm to notify us if a five-alarm fire is raging in the parent company or an affiliate, and make that notification a requirement by law.”
Breeden also suggested that federal securities regulation would be much more orderly without existing exemptions for some financial instruments offered by state-regulated insurance companies and savings and loans. “All securities offered to the public” should fall under SEC regulations, he said.
