The Five Dumbest Things on Wall Street

1. The Audacity of Cox

Who says Wall Street's watchdog is a poodle?

Securities and Exchange Commission Chairman Christopher Cox showed some bark this week when he told Sen. Chuck Grassley (R., Iowa) where he could put his request to disclose why the SEC abandoned a 2005 investigation into whether Bear Stearns BSC duped investors by improperly valuing complex debt securities.

Now that Bear is smoldering in the junkyard of Wall Street's ongoing credit crunch, Grassley has joined the rest of Planet Earth in wondering whether Cox should be showing a little more bite.

As The Wall Street Journal reported in December, an SEC branch office said it intended in 2005 to recommend that Bear be charged for improperly pricing about $63 million of mortgage securities it sold to a bank. Mysteriously, the charges never saw the light of day.

Two years later, Bear sparked the credit storm after two of its internal hedge funds piled high with complex debt securities unraveled while its CEO was incommunicado at a bridge tournament. In mid-March, the Federal Reserve had to rescue the firm from bankruptcy and oversee its fire sale to JPMorgan Chase JPM.

Given this unfortunate turn of events, Cox's decision to scrap the 2005 investigation into Bear's valuation practices is now raising eyebrows.

"High-profile enforcement cases could have sent a message to Bear Stearns and other Wall Street firms to attempt to more accurately price mortgage securities," said the Journal. "Such a message could have helped blunt the impact of the current crisis, which has led to investor uncertainty over how firms price these mortgage-related instruments."

This particular instance of relaxation at the SEC is no anomaly in Cox's tenure. As Grassley noted in a recent letter to the SEC's inspector general, a Senate inquiry into the commission's failed investigation of Pequot Capital Management found that senior SEC officials showed "extraordinary deference" in gathering testimony from Morgan Stanley MS CEO John Mack because of his "prominence."

The New York Times recently reported that the SEC's budget is shrinking, and its staff numbers have been slashed. Moreover, its remaining lawyers complain that commissioners are overruling the findings of the commission's enforcement division and watering down fines.

Cox has refused Grassley's request for disclosure on grounds of confidentiality. He no doubt smells the makings of a partisan witch hunt being launched by his fellow Republican.

Of course, when the SEC was created by Congress in 1934, it was guaranteed to be a nonpartisan agency because no more than three of its five commissioners can belong to the same political party. Now, President Bush has enhanced this arrangement by keeping only three commissioners -- all Republicans -- at the helm in order to protect the agency's bipartisanship from terrorism.

Dumb-o-meter score: 95. Wall Street's watchdog is more of a cockapoo.