Would the sale of Bear Stearns to JP Morgan have been prevented if broker-dealer net-capital rules had been reformed?
Some are arguing that without the change of net capital rules in 2004, the Bear Stearns downfall would not have happened. Under the Securities and Exchange Commission's (SEC) rules, assets don't need much underlying capital.
The SEC proposed to change net capital rules (the Alternative Net Capital Requirements for Broker-Dealers That Are Part Consolidated Supervised Entities) in 2007, but nothing came of it.
The financial and legal communities are questioning whether the proposals would have prevented Bear Stearns, and if a change now would discourage similar incidents. The SEC argues that it would not have done, as Bear Stearns wasn't the result of net capital, but of liquidity.
The main issue is valuation and systemic risk. The amount of capital in a high risk situation was lowered by the 2004 rules.
"Under market stress, it's almost impossible to get good valuation, an accurate mark for securities. Are we leaving broker dealers with too much leeway on valuations?" said Anna Pinedo, partner at Morrison & Foerster.
Others consider risk and valuation to be a subjective matter that cannot be governed by rules. If the broker-dealer net capital rules do change, it may come from a higher power than the SEC.
"The SEC doesn't really control the markets. The Fed is the watchdog and has proposed under the Blueprint some application of safety and a sound measurement of capital," said Gregory Gnall, counsel at White & Case.