SEC Chair Defends His Restraint During Financial Crisis

"In one of its core areas -- regulation of Wall Street firms -- its caseload was down significantly," said Ben A. Indek, a securities lawyer at the firm.

Under Cox, the SEC has taken particular heat for its oversight of the five major investment banks -- all finance titans synonymous with Wall Street.

It became the agency's responsibility to monitor them for financial and operational weaknesses under a program set up before Cox's tenure, but under his watch they got into such trouble that today they no longer exist as investment banks. Bear Stearns and Lehman Brothers failed, Merrill Lynch had to be taken over, and Goldman Sachs and Morgan Stanley converted themselves into bank holding companies.

The March collapse of Bear Stearns illustrated an array of agency shortcomings, according to a review by the SEC's inspector general. He concluded that agency officials had been aware of "numerous potential red flags" at Bear Stearns "but did not take actions to limit these risk factors."

"It is undisputable," the inspector general concluded, that the "program failed to carry out its mission in its oversight of Bear Stearns."

The SEC was aware that the firm's exposure to mortgage securities exceeded its internal limits and represented a significant risk, but the agency made no effort to reduce that exposure, the report found. The agency also knew about but failed to adequately address various weaknesses in Bear Stearns's management of mortgage risk, such as a lack of expertise, persistent understaffing and an apparent lack of independence between risk managers and traders. In violation of an SEC rule, agency officials also allowed Bear Stearns and other investment banks to entrust critical checks and balances to internal, rather than outside auditors, the report found.

Cox shut down the oversight program this year. "This voluntary regulation of investment bank holding companies was flawed from the inception," he said. Instead, he went to Congress and asked for the explicit authority to regulate investment bank holding companies. In the interview, he said he wished he had gone to Congress earlier to get the authority.

Outside securities experts and government officials said they were surprised this year to see the SEC and Cox on the sidelines after Bear Stearns collapsed in March and Lehman Brothers failed in September.

Treasury and Fed officials viewed Cox and his staff as nonplayers who had failed to foresee the brewing problems, according to people who were involved in those efforts but spoke on condition of anonymity because of the sensitivity of the matter. They said Cox was often brought in for consultation only after major decisions had been made by Treasury and Fed officials.

Cox said it was natural that the SEC would have less of a role once it became necessary to bail out the firms. "We don't have macroeconomic levers," he said. "That's not what we do."

At the moment, the agency's biggest problem is the Madoff scandal, Cox said. Last week, Cox ordered an internal investigation into the agency's failures to uncover fraud at Madoff's investment advisory firm despite multiple warnings.

Cox has declined to talk about the specifics of the investigation. He has said that concerns about Madoff's activities were never presented to the commissioners.

When Cox was asked whether he should be blamed for a culture of lax enforcement that allowed multiple warnings about the fraud to go undetected, he said: "Absolutely not. In fact, it's in the DNA here that people thrive on bringing big cases."

Staff writers Binyamin Appelbaum and Neil Irwin contributed to this report.