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SEC points a finger at itself

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The SEC has been accused of being flat-footed on the issue of short selling. The impression among the media and some politicians is that the agency has failed its charter to be the primary watchdog over markets on a number of occasions. John McCain even said he would fire Christopher Cox, the SEC chairman.

Adding to the disdain is a report from inside the SEC itself issued by the agency's monitor of internal controls. According to The Wall Street Journal (subscription required), "Inspector General David Kotz said it is 'undisputable' that the SEC 'failed to carry out its mission in its oversight of Bear Stearns.'" Kotz says the SEC was aware of the threats posed by subprime mortgages and did nothing.

The news adds to the perception that if the federal government had been on top of the credit crisis beginning in early 2007, a number of large banks and brokerage firms would not have failed or watched their shares lose 80% of their value. Based on this point of view, the government is liable for hundreds of billion of dollars loses suffered by common shareholders and bond holders.

Private enterprises rarely have any success suing government agencies. in many ways that is a practical way to keep the courts from being overwhelmed by people with grievances against federal authorities. But, the inspector general's comments do say that investors in the firms which failed were not fools. They simply never had the benefit of assistance from the one agency which should have protected them.

Douglas A. McIntyre is an editor at 247wallst.com.

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Last updated: November 25, 2009: 08:10 AM

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