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By admin, October 31, 2010 8:14 pm

How is the Bush administration responsible for the Lehman Brothers failure?

I see where Obama blames the Bush Administration and some how (ties Mccain into this) for the Stock crisis. Can some one please explain to me how the administration or any other administration can be blamed for big business corporation for making extremely poor business decisions? Over speculation? And corruption? Please, educated answers only without the 4 letter words about any specific administrations name . . . its a general question about government and how it can affect business.

There is an independent federal agency called the Securities and Exchange Commission. The SEC was created by Congress, but is overseen on a day-to-day basis by the current presidential administration.

The SEC’s task is to regulate financial markets. It regulates them not by getting directly involved in running the markets, but by making sure that participants in financial markets honestly disclose information about their financial condition. It also makes sure that securities are not sold illegally. All of the investment banks currently in trouble participate in markets regulated by the SEC, and must generally follow the SEC’s rules.

The theory behind having the SEC is that if public companies have to disclose their operations, potential investors will KNOW when a company has made bad decisions. If investors have access to accurate information, they will be able to reward successful companies with further investment and punish companies that make poor decisions by withholding investment or by selling existing investments. If there were no SEC, people would be investing in the dark. There would be no way to know which companies had healthy balance sheets and which ones had huge losses or a terrible business model.

The Presidential administration can choose how strictly or loosely it wants the SEC to regulate. It can enforce existing laws to the letter, and if it wants, it can propose stricter regulations as long as those regulations do not conflict with statutes passed by Congress.

On the other hand, the administration can choose to enforce the SEC disclosure rules in a very lax way. It can decide to take public companies at their word when they say that everything is fine, even when everything is not fine.

Obama is accusing the Bush administration of being too lax in its enforcement of existing laws. His point is that the SEC’s job is to make sure the public has access to information that will allow it to make wise investment choices. And he is arguing that the SEC, which is under control ultimately of the President, didn’t do its job.

You might agree or disagree. But that’s the argument he’s making.

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