The Inside Story on the Breakdown at the SEC

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Illustration by Sean McCabe for TIME; Getty (4); AP; Reuters

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Critics say Cox either never really understood his job and its powers or simply wasn't interested in flexing the agency's muscles. With investment banks and Wall Street in trouble, he should have sought regular reports from his staff and demanded changes, says former SEC commissioner Harvey Goldschmid, whose term preceded Cox's. The chairman, Goldschmid says, should have "gone in and pounded on the table and said, 'Look, there are all these red flags. Why are you still leveraged? We want you to have more capital.' There's never been a time when those firms were not going to respond to demands by the SEC chairman." Cox, Goldschmid adds, "was the primary regulator. He should've been there earlier to try to avoid these things from happening."

But Cox kept his distance from the investment banks. He says the SEC chairman "typically does not" jawbone CEOs of those firms. Other observers say Cox simply checked out. "They never heard from him. They never saw him," says another ex-commissioner. "He was never a factor. Even when things got bad, it took a long time before he got on the phone to find out from these firms what their exposures were and what they were doing about it."

A New Leader

Some experts argue that the origins of America's financial crisis are far larger than Christopher Cox. "If you want to cast blame, there are many regulators, agencies and Congress that are as much, or more, at fault than Cox or SEC," says Joseph Grundfest, who was an SEC commissioner in the 1980s.

But the SEC's failure under Cox now has some members of Congress working to shrink the commission's authority and hand some of its most important duties to the Federal Reserve and other agencies. It will fall to 53-year-old Mary Schapiro--a former SEC commissioner and a former head of the Financial Industry Regulatory Authority, whom Barack Obama named to replace Cox--to prevent that from happening.

Since taking over on Jan. 27, Schapiro has launched an aggressive campaign to beef up enforcement and reverse a number of Cox-era practices. She has already canned the rule requiring staff to obtain approval from the SEC's commissioners before resolving cases against violators. She is studying new technology to cope with the estimated 700,000 tips the SEC gets from informants annually--like those it received but ignored in the Madoff case. And she has quickly filled senior SEC jobs, selecting a variety of candidates who have been prominent Cox critics. For immediate impact, Schapiro has unleashed a spectacular new case, charging R. Allen Stanford and three of his companies with an $8 billion investment fraud.

But Schapiro's steps are overdue and may not be enough to save the SEC. Grassley recently demanded to know what Schapiro will do about 4,000 e-mails and other documents that suggest there was insider trading at Lehman Brothers, the investment giant whose 2008 bankruptcy marked a turning point in the financial crisis. The whistle-blower in that case, a Lehman Brothers employee, was fired and last spring spent many hours with senior SEC staffers. Cox told TIME that he was uninformed about the case. The former chairman, who isn't sure about his next career move, believes that much of the criticism leveled at him is uninformed or tendentious. "I take full responsibility for the actions of the SEC during my chairmanship," he said in an interview. "And I have tremendous pride in the extraordinary, around-the-clock efforts of the SEC staff in attempting to avert the crisis."

That is not a view, as they say about securities, that is widely held.