NEW YORK (CNN/Money) - The Securities and Exchange Commission and other watchdogs failed to anticipate or address the Enron Corp. debacle, helping to bring about this year's stock market collapse and lingering economic weakness, a Senate review panel said Monday.
In a 127-page report, the end result of an investigation that began in January, the Senate Governmental Affairs Committee said the SEC, Wall Street analysts, and credit rating agencies all failed to recognize Enron's problems in the months and years leading up to the energy trader's bankruptcy in Dec. 2001.
"What [the committee] found was systemic and catastrophic failure across the board," Sen. Joseph Lieberman (D-Conn.) said in a press conference. "Despite the magnitude of Enron's implosion, no one in the system that was supposed to protect investors saw the disaster coming or did anything about it."
Enron's collapse -- which followed years of creative accounting that obscured the true financial condition of what was once the No. 7 U.S. company -- led to thousands of layoffs, the loss of billions of dollars in stock value, and weakened the confidence of investors in corporate accounting.
Other scandals followed, further weakening investor sentiment, stock prices and the U.S. economy's recovery from a recession that began in March 2001.
As he has done several times during the crisis, SEC Chairman Harvey Pitt responded by blaming his predecessor, former SEC Chairman Arthur Levitt, for the problems, saying they began in 1992 and continued throughout the 1990s.
"Since I have taken on the leadership of the commission, we have been working hard to fix the problems that have created the current crisis of confidence, and we have been making enormous strides to correct the mistakes and abuses of the past," Pitt said.
Pitt was appointed by President Bush in February 2001, 10 months before Enron's bankruptcy filing. Levitt served from 1993 until Pitt's appointment. Pitt has been criticized for appearing to drag his feet on significant reforms, including the ones mandated by the Sarbanes-Oxley Act of 2002, the most sweeping corporate reform legislation since the Great Depression.
Click here to read the Senate committee report.
The Senate report said the SEC has been too reactive when it comes to corporate malfeasance, relying on the private sector and other groups to police financial accounting and Wall Street research.
"At the SEC, the search for fraud was left largely to others -- private auditors and boards of directors, which were either doodling at their desks or were engaged in conflicts of interest that made it unlikely they would ever bark at corporate fraud or crimes," Sen. Lieberman said, citing the staff report.
The report, which was sent to Pitt on Monday, recommended that the SEC be given more staff and better technology to more actively police corporate finances and to enforce compliance with regulations.
As for Wall Street analysts, the report said many were conflicted by the investment banking relationships Wall Street brokerage houses had with companies they were reviewing.
Last week, Pitt publicly pledged to work with New York State Attorney General Eliot Spitzer, who has been the primary driver behind a crusade to reform Wall Street analysis -- a job many critics have said was the SEC's.
Spitzer brought charges against Merrill Lynch earlier this year after finding e-mails that showed some of the firm's analysts were recommending stocks the analysts themselves thought were bad investments, in large part because Merrill Lynch had investment banking relationships -- far more lucrative to the firm than its research business -- with the companies issuing the stock. Merrill agreed to pay a $100 million fine and reform its research operations.
The Senate report also said credit rating agencies had been lax in reviewing Enron's finances and had been given far too much power in influencing the decisions of institutions to issue credit to companies. The panel recommended the SEC develop a set of strict guidelines for the agencies to follow when rating companies.
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