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Since 2008, many commentators on the financial crisis of 2007-2009 have identified the 2004 rule change as an important cause of the crisis on the basis it permitted certain large investment banks (i.e., Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley) to increase dramatically their leverage (i.e., the ratio of their debt or assets to their equity).

Financial reports filed by those companies show an increase in their leverage ratios from 2004 through 2007 (and into 2008), but financial reports filed by the same companies before 2004 show higher reported leverage ratios for four of the five firms in years before 2004. The companies that received SEC approval to use its haircut computation method continue to use that method, subject to modifications that became effective January 1, 2010.

The ratio of shareholders' equity in the company (share capital and reserves) to the company's borrowing.

The uniform net capital rule is a rule created by the U. Securities and Exchange Commission ("SEC") in 1975 to regulate directly the ability of broker-dealers to meet their financial obligations to customers and other creditors.

The SEC had maintained a net capital rule since 1944, but had exempted broker-dealers subject to "more comprehensive" capital requirements imposed by identified exchanges such as the New York Stock Exchange (NYSE).

The 1975 uniform net capital rule continued many features of the existing SEC net capital rule, but adopted other (more stringent) requirements of the NYSE net capital rule.

Each of the investment banks that became a CSE Holding Company stressed the importance of a "net leverage" measure that excluded collateralized customer financing arrangements and other "low risk" assets in determining "net assets." This net leverage ratio was used by one rating agency in assessing investment bank capital strength and produced a leverage ratio much lower than the "gross leverage" ratio computed from total assets and shareholders' equity.

In a July 2009 report, the Government Accountability Office ("GAO") reported that SEC staff had stated to the GAO that (1) CSE Brokers did not take on larger proprietary positions after applying reduced haircuts to those positions under the 2004 rule change and (2) leverage at those CSE Brokers was driven by customer margin loans, repurchase agreements, and stock lending, which were marked daily and secured by collateral that exposed the CSE Brokers to little if any risk.

The report also stated officials at a former CSE Holding Company told the GAO they did not join the CSE program to increase leverage.

The GAO confirmed that leverage at the CSE Holding Companies had been higher at the end of 1998 than at the end of 2006 just before the financial crisis began.

Beginning in 2008, many observers remarked that the 2004 change to the SEC's net capital rule permitted investment banks to increase their leverage and this played a central role in the financial crisis of 2007-2009.

This position appears to have been first described by Lee A.

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