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William Donaldson

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William Donaldson

As chairman of the U.S. Securities & Exchange Commission, Donaldson agreed in 2004 to exempt the five big investment banks' brokerage units from regulation that limited the amount of debt they could take on in exchange for gaining regulatory oversight of the five banks at the holding company level. The changes were spurred by a pressing matter: European regulators were demanding SEC oversight of U.S. investment bank holding companies in order for the firms' subsidiaries to continue to do business in Europe, according to Donaldson. This indirectly led to a surge of debt-to-equity ratios on these banks' balance sheets from roughly 12 to 1 to between 25 and 33 to 1, exacerbating their liquidity problems as the credit crisis deepened. Donaldson responds that regulators had put in place formulas to properly monitor investment banks' leverage.

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