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Barbara Roper Weighs in on the SEC Vacancy

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Matt Stoller is a fellow at the Roosevelt Institute. You can follow him at http://www.twitter.com/matthewstoller.

In the comments of my last post on the SEC nomination issue, director of investor protection for the Consumer Federation of America, Barbara Roper, laid out a rationale for different choices at the SEC. Roper is a highly respected analyst on this question, and her opinion carries considerable weight.

I agree with the premise of this article — that we ought to care deeply about who is the next head of the SEC, that we need someone who is independent and willing to be an outspoken advocate of reform, and that he or she needs to take a tough stance on enforcement. But I do think the article under emphasizes the importance of the regulatory challenges facing the agency relative to the enforcement issues.

The SEC still has two-thirds of its Dodd-Frank rules to complete, and many of the rules that have been proposed in key areas (derivatives, credit rating agencies) are too weak to prevent a return to the problems that led to the crisis. It also has the JOBS Act to implement, and the challenge of finding a way to implement that misguided piece of legislation that minimizes its potential harm to investors. And then there are the market structure issues related to high-frequency trading, etc. On top of all that, it needs to find a way to write tough rules that can withstand the constant threat of legal challenge.

The ideal candidate, therefore, needs to be not just a tough enforcer but also an effective rulemaker. If I had to prioritize the two, I’d prioritize the latter, and then work to ensure that they appoint a head of enforcement who is tough as nails. Under the circumstances, someone like Charley Niemeier, who has a background in enforcement, is highly principled, and was incredibly effective at the PCAOB, or Ed Markey, who was a strong champion for investors when he headed the Securities Subcommittee, might make surprisingly good candidates. I’m not suggesting that some of the other names you mentioned wouldn’t also be strong candidates, and I am not endorsing anyone. I’m just suggesting that you not write these guys off. Investors could do much, much worse.

Roper knows what she is talking about, and she is right about questions of market structure, rule-writing and high frequency trading (and actually, Roper would be a great pick as an SEC Commissioner herself). The SEC will be writing many rules mandated Dodd-Frank, and these rules will have a huge impact on capital formation and investor fairness. Writing these rules well matters. I could point to Tom Curry at the OCC, who is doing good work at a regulatory agency known for its adherence to the wishes of big banks, as an example of the kind of regulator who makes a difference by focusing on quiet institutional progress.

That said, for a different take on this question, Eliot Spitzer laid out the counter-argument. He does not think the crisis happened just because regulatory laws were too weak, but that regulators simply didn’t do their job.  Regulators, according to Spitzer, “just failed.” In this, Spitzer is not disagreeing with people like Roper so much as he is confronting the narrative of the financial crisis that says that the problem is that laws were too lax . This narrative implies that bank executives were unethical in their behavior, but did not break the law. Thus, it supports the Obama administration’s policy of not prosecuting high level executives, and buttresses officials like Robert Khuzami at the SEC. Spitzer would argue, and I’m guessing Roper would agree, that there should have been prosecutions, that laws were broken, even if the laws themselves were also too weak. It’s both prosecutorial discretion and a question of weak laws. For instance, Glass-Steagall mattered, of course, but so did enforcement of Glass-Steagall by the human beings in the regulatory agencies that had jurisdiction.

Still, who the regulator is really does matter, especially at the SEC, which is an enforcement agency. A key question is the willingness of regulators to buck what is essentially a pro-fraud establishment. This willingness takes the form of aggressively and creatively using power, as well as using public and private forums to make it different for the pro-fraud forces to get their way. It’s not just wanting to do the right thing on some policy ideas. Mary Schapiro, for instance, had the right policy instincts on money market funds (and the JOBS Act), but she could not implement the right policy even though she was the Chairman of the SEC. She’s an entrenched establishment player, so when confronted with a situation that required courage and creativity, she was a disaster. Contrast her with Jeff Connaughton and Ted Kaufman, who waged a laudable two man high profile and aggressive fight in the Senate for financial reform and nearly broke up the big banks with the Brown-Kaufman amendment, or Neil Barofsky, who turned his perch at SIGTARP into an office that had substantial impact on the bailout implementation and actually led to high level arrests at banks fraudulently using TARP funds, or Elizabeth Warren, who at the Congressional Oversight Panel was able to do the same. Of course, Eliot Spitzer creatively broke the mold of the standard state AG, and used his power and then some to take on Wall Street when the Feds wouldn’t act. All of these individuals were willing to take their case to the public, sacrifice possible future opportunity, make administration officials mad, and be creative and aggressive.

These are the traits that one should look for when considering government personnel in Obama’s second term. There have been plenty of reasonable regulators placed in positions of power over the years by the Obama administration, but many of them have by and large lost out on policy battles with nothing to show because they accepted defeat quietly and went home. It was the loud ones, like Sheila Bair, Neil Barfosky and Elizabeth Warren, who made change, or built up the seeds for future fights. After all, you can write all the rules you want at the SEC, but if you put Robert Khuzami in charge of enforcement at the SEC, he’s simply going to cover up the wrongdoing that took place on his watch at Deutsche Bank. There is no law that can stop crime, if the criminal is the one with the badge and gun.

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26 comments

  1. Hypothetical_Taxpayer

    I’ve been waiting for them to appoint Bernie Madoff and call it public service time. There’s a guy that knows his stuff – and wouldn’t let all that whistleblowing noise distract him from the real work at the SEC, which is restoring robot confidence in our markets.

    1. JGordon

      Yeah, Bush and Obama made a terrible blunder when they appointed/reappointed Bernranke to the Fed. Madoff now, there’s a fellow who knows what it takes to run a ponzi scheme, even if a relatively small potatoes one (compared to the Fed).

  2. From Mexico

    Matt Stoller said:

    There have been plenty of reasonable regulators placed in positions of power over the years by the Obama administration, but many of them have by and large lost out on policy battles with nothing to show because they accepted defeat quietly and went home.

    That’s because Obama is, and almost invariably appoints, what in the vernacular of San Antonio’s southside latinos are called “junkyard dogs.” They make a lot of noise when the theives approach, but quickly go back to sleep as the theives ransack the junkyard.

    Matt Stoller said:

    After all, you can write all the rules you want at the SEC, but if you put Robert Khuzami in charge of enforcement at the SEC, he’s simply going to cover up the wrongdoing that took place on his watch at Deutsche Bank. There is no law that can stop crime, if the criminal is the one with the badge and gun.

    As Amatai Etzioni put it in The Moral Dimension, “If those whose duty it is to set and to enforce the rules of the game are out to maximize their own profits, a-la-Public Choice [the darling of the Chicago School of Economics], there is no hope for the system.”

    1. Bhikshuni

      “That’s because Obama is, and almost invariably appoints, what in the vernacular of San Antonio’s southside latinos are called “junkyard dogs.” They make a lot of noise when the theives approach, but quickly go back to sleep as the theives ransack the junkyard.”

      Yeah, a few pockets-full of fresh meat to throw to junkyard dogs is all it takes to shut them up.

  3. MIWill

    Yes.

    ‘We would like to have integrity, but Dodd-Frank rules are incomplete. So, check back later. Or not.’

  4. diptherio

    I have to disagree with the whole line of thinking that says having a tough chairperson at SEC is a good thing. I think quite the opposite. I find the desire to extract rent from the economy through such mechanisms as the stock market a socially deleterious thing and think the more we do to quash it, the better. Put an old-timey villain in charge, preferably with a handle-bar mustache and a permanent sneer; that way, everyone will know what to expect from the financial industry, and they’ll go find something productive to do with their surplus wealth.

    I vote for this guy:
    (http://www.newsbiscuit.com/wp-content/uploads/2009/10/Silentmovievillain-1.jpg)

  5. Barbara Roper

    Mr. Stoller is right that I don’t have a fundamental disagreement with Eliot Spitzer’s point about the importance of tough, creative enforcement. As attorney general, Mr. Spitzer provided the model of what it is possible to achieve through enforcement. When he went after the tech bubble inflating stock analysts, he didn’t just reform analyst practices, he overturned the assumption that we have to passively accept practices that have become standard in the industry. Of course, he had to drag the federal regulators kicking and screaming into that fight. When he tackled the issue of mutual fund fees, the federal regulators (and congressional Republicans) were apoplectic and dug in their heels in opposition.

    So, yes, the best rules in the world do us absolutely no good if we don’t have regulators who are willing to enforce them. But I do think the rules matter, and I don’t think this should be an either/or proposition. Our decision not to regulate the derivatives markets helped turn a U.S. housing crisis into a global financial catastrophe. We need new rules to bring that market out of the shadows and to subject it to basic business conduct standards. The regulatory decision to allow credit ratings to substitute for disclosure in the asset-backed security market left our system vulnerable when the credit ratings on MBS and CDOs proved (predictably) to be unreliable. We needed rule changes to address that problem. While a creative enforcer might have found a way to hold the ratings agencies accountable for ignoring their own policies and procedures to arrive at the desired AAA rating, that’s easier to do if we have rules that make adherence to those policies and procedures an explicit requirement.

    For these and other reasons, I believe a regulatory response to the financial crisis was absolutely necessary. But it will be for nought if we don’t also have regulators who are ready and able to wield that regulatory power effectively, and, as Mr. Stoller and Mr. Spitzer argue, that has to include a strong and creative enforcement program.

    1. Lambert Strether

      Ms. Roper: A quick note of thanks for entering the clash of views in the oft-combative and very tough-minded* NC comments section. This is really much more appropriate behavior than attempting to engage Yves or Matt in private telephone conversations. This way, everybody has “access.”

      And now, we return you to our regularly scheduled ankle-biting activities. This has been a public service announcement. With guitars!

      NOTE * Yet oddly friendly and humorous!

      1. Barbara Roper

        Lambert Strether: This is nothing — as you say, “oddly friendly and humorous.” I’ve been known to venture into the comment section on the Wall Street Journal. Now that is a scary place indeed!

    2. Sluggeaux

      As a career prosecutor of nearly 28 years, I find this entire discussion to be a laughable exercise in futility. The appointing authorities, the President and the Senate, are completely captured by monied interests. They will never bite the hands that feed them, either by creating effective regulations or by appointing competent enforcers.

      The only people who will be prosecuted by this or any other administration free to take Wall Street and Bank money during and after they hold office are those naive enough to come out as whistle-blowers.

      1. JEHR

        After seeing how many “parking tickets” that Goldman Sachs has had to pay (in the billions) since 2008 without admitting wrong doing where they just treat the payments as “part of doing business,” I agree with Sluggeaux. I see nothing on the horizon that will say that regulators will become harsher in pursuing fraudulent behavior.

        A criminal indictment of just one executive (Blankfein) would do more than all the rules and regulations that are being worked on now. (Remember though, we must not look backward!)

    3. just me

      Barbara, did you really weight in? I saw the headline hours ago, thought it would get fixed to weighs… but I guess I’m still, uh, weighting…

    4. Nathanael

      The fact that Spitzer was largely *right* — and now we instead have Cuomo, who is trying to push through destructive hydrofracking — is one reason I think we need to legalize prostitution. I don’t want the people who are doing their jobs properly to be thrown out over unorthodox sexual choices.

  6. Screwball

    Puzzles me why so many discuss this. The appointee will be a sock puppet for the banks. That’s a given, the name doesn’t matter.

    SSDD

  7. Stuart Gittleman

    Another sticking point on SEC appointments is that there will be, by law, two Republican commissioners. Of the current duo, one was an industry lawyer and the other an academic for whom every investor-protection reform can use more study. I’m not suggesting another “consensus builder” like Chris Cox, but would an excellent choice like Neil Barofsky be too abrasive to work with GOP commissioners Dan Gallagher and Troy Paredes?
    There is also the fact that the DC Circuit Court of Appeals is knocking down rules as fast as the SEC and CFTC can adopt them for a purported lack of adequate cost-benefit analysis. In part this is a weakness of the Dodd-Frank and JOBS (for lawyers, developing country slave labor and maybe prison guards) Acts that could have, but didn’t, put tough provisions into law instead of punting them to regulators. Can these studies be done by academics and grad students to help put the US capital markets on a better footing and protect investors?

    1. Nathanael

      The DC Circuit is packed with right-wing Republican criminals who need to be impeached. Of course, impeachment is impossible.

      Madison screwed up the US Constitution by making impeachment too difficult. When asked about all the other ways the government could become corrupt under the poorly designed US Constitution, “impeachment” was his solution for the problem — but impeachment is too difficult to execute, so the government does, in fact, become corrupt in all those ways.

    2. diptherio

      Well, I can give you half a dozen reasons why cost-benefit analysis is a bunch of BS; I wrote my undergrad thesis on the topic. Unless things have changed since 2004, the requirement that administrative rules and regulations pass a CBA before being implemented is the result of an executive order, issued first by (I believe) Reagan, and then renewed by Clinton.

      Removing CBA as a prerequisite to regulation would be a step in the right direction. Like I said, I can provide you with plenty of research that shows why CBA doesn’t work or do what its proponents claim, if you think that will help.

      1. Barbara Roper

        dipherio: I couldn’t agree more. Though it isn’t subject to a formal CBA requirement, the SEC does have to weigh all major rules for their impact on competition, efficiency and capital formation. Industry has used that very effectively to overturn any rules they don’t like.

  8. From Mexico

    If one could look down upon this debate between Matt Stoller and Barbara Roper from outer space, one could discern that it is nothing short of surreal.

    After all, what they’re quibbling over is how capital’s share of the nation’s Aggegate Gross Income (AGI) is going to be divied up. On one side are the creators of financial products, the finance industry. On the other side are the consumers of financial products, the investors.

    Truth be known, both of these groups have fared magnficiently since the advent of the “Reagan Revolution.” Their take of the AGI is realized as interest, dividends, business net income, net capital gains and other income. Their share of the AGI almost doubled from 1980 to 2005, from 17% to 31%.

    The losers throughout all this have been the workers, whose salaries and wages have fallen from 83% of the AGI in 1980 to 69% of the AGI in 2005.
    http://www.businessinsider.com/taxes-components-of-adjusted-gross-income-as-a-percent-of-total

    Couple this with the fact that the federal tax burden has been increasingly shifted off of corporations (corporate income taxes) and onto workers (employment taxes):

    See page 69, “Figure 6: Federal Receipts by Sources as Share of Total Receipts”
    https://www.jct.gov/publications.html?func=startdown&id=3711

    It seems to me like the 99% have bigger fish to fry than quibbling over how the 1% is going to split up its ever-increasing share of the nation’s income pie.

    1. Barbara Roper

      From Mexico: Actually, in the United States roughly 50 percent of all households are investors. Many of these are workers whose retirement savings are invested through 401(k) plans and whose financial well-being in retirement rests, at least in part, on the integrity of our capital markets. At least, that’s what I tell myself when I wonder about the relevance of my work.

  9. Susan the other

    I’ve never been more horrified by a government office than I was observing the denial and intentional incompetence practiced by the SEC in the heat of the economic meltdown (a meltdown caused by this very behavior in fact). The SEC made “the decision” NOT to regulate derivatives! What a fine piece of rule making that was. Spitzer is right but even he doesn’t go far enough. How about these for rules: Make the SEC write and maintain its own living will which automatically hands all authority over to the FBI and a panel of tough prosecutors should this shit ever happen again.

    1. Barbara Roper

      Susan: It wasn’t the SEC that decided not to regulate derivatives. It was Congress, with the full backing of President Clinton and his Administration. On your dissatisfaction with the SEC, however, point well taken.

  10. Kim Kaufman

    I wouldn’t expect Obama’s appointees to be any better in his second term. In L.A., Mayor Villaraigosa just signed onto the “Fix the Debt” Catfood Commission in what we hear will be a promotion for the photo-op mayor to Dept of Transportation. Here is Mayor V’s statement:

    “As a progressive Democrat, I joined the Campaign to Fix the Debt because Democrats and Republicans need to come together to find a balanced approach to our fiscal future. We need job-creating investments in our nation’s infrastructure. We need to ensure a safe and secure retirement for all Americans. We need to preserve the social safety net for the most vulnerable. We need to demand that the wealthiest Americans pay their fair share.

    That’s why I join President Obama in advocating a balanced approach that includes spending cuts and letting the Bush tax cuts expire for the top two percent of Americans. But I also believe that there are tough decisions ahead and the only way that we are going to find long-term solutions is by stepping out of our ideological boxes and reaching out to a broader coalition to get something done.”

    So he’s being Obama’s proxy to cut SS in exchange for a cabinet post. Well, at least it’s not another lobbyist, right?

    We’re asking Villaraigosa to step down:
    http://signon.org/sign/mayor-villaraigosa-hands?source=mo&id=58854-9398806-cv5Pg_x

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