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.