Matt Stoller is a fellow at the Roosevelt Institute. You can follow him at http://www.twitter.com/matthewstoller
I’ve been trying to figure out what is going on with the Securities and Exchange Commission for the past month or so, because it is the biggest weakness in our regulatory apparatus. In an interview with Neil Barofsky at Salon, he says that he would take the SEC job if offered. His plan for reform would involve rearranging enforcement priorities at the agency, and reexamine the policy whereby the SEC does not bring cases against corporations but settles without forcing an admission of guilt on particular facts.
This policy has turned the SEC into an agency that issues parking tickets. Corporations can now simply build the cost of these settlements into their business model, without having to prevent fraud. Senator Carl Levin has been particularly angered by this policy. This method is “a symbol of weak enforcement. It doesn’t do much in the way of deterrence, and it doesn’t do much in the way of punishment.” That’s basically right, and it’s why Barofsky’s statement is so important. He also mentioned that he’d change the way that the Financial Stability Oversight Council, or FSOC, operates. FSOC is the board of regulators established by Dodd-Frank that has the power to break up the banks, and it hasn’t done much since the law was signed.
Meanwhile, Treasury and the White House are fishing around trying to find someone they can appoint to the SEC to fill Mary Schapiro’s spot. They tried Mary Miller, a bureaucrat at Treasury who is trusted by Geithner, but she was far too close to Wall Street to make her confirmation hearing easy. Then they shifted to Sallie Krawcheck, a brilliant former bank analyst with a significant media presence. She was lobbying for the job, but as it came out that she was the former CFO of Citigroup from 2004-2007 when the bank loaded up on subprime assets and put them off-balance sheet, the White House realized her confirmation hearings wouldn’t be easy either. Now they are looking at a number of different people.
One possible candidate seems to be Mellody Hobson, a mutual fund manager in Chicago who is dating George Lucas. Hobson is a strong proponent of financial literacy and appears frequently on TV as a financial literacy expert. She’s the perfect looks-good-but-has-no-track-record lightweight. She’s also on the wrong side of the money market fund issue, a key problem in the shadow banking system. The administration likes SEC enforcement chief Robert Khuzami (more on his below). Congressman Ed Markey is also being floated as a possibility, as is former SEC Accounting chief and former PCAOB acting head Charles Neimeier.
The administration might simply retain Elisse Walter as Chair; Walter is mostly a Schapiro clone, an unimpressive former FINRA bureaucrat who has some reasonable and some unreasonable instincts. But that still leaves a fifth seat unfilled, so they have to find someone. Good picks, people who have been honest and forthright to the public about TARP and Dodd-Frank – Barofsky, Eliot Spitzer (someone William Cohan likes), Dennis Kelleher, Brad Miller – aren’t considered possibilities. Moderates, like George Neimeier and Ed Markey, are possibilities. Insiders like Khuzami or Hobson are the clear preference of the administration – Krawcheck and Miller are the template for who they want, and it will take public pressure from Senators push the administration in a more aggressive direction.
Among insiders, there’s still a basic reticence to cross Treasury. Their view is no way that someone who has spoken up publicly about problems in Dodd-Frank and TARP – anyone from Ted Kaufman to Dennis Kelleher to Neil Barofsky to Eliot Spitzer – is “a credible” pick. That is, in my opinion, silly. Effective regulators aren’t easy to put in place in the Obama administration. People have to fight for them, make a clear case, and make it painful for the administration to pick someone else. It’s why Warren was chosen as temporary head of the CFPB, because the White House couldn’t pick someone else without arousing significant anger. It should be a bit easier with the SEC Chair. The very fact that their top picks, Miller and Krawcheck, was knocked out of contention so quickly, already shows that pressure on this position is effective. Since there are already so many positions to fill, Secretary of State, Treasury, and Defense, and the Senate has a bunch of new liberal members, a fight over the SEC is winnable. I don’t know if it’ll be waged, but it’s certainly possible to frame a debate around enforcement.
And this brings us to the real issue, which is the point of all of this. Why have an SEC at all? The agency exists to protect capital formation, but it’s obvious that the agency today exists as a way of pretending there’s a cop on the beat, a cop who never seems to stop the bad guys but always has a skilled PR agent telling you why his job isn’t to catch crooks. The SEC has been turned into an agency that serves the interests of big banks, mostly through SEC enforcement chief and former Deutsche Bank executive Robert Khuzami. What is shocking is the utter flimsiness of the excuse making. Here’s Khuzami on why the SEC has reduced accounting fraud lawsuits to a 10 year low, per Francine McKenna.
When I spoke to Khuzami in early October, he said he’s filing fewer accounting fraud and disclosure cases because there is less accounting and disclosure fraud. What’s the proof? Everyone knows, he told me and has said publicly, fewer accounting restatements means there’s less fraud. The SEC, it seems, is taking its accounting-related enforcement cue from what companies and their auditors decide is a problem.
When the Obama administration chooses someone to appoint to the SEC, it’s going to change the agency. Already Schapiro’s people are leaving, and a new staff will be hired when a new permanent Chairman is appointed. I suspect, ironically, the easiest person to confirm to the SEC Commission would be… Neil Barofsky. He’s respected by both Republicans and Democrats, because he’s perceived as an honest broker who pulls no punches. He already was confirmed by the Senate at SIGTARP. The question is whether anyone at the White House would be willing to, as Simon Johnson put it, change the conventional wisdom on Wall Street. I suspect no, but stranger things have happened.