SEC Commissioner Kara Stein Issues Blistering Dissent on Waivers for Bank Recidivists

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SEC Commissioner Kara Stein has waged an uphill battle to have the agency stop giving financial firm miscreants waivers from sanctions that would otherwise take effect when they enter into settlements for bad conduct. Stein took issue with the SEC’s prior stance, that these “get out of jail” cards were issued freely to big firms by virtue of simply asking for them. The tacit assumption seemed to be that these firms were big reputable players and hence imposing the normal legally-mandated sanctions was overkill. In fact, as we know too well, the behemoth banks do disproportionate harm by their bad actions, and recent history has shown that they’ve misbehaved across a large swathe of businesses.

Despite the fact that a single SEC commissioner has limited power, Stein has managed to stymie the granting of some of these waivers by teaming up with like-minded SEC Commissioner Luis Aguilar on cases where Chairman Mary Jo White has had to recuse herself. Stein and Aguilar’s opposition to granting waivers on a recent Bank of America settlement led to further negotiations that imposed additional requirements upon the Charlotte bank. Stein and Aguilar has also been pushing for tougher punishments, including lifetime bans from SEC regulated entities for bank executives who break securities laws.

Below is Stein’s dissent on the granting of waivers to the five banks that admitted to a criminal conspiracy to rig the spot foreign exchange market in dollars and Euros. As Stein points out, the issue isn’t just the severity of this particular incident; it’s that theses firms are recidivist bad actors yet have been granted waivers on the barmy presumption that they are for the most part, corporate citizens in good standing.

I strongly urge you to read her letter, since it’s short and forcefully argued.

2015-05-21-Stein-FX-Waiver-dissent
2015-05-21 Stein FX Waiver dissent

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12 comments

  1. Gaylord

    This letter should be front & center on the President’s desk. Oh sorry, that President works for the banks.

  2. BondsOfSteel

    At the very least, they should be banned from the very market [for X amount of time] that they were caught manipulating. At least other market participants would know that the market would be a little less rigged [for a while] with the criminal elements removed.

    As it is now, I see ‘market’ and hear ‘rigged’. Every time I make a transaction, I do so with the knowledge that somewhere, someone is stealing [a little] from me.

  3. Anonymous123

    Is it helpful to send a letter to Stein’s office to thank her for her tough stance? Is there anyone else worth writing a letter to about it?

    1. Yves Smith Post author

      Thanks for the offer! Please send a cc to Mary Jo White, the chairman of the SEC. As much as I am sure Stein will be glad to get the the messages, it is MUCH more important to let MJW know that the public appreciates Stein’s work, since MJW has, to put it mildly, not operaed from the same playbook. Public support for Stein makes it harder for MJW to undermine Stein.

  4. David Woolley

    Powerful writing. Clear and concise. The balance of the commissioners will likely work against her in the future and actively try to have her replaced- all the while stopping by her office to tell her how much they admire her courage. There will be little room for a reformer. In her last days she will look back and realize she had no other choice- her integrity and ambitions are not for sale. Ms. Stein is a model regulator. Unfortunately, in today’s lawless practices, she and Lawsky will likely end up running a bed and breakfast in upstate living off the generosity of tourist tips.

  5. Abigail Caplovitz Field

    Thank you again, Kara Stein. Please keep up the good work. Please keep up your clear, plain English exposure of the, well, ‘regulatory capture’ doesn’t quite touch it, does it? Perhaps we should just start calling the Commission SEC, Inc., and putting it in a corporate org chart that shows it as a subsidiary of the biggest banks. Then you can be seen as an activist, minority shareholder trying to fix a glaring corporate governance problem…

  6. Ben

    Just when I thought all the heroes (and heroines) were in books. We need more, but it’s a start.

  7. George Bailey

    To your point that a single commissioner has limited power, it’s remarkable how effectively Stein’s exercised it, in stark contrast to the nearly complete abdication of that power by Mary Jo White to her former clients. At the same time it highlights how important is to make good appointments.

    Ironically, Ms Stein’s most successful victory in this battle to use the SECs enforcement authorities and deny waivers for criminal recidivists came as a result of the folly of installing a compromised and celebrated former prosecutor who had to recuse herself from her own agency’s enforcement function because she had represented the crimminals in her post prosecutor life.

    That episode made clear that Obama’s “you don’t want to mess with her” assurances of MJW as SEC enforcer was indeed a cynical joke. Kudos to Stein for standing her ground to make the point crystal clear that that joke was, by design, on us.
    .
    In these current cases MJW sided with her unabashedly pro banker Republican commissioners, and delivered on the Obama administration’s Hippocratic promise’ first do the bankers no harm’.

    Bloomberg published a piece yesterday with the headline ‘The Agency that Barely Moves’, with an apparently negative sub head ‘ The agency is paralyzed by politics and poor leadership’;
    http://www.bloomberg.com/news/articles/2015-05-21/mary-jo-white-s-sec-is-the-agency-that-barely-moves

    Yet it lauds MJW’s masterful performance in pulling her fellow commissioners in line to grant waivers as part of this settlement.

    ‘The pressure on SEC Chair Mary Jo White was almost palpable, two people involved in the negotiations say, as defense lawyers and prosecutors barraged her staff with inquiries and fellow commissioners weighed in with threats to vote against some of the waivers. Determined not to let the squabbling scuttle the broad settlement, White called a private commission meeting on May 19, when all the waivers were approved. The settlements were announced the next day.
    It was a rare victory for White, whose two-year tenure heading the securities regulator has been marked largely by discord and paralysis rather than accomplishments.’

    Rare victory indeed. She had the deciding vote, the other commissioners were stalemated. Her ‘victory’ was limited to her ability not to be required to recuse herself. She convinced neither side to change their position. As to discord and paralysis, MJWs revolving door complicity is the source, She should resign and either return to private practice or resume a prosecutor’s role. Regulation should not be held hostage any longer to her personal dilemma.

    After some fawning praise from Treas Sec Lew and former SEC commissioner Lew the article degenerates’ in classic BBG style , into a hit piece on Stein,

    ‘The pressure on SEC Chair Mary Jo White was almost palpable, two people involved in the negotiations say, as defense lawyers and prosecutors barraged her staff with inquiries and fellow commissioners weighed in with threats to vote against some of the waivers. Determined not to let the squabbling scuttle the broad settlement, White called a private commission meeting on May 19, when all the waivers were approved. The settlements were announced the next day.
    It was a rare victory for White, whose two-year tenure heading the securities regulator has been marked largely by discord and paralysis rather than accomplishments.’

    MJW may have called a private meeting but Stein’s public dissent tells us all we need to know about what happened in private. MJW swayed no one.

    But the article’s main point is that Stein will be corralled, come June:

    ‘White may have an opportunity to change the dynamics. In May, Republican Commissioner Daniel Gallagher submitted his resignation, and the White House has begun scouting for a replacement for Democrat Luis Aguilar, a commissioner whose term expires in June. Although White doesn’t have a say in picking a Republican to replace Gallagher, she has sought a more moderate replacement for Aguilar, say people familiar with her thinking. A Democrat who shares more of White’s views could dilute Stein’s influence.’
    Which Democrat would that be?
    My preference would be to find a Democrat who shares more of Stein’s views. Since it’s unlikely that MJW will
    be forced to exit I hope we can help Ms Stein to be provided with an ally who will continue to check MJWs incompetence.

    Who prepares the short list of candidates, and how can we participate in that choice?

  8. Ed Walker

    Mary Jo White is a genuine captive regulator in the flesh. She has lost the fire in the belly that a real regulator keeps at white heat; and replaced it with a genuine love for the repeat offenders who made her rich and gave her power.

    I had hoped for mare, but alas, disappointed agains.

  9. patriot77077

    Is it time yet? Will they ring a bell or something when it’s time?
    The country’s entire financial system is apparently run by criminal gangs who are completely above the law. We should A: be hopping mad in the streets yelling at the elites who are stealing our future, or B: stop any hypocritical talk about “freedom” and “democracy” and “representative government” and “the rule of law”.
    I pick “A”, I think it’s time.
    https://www.youtube.com/watch?v=tYdJqSG3K6c
    https://www.youtube.com/watch?v=NUqytjlHNIM

  10. Ensign Nemo

    Many of these market manipulations involve fudging the closing price, i.e. the final price charged for the last sale of the day.

    The simplest method to eliminate this behavior for widely used benchmarks such as LIBOR would be to simply use the average price for that day. Add up all of the sales, divide by the number of sales, and use that as the benchmark. Anyone who wants to manipulate the price would need to skew all of that day’s sales, not just the last few of the day. A computer could easily do the math in a few milliseconds.

    This is simple, straightforward, and obvious. It would eliminate the opportunity for much mischief and fraud.

    Those are precisely the reasons why I think that the Powers That Be will make damn sure that it never happens.

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