The Most Dangerous Choice for SEC Chairman

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In a new column in the New York Times, Simon Johnson points out that Obama is likely to be appointing a new SEC chairman soon. He describes two alternatives: choosing a friend of the industry versus someone who might actually be willing and able to regulate it. Johnson believes that a tough-minded chairman should not only enforce the rules but “actively seek to change the conventional wisdom around finance.”

While I like Johnson’s recommendations (former Delaware senator Ted Kauffman, Neil Barofsky, and Dennis Kelleher of Better Markets), I’m not sure I agree with his emphasis on changing the discourse. When I worked on Wall Street, the SEC was feared, and it was feared because it had an effective enforcement department, the legacy of the legendary Stanley Sporkin. A reader provided some corroborating detail in comments on a post over the summer:

I was an SEC enforcement attrorney during the generally-regarded halcyon days of the Sporkin era, and I can tell you, we kicked ass and took names. I myself was involved in many cases involving some of the biggest names on Wall Street, and was instrumental in several cases that eventually resulted in the enactment of the Foreign Corrupt Practices Act. We had a trial unit back then that was quite busy actually trying, and, more often than not, winning cases. We referred many cases for criminal prosecution (including for perjury), not having prosecutorial authority ourselves.

Back then, the industry quaked in its boots when we came calling. The only partially apocryphal story about Stanley is that, during an investigation he was leading (before he became the head of enforcement), he had a group of witnesses waiting to give on-the-record testimony. When the witness he had been deposing had a heart attack during the deposition (a not-infrequent occurrence), the ambulance attendants wheeled the stricken witness out of Stan’s office on a gurney, with Stan close behind, announcing to the waiting group of witnesses, “alright, who’s next.”

By contrast, the SEC chairman is not in a great position to change public perception. Yes, any agency head has some media access, but the SEC chairmanship is not a great bully pulpit unless its chief makes the agency worth paying attention to. And the SEC, unlike banking regulators, has to go hat in hand to Congress for budget approval. Wall Street friendly Congresscritters regularly threaten to cut SEC budgets when the agency looks like it might get serious about its job. So for a new SEC head to surmount this obstacle, it needs to start with enforcement and public interest. And the public is all in favor of having banks obey the rules just like everyone else; the departure of retail investors from the stock market is in part due to widely held and largely correct perceptions that they are at a serious disadvantage versus the pros. Conventional wisdom will be slow to change in the elite echo chamber because a critical mass of incumbents are bought and paid for by the financial services industry.

So the most dangerous choice is the one who would be the most effective, and my bet would be on Neil Barofsky. His background as a prosecutor would be enormously helpful in helping the SEC strengthen its enforcement department, tee up significant cases, and some of the time, put the miscreants through the wringer of a trial . If the SEC starting showing it could litigate something other than insider trading cases effectively that would change the dynamic with securities firms, both on a day to day basis and in those cases it did decide to settle. And an aggressive SEC chief might even find creative ways to pressure the DoJ when it passed on cases for prosecution that it thought were viable that the DoJ ignored (I’m assuming the DoJ continues to be as inactive as it has been under Holder). Making the SEC a highly regarded agency alone would change the dynamic; it would demonstrate that regulators can wield power and command respect. That alone would change conventional wisdom.

But of course, Johnson’s recommendations to Obama will never go anywhere. Even though Wall Street shifted its campaign dollars away from Obama to Romney, the President has other reasons not to ruffle their feathers. As Matt Stoller wrote in 2011:

Political analysts tend to gloss over what I would call hedging behavior on the part of political elites. While elections are somewhat random, the fact that you will be on the losing side of an election at some point is guaranteed. So politicos don’t ask: What’s the best way to win an election? Rather, they ask: What’s the best way to preserve my risk-adjusted position in the political ecosystem of influence and money? This means setting yourself up to win an election if possible, but not in an especially populist manner that could increase the downside of losing or falling into the minority…

I sometimes see Wall Street titans or wealthy people bemoaning the corruption in DC. Hedge fund manager Michael Steinhardt, for instance, says that he wants his taxes raised. This may be laudable, but it ignores the basic hedge in DC. If a politician votes against special interests, he will face enormous bitter attacks, and should he lose, he will fade into obscurity. If a politician votes for special interests, the converse dynamic will kick in. In such an environment, you wouldn’t expect brave politicians or staffers to last very long. And they don’t.

Obama’s likely post-presidential life is likely to look something like Clinton’s: give highly paid speeches, write yet another biography, maybe set up a foundation. Most of the interesting things he could do depend on not unduly annoying the top 0.1%. So no matter how badly Wall Street has treated him recently, the odds that Obama would appoint anyone who would endanger his end game are awfully low.

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  1. Richard

    Split up the SEC and move its enforcement arm into a new agency. Put Barofsky in charge of this agency. Funding for agency comes from tax on industry.

    To attract the best and give them an incentive to really enforce the laws, perhaps they should have a bonus system … Wall Street CEO goes to jail pays out much more than settling at expense of shareholders.

    1. Raskolnikov

      Eliot Spitzer.

      And make Bill Black his right hand man.

      Give them both an adequate supply of pepper spray, Billyclubs, and leg irons, and put them to work.
      These two guys alone could clean up the Wall Street sewer in no time flat.

  2. Middle Seaman

    It’s a big country; there many tough candidates that can cause WS heartburn. The main reason Obama is unlikely to nominate extra-WS guy is Obama’s natural affinity for WS. He can fight WS and still get rich after 2016. Fighting is not Obama except for himself. He is fine with the current WS take some minor nasty comments. Who cares about that anyway?

    He’ll never succeed as well as Bill Clinton because he has very little to sell.

  3. psychohistorian

    What are you all smoking? That Hopium was some vapid shit and now your smokin some of that Forward stuff

    This is Obama, right? How many years before you learn?

    1. Yves Smith Post author

      Please read again. I am politely saying Johnson is smoking hopium. I know, I am so rarely polite these days it might be hard to get that. It was tempting to beat up Johnson for treating Obama as capable of acting in good faith, but Johnson is one of the few people who is consistently tough on banks, and people who’ve had significant jobs (he was chief economist of the IMF) obey the elite rules of not calling people in positions of authority corrupt unless they are caught with envelopes of cash.

      1. psychohistorian

        Thanks for the response Yves.

        I was focused more on the commenters than you but as “radical” as Simon Johnson is not, I hope someday to get all folks on the same page about the global inherited rich and the game they have us all playing.

        Simon Johnson, Krugman, Delong, Thoma, etc. could all bring the economic myth discussion out of the fog if they were not so part of the sick class system we live under in Western “Democracies”. They are paid to defuse the energy of the intelligent segment of the 99%.

  4. jake chase

    Sporkin was Director of the Enforcement Division from 1974 to 1981, during which period not one damn thing happened to make any difference in Wall Street behavior or investor protection either. He was appointed a Federal Judge by Ronald Reagan, and if that doesn’t tell you anything you haven’t been paying close enough attention.

    I don’t care how much Sporkin abused witnessess and heart attack victims, or what kind of thug he looked like (and he did look like a thug). His idea of prosecuting fraud was harrassing Warren Buffet, just about the only honest man inhabiting the financial world during the past forty years.

    The SEC has been a paper tiger since 1935. Its job is to make public investors think somebody is watching out for them. The whole thing is a con. You might as well appoint Elmer Fudd Chairman, since Wall Street still has Bugs Bunny.

    1. Yves Smith Post author

      You don’t know what you are talking about. Your remark is honestly embarrassing. Go take your ignorance and cynicism elsewhere. People in my day got fired if there were errors in SEC documents. Minor minor errors. The sort of misrepresentations that were made in MBS and CDO documents would have been inconceivable in the 1970s and 1980s.

      And even in with the SEC’s diminished state, the 1933 and 1934 acts still provide some meaningful protections. The 1934 Act limited rehypothecation of customer assets. The absence of those rules in London led to over $8 billion of losses from customer accounts in the Lehman failure.

      1. jake chase

        The fact that a few preppie twits got fired for typing mistakes does not investor protection make.

    2. Percy

      Did nothing to Wall Street? Nonsense. I, too, was there during Stan’s heyday. On my end we did away with fixed commissions, broke the NYSE’s monopoly on last sale and quote data (giving you the real-time consolidated data you look at all day now), got rid of exchange off-board trading rules and barriers to institutional and foreign membership, forced SROs into filing and getting SEC approval for their rule changes after seeking public comment, forced dealers to refrain from trading ahead of their own customers at the same price, stopped short tendering into tender offers, created the net capital rule, and a few other things along the way. Stan did the Foreign Corrupt Practices Act, invented the SEC’s current case settlement procedure, and did, as Yves points out, get people to keep accurate records (or get hit over the head), revitalized the inspection program, and brought lots and lots of cases, though he was a little too respectful of the etablishment firms. Then there was what Corp Fin did, tender offer rules, going private rules, Rule 144, shelf registration statements, and so on, but that’s a different topic. Perhaps you are too young to remember what the Street used to be like.

  5. Mary Bess

    Insulating the SEC chief from Congressional retaliation is critical.

    Figure out what it will cost to do the job right and, to build some incentive into the system, impose a transfer tax on stock trades that fluctuates to meet the cost of enforcement of SEC rules.

  6. charles sereno

    Comic relief: I do notice Yves’ use of words because I consider her a mentor (Is it possible to have a mentor who is much younger?). I leave discussion of “role model” for another day. Right now I’m concentrating on “bully pulpit.” Yves says — “…the SEC chairmanship is not a great bully pulpit…” I certainly agree with the thought, but the “bully pulpit” phrase gives me indigestion. It’s like bringing together two disparate concepts in a decidedly unpoetic fashion. Although “pulpitious” will never fly, it would at least avoid connections between bad playground behavior or the Mafia and words from on high. That is, unless Religion and Business have some unknown secret ties.

  7. Zapster

    On presidential hedging, GW hedged his bets from all sides, and he’s now become so poisonous that his historical legacy as an incompetent clown will live in infamy for generations. FDR, on the other hand, “Welcomed their hate.”

  8. Lafayette

    So no matter how badly Wall Street has treated him recently, the odds that Obama would appoint anyone who would endanger his end game are awfully low.

    I dunno.

    This guy could surprise us all in his second term. Let’s not judge him too harshly just yet.

    He set expectations too high once and failed them. His history as a PotUS means a lot to him (one might imagine). He’ll want to accomplish as much as possible in his second term that he was unable to do in his first.

    By now, he should know that trying to bring diverse groups together to win with solidarity an election is one thing and DC-hardball is quite another. He’s a fast learner and intelligent man.

    He has a choice. Does he want to go down in history as a footnote as the first black President of the US or as the first black PotUS who actually reformed America importantly.

    Admittedly, with the Replicants still in charge of the HofR, he’s not got all that much of a dynamic to work with.

  9. steelhead23

    Perhaps we should just do away with the SEC and leave enforcement on Wall Street to Wall Street. I suspect that within a few weeks the local gutters would be filled with blood and the BIS would implode. Oh, in case you didn’t recognize it, that was sarcasm.

    So, next question: Who’s gonna fill Timmah’s shoes?

  10. JGordon

    I don’t believe that giving speeches and book tours will be an especially profitable activity after society has collapsed. And on that topic, that’s why I am in favor of arrogance and criminality among the elites; they are parasites who can’t stop themselves from sucking all the life blood from the system that supports them. And when the system is gone, they are gone. And all that will be left are those saw what was coming and escaped early.

      1. JGordon

        Yes, a low-stress minimum wage job and plenty of government handouts enables quite a nice lifestyle once you learned that it doesn’t take money to pay for things like food and shelter when you are creative and self sufficient.

  11. Kim Kaufman

    “Obama’s likely post-presidential life is likely to look something like Clinton’s: give highly paid speeches, write yet another biography, maybe set up a foundation. Most of the interesting things he could do depend on not unduly annoying the top 0.1%. So no matter how badly Wall Street has treated him recently, the odds that Obama would appoint anyone who would endanger his end game are awfully low.”

    I’ve been saying since about Obama’s first year that all Obama really wanted to do was get re-elected so he can wind up being a smug rich guy like Clinton.

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