Matt Stoller: Why It’s Worth Fighting Over Who Runs the SEC

Matt Stoller is a fellow at the Roosevelt Institute. You can follow him at

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.

 That’s Khuzami for you. Why isn’t the SEC doing enforcement? According to Khuzami, it’s because there’s simply less accounting fraud these days. What’s the proof? The people who might be committing fraud are saying there’s less fraud. A more honest accounting is that Khuzami himself is corrupt, and is in charge of making sure that the agency doesn’t do anything to undermine Wall Street’s tacit support for the Obama administration. It certainly seems likely, considering that Khuzami refused to act on allegations of fraud by whistleblowers that took place on his watch at Deutsche Bank.

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.

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About Matt Stoller

From 2011-2012, Matt was a fellow at the Roosevelt Institute. He contributed to Politico, Alternet, Salon, The Nation and Reuters, focusing on the intersection of foreclosures, the financial system, and political corruption. In 2012, he starred in “Brand X with Russell Brand” on the FX network, and was a writer and consultant for the show. He has also produced for MSNBC’s The Dylan Ratigan Show. From 2009-2010, he worked as Senior Policy Advisor for Congressman Alan Grayson. You can follow him on Twitter at @matthewstoller.


  1. gatopeich

    Disturbing, how we are getting used to comment on this landscape of corruption as if it was the normal thing.

    Especially when it comes to a government’s overt efforts to protect a gang of fraudsters.

    1. Mark P.

      It _is_ the normal thing, dude. Mark Twain wrote about America’s only “distinctively native criminal class” being Washington during the last Gilded Age, more than a century ago. The more thigs change, etcetera ….

  2. From Mexico

    The SEC’s prosecution of Martha Stewart was what awoke many Americans to the fact that the SEC had become a terrorist organization. Whether Stewart was guilty or not is beyond the point. What is important is that the SEC had lost any sense of proportion or equal justice before the law. At the same time it was pursuing its scorched earth enforcement jihad against Stewart, it was turning a blind eye to infractions that were orders of magnitude more harmful to the economic and moral well-being of the nation.

    It was Ronald Reagan who ushered in this double standard in law enforcement and oversight. For instance, here’s Reagan’s treatment of the bankers:

    During the early years of the administration, responsibility for the unfolding thrift crisis lay with the Cabinet Council on Economic Affairs, chaired by Treasury Secretary Donald Regan. Its members included senior
    officials from OMB and the White House. Firm believers in “Reaganomics,”” this group crafted the policies of deregulation and forbearance….

    The free-market philosophy of the Reagan administration also called for a reduction in the size of the federal government and less public intervention in the private sector. As a result, during the first half of the 1980s the federal banking and thrift agencies were encouraged
    to reduce examination staff, even though these agencies were funded by the institutions they regulated and not by the taxpayers. This pressure to downsize particularly
    affected the FHLBB, whose budget and staff size were closely monitored by OMB and subjected to the congressional appropriations process.

    –FDIC, History of the Eighties — Lessons for the Future

    Now contrast the era of banker impunity that Reagan ushered in to the draconian law enforcement he was concomitantly directing towards lower elements in the society:

    He boosted the budget for domestic repression, doubling the FBI’s funding while the US Bureau of Prisons got a 30 percent increase and the DEA saw moderate budget expansion. At the same time the legal reins of police began to loosen; federal use of wiretaps shot up 22 percent between 1981 and 1982, while the duration of the average tap went from twenty-four hours to twenty-six days. Meanwhile Reagan’s Chief of Staff Ed Meese and Attorney General William French Smith started demanding changes in the criminal code. “We must increase the power of the prosecutors,” insisted Meese….

    The early eighties also saw a veritable coup in the judiciary, as Reagan stacked the federal bench with mean-spirited, anti-crime, anti-drug zealots, who in turn began handling down law that, as Meese had wished, “empowered the prosecution.”….

    The year of the Leon decision, 1984, also brought an election-year spirit of anti-drug jihad…. [The Leon decision was the Supreme Court decision that gave police a “good faith” exception to the “exclusionary rule” which requires that courts “suppress” or disregard illegally obtained evidence.]

    On the campaign trail, president Reagan made it clear that his next four years would bring a renewed anti-crime crackdown. “Permissive attitudes are giving way to a new sense of responsibility,” declared Reagan triumphantly. Meese would take the victim-blaming ethos to new heights.

    CHRISTIAN PARENTI, Lockdown America

    Reagan added to America’s civic religion a crucial belief: impunity and forbearance for the finance sector and large corporations, and the jackboot of the state against the neck of everyone else. The time should fit the crime, equal justice under the law — Reagan’s abrogation of these ancient bits of folk wisdom did as much to recast America’s moral constitution as did sex, drugs and rock and roll.

    Although I believe Matt Stoller is certainly well intentioned, until he takes a look at the ailing heart of American law enforcement — the double standard that rips away at its heart and soul — his calls for blanket crackdowns will largely go unheeded.

      1. From Mexico

        When I use the word terror, I use it in the sense of what Hannah Arendt called the “paradox of Auchwitz,” where justice becomes so perverse that those who actually committed crimes were placed “in protective custody” (Schutzhaftijuden) and who, under the totalitarian priciple of directing the full terror of the regime against the “innocents,” were considerably better off than the others.

        As Arendt goes on to explain in The Origins of Totalitariansim, what distinguishes “police terror” is “the arbitrariness by which victims are chosen, and for this it is decisive that they are objectively innocent, that they are chosen regardless of what they may or may not have done.”

        Ralph Ellison said much the same thing in “An Extravagance of Laughter.” “Whiteness,” he wrote, “didn’t care whether its victims were guilty or innocent, for guilt lay not in individual acts of wrongdoing but in non-whiteness.” This “denial of personality” allowed “any Negro to be interchangeable with any other.” Lynching “served to affirm white goals and was enacted to terrorize Negroes.” Thus it “does not matter if its sacrificial victim is guilty or innocent.”

        The same is true of the era of paramilitary policing that Reagan ushered in. Innocence, petty criminality and major criminality became one and the same in its neighborhood sweeps, field interviews and curfew busts:

        If there is a parable to be drawn from the story of paramilitary policing in the US, it is that the political theatrics of terror are by no means dead. Physical terror and spectacular displays of violence are still central to the state’s control of the dangerous classes. The helicopters, guns, and constantly barking dogs of the American tactical army are a blunt semaphore to the lumpen classes and working poor… The point is that ritualized displays of terror are built into American policing.

        –CHRISTIAN PARENTI, Lockdown America

        Terror is now used “as an instrument to rule masses of people who are perfectly obedient,” as Arendt put it in The Origins of Totalitarianism. Thus anybody “may suddenly become a victim of the police terror.” This is the situation, described here by Glenn Greenwald, that the United States has descended into:

        [A]ll of this had one overarching objective. It was designed to create a climate of repression and intimidation by signaling to the world — and its own citizens — that the U.S. was unconstrained by law, by conventions, by morality, or by anything else: the government would do whatever it wanted to anyone it wanted, and those thinking about opposing the U.S. in any way, through means legitimate or illegitimate, should (and would) thus think twice, at least.

        That a large percentage of those brutalized by this system turned out to be innocent — knowingly innocent – is a feature, not a bug: that one can end up being subjected to these lawless horrors despite doing nothing wrong only intensifies the fear and makes it more effective. The power being asserted is not merely unlimited and tyrannical, but arbitrary.
        –GLENN GREENWALD, “Government-created climate of fear”

        1. skippy

          The usage of ones own social strata to enforce terror is age old, from antiquity to “Auchwitz” and today.

          skippy… would the law makers employ their very own blood (DNA seed) to do so… would be more honest, methinks. The architects never have that kinda of skin in the game… eh, yet some ponder… sigh.

          PS. a – DEEP PERSONAL – thank you[!] for taking the time to dispel the white noise, cortex injected from the usual places and people.

  3. Barbara Roper

    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.

    1. JEHR

      I agree with you, Jeff. Goldman Sachs has billions of dollars worth of those parking tickets! A jail cell would be more efficient.

  4. jake chase

    Whoever heads the SEC should go to work every day wearing oversized shoes, a neck ruffle and a red nose. He will be specifically selected for collegial connections to Wall Street, ideological purity, an inability to understand financial statements, and no interest in making them anything but fantasy. These qualities would make him essentially no different than every SEC Chairman since 1968. Worrying about who runs the agency marks the worrier as knowing very little about how it actually functions. Its purpose is public relations, selling our vibrant free unfettered capital markets to a gullible investing public enthralled by daily tips issued by the CNBC Clown Chorus.

    I think the Chairman’s office has a putting green behind the desk, so whoever is selected ought to be an avid golfer.

    1. Mark P.

      ‘Whoever heads the SEC should go to work every day wearing oversized shoes, a neck ruffle and a red nose.’


    1. neo-realist

      Are you kidding? Obama would actually have to grow a pair and actually practice “change that you can believe in”.

  5. Peter Principle

    “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”

    That was a joke, right?”

    “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.”

    I know these guys aren’t very fast on the update about almost anything that doesn’t involve winning an election, but really? Or was that another joke?

    Krawcheck was fired from her CFO job (a job she was completely unqualified for in the first place) for rank incompetence. Rank incompetence — at Citigroup. Think about it.

    Things woulda been different if Romney hadn’t won the election, that’s all I’ve got to say.

  6. Gil Gamesh

    Khuzami. Fowler. Garbage in, garbage out.

    The evil of banality is not banal. Central banks around the globe have loaded up their governments with worthless bank assets. Now, sovereigns are too “resource constained” to fund, say, climate disaster mitgation and adaptation. Naturally, private capital is at the ready, thanks to bullshit balance sheets, to make money for the biggest carbon polluters and gouge the developing countries that will be hammered by storms, droughts, heatwaves, desertification, and rising sea levels.

    First they steal from us, then they kill our kids. Call it the “Way of the Khuzami”, our distinctly American improvement on the Way of the Tao.

  7. Lambert Strether

    Elite impunity is, I think, the issue (“accounting control fraud” speaks to method; “elite impunity” speaks to outcomes.

    And amazing as it may seem, there are countries that have fought successfully against elite impunity, although it’s a never ending battle. So there is hope, even if you wouldn’t know it from reading our famously free press.

    1. charles sereno

      “Elite impunity” envisions no cliffs. Even if there’s a stumble, unlike with the “Titanic,” deck chairs are successfully re-arranged. Everyone knows Barofsky won’t be appointed. It’s true he got to be IG of TARP by mistake. Fool the elite once and you’re dead meat except as a useful example of misguided zealotry. It always works. Actually, there is a real edge to the world. Well, I think so along with a collection of prophets. I’m a little different because I really don’t have an idea about what will happen but yet choose hope (What’s there to lose?).

    2. jake chase

      Which countries have fought successful battles against elite impunity? Please don’t say France and Russia, or China either, although I suppose each of those would qualify, right?

  8. Tom

    It is important who runs the SEC – someone without conflicted interests. Throughout this crisis – I have been amazed at the lack of enforcement exhibited by the IRS. It appears they are hand tied in making any enforcement headway because TBTExist financial institutions have not been required to make admissions of their culpability via the purchased get-out-of-jail-cards (fines without admissions of guilt)issued by DOJ, SEC etal.

    1. Lord Koos

      “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.”

      This sums it up, what else is there to say?

  9. Peter Principle

    The irony is that Mary Miller actually had a pretty good story to tell: She was head of fixed income at T. Rowe Price (big mutual fund house) in the bubble years, during which she and her analysts steadfastly refused to buy nearly all of the mortgage derivative junk Wall Street was peddling — because they could see it was junk.

    Asset management is buy side, not sell side — close to Wall Street, yes, but at least not on the same side of the table.

    To drop Miller because she was “too close to Wall Street” and then look at Sally Krawcheck is really quite insane.

  10. Martskers

    Stan Sporkin still gets my vote. Yes, he’s gone over (but just a bit) to the dark side (on behalf of BP), but who else has a CV like his when it comes to independence, integrity and the ability to kick some serious Wall Street butt.

    I’d love to see the look on the faces of Biggie Rat (Lloyd Blanfein) and Itchy Brother (Jamie Dimon) when they found out about that appointment.

  11. alex morfesis

    it would be better if Neil waited for Holder to resign and there was a big push made to get Mr. Barofsky named the next US Attorney General…

    Holder should be resigning some time next year…only three USAG’s in the last 100 yrs have served longer than Holder has.

    Why be tied down to “requesting” there be prosecutions from the side show at the SEC, which has had its budget tied down…would not be bad having another bobby kennedy type being the top prosecutor in the country.

  12. Paul Tioxon

    Network of interlocking directorates of Citi & JPM. Just a for instance, but you know, it is a wide network of power, not an isolated case of banksterism, it is the love that dare not speak its name: capitalism. Rule by money with the state and the market joined together to make the social order possible.

    You know, it just capitalism, forget it Matt, it’s capitalism, there is no alternative. Lets get out of here.

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