The SEC’s Mary Jo White: A Failure, or Doing Her Real Job?

Your humble blogger has to confess to having called Mary Jo White’s appointment incorrectly, based on enthusiastic readings on her from people who’d worked with her as a prosecutor, such as Neil Barofksy. But the default assumption for Obama appointees, that he’d never give anyone who’s rock the status quo a serious role, was the right assessment. White’s ten years in the private sector at Debevoise seems to have reinforced habits that aren’t serving her well, even in her role as Potemkin fixer-upper of an agency that is widely seen as timid and floundering. Not only is she failing to move regulatory measures forward quickly enough, but she’s also engaged in an unseemly amount of turf warfare with other agencies.

An article yesterday in ProPublica by Jesse Eisenger was tame in its criticism of Mary Jo White. Yes, the headline does state that she hasn’t turned around the agency, and points out early on that “opinions of Ms. White’s performance range from dissatisfied to infuriated.” But the article has a handwringing tone, as if Eisenger is puzzled as to why this sorry turn of events has come to pass.

Part of the problem is Eisenger fails to appreciate why the SEC was once a feared and respected agency, and why it has fallen. He unwittingly gives the impression that it was seen as competent recently. In fact, the neutering of the agency started in the 1980s, and has continued even under chairmen who had modest ambitions for the SEC. We’ve repeatedly discussed the account of the longest-serving SEC chairman, Clinton appointee Arthur Levitt. As a non-attorney and former head of the American Stock Exchange, Levitt no doubt was expected to be pro-business and not very interventionist. But while Levitt thought that large institutions could more or less fend for themselves, he was very serious about trying to protect retail investors. And even with those limited aims, he ran into considerable opposition from Congress, which threatened to cut his air supply by slashing the SEC’s budget. Eisenger cites Bush appointee Christopher Cox as responsible for crippling the agency, when Cox’s immediate predecessor, Harvey Pitt, was a bit of a horrorshow.

So if you put aside the matter of Mary Jo White’s true ambitions and loyalties, why was it reasonable to believe that she might have been able to turn around an agency that was a shadow of what it had been in the 1970s? The answer: her prosecutorial chops. White is widely respected by the people she worked with, and is seen as a tenacious litigator. And what led the SEC to be feared and respected in its heyday? Its head of enforcement, Stanley Sporkin. From a 2012 post:

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.”

So the real tell as to whether Mary Jo White was serious about her job was who she appointed to be head of enforcement. When Neil Barofsky wasn’t nominated to lead the SEC, there were calls for him to be named head of enforcement, which meant he set the standard for what the public hoped for. Instead, White chose a colleague from Debevoise, meaning a litigator who represents corporations. While a Pauline conversion was possible, it wasn’t something a rational person would bet on. Mary Jo White’s pick wasn’t as obvious a repudiation of the promise of reform as Obama’s choice of Timothy Geithner as Treasury Secretary, but it lowered expectations of her among the cognoscenti big time.

Even so, White has been inept as well as unable to fake ambition. Eisenger does usefully recount many of the people she’s alienated. She has the rest of the Financial Stability Oversight Council annoyed for stymieing efforts to designate asset managers like Pimco and Blackrock as systemically important financial institutions. She’s even managed to undercut tame reform measures advocated by the not-at-all aggressive Public Company Accounting Oversight Board. And he gives a very good description of why the SEC fixes for money market funds did virtually nothing to address the real problems.

But Eisenger seems mystified that Mary Jo White does not get on well with reform-minded Democrats, including the Democratic SEC commissioner Kara Stein, Senator Carl Levin (who is unhappy about how slowly White is moving on Dodd Frank rulemaking and how weak the results have been), as well as other progressive Senators who want the agency to implement rules to bar financial firms from creating transactions that are most profitable for them if they fail, as John Paulson, Citigroup, Goldman, and most important, Magnetar did.

The real tell that White simply has no interest in making meaningful changes is its response to the Michael-Lewis-induced furor over high frequency trading. This is a long-standing abuse. Even though it’s less profitable to the perps than it once was and in the overall scheme of financial services industry rent-seeking, it’s not all that high on the list, it’s worth cleaning up. Both the flash crash and a raft of follow-on academic studies have demonstrated that HFT has had adverse effects on market structure. Not only does it produce junk liquidity, as in more when markets don’t need it, it drains liquidity when participants need it most, when trading is thin and volatile.

The SEC is singularly responsible for the rise of HFT by allowing traders to have advantaged access to orders by co-locating servers at exchanges. This was an obvious move to front-run trades that the SEC permitted and still refuses to roll back. Similarly, the agency has failed to address the failing of its Regulation NMS, which was meant to create a modern, electronic market structure but has in fact made markets less stable and more failure prone than before. From a post earlier this year:

The old exchange system was a hub and spoke model, which was a stable system architecture. The internet was an outgrowth of a DARPA project to make a communication system so decentralized that it could not be taken out by a nuclear strike. Hub and spoke models are stable, but subject to an outage, say by a nuclear bomb or electrical failure. What chaos theorists have found is that highly decentralized networks are stable, as are single node networks (like exchanges), but that slightly decentralized networks are fragile. And that is what we have now thanks to the SEC’s misguided efforts to “modernize” the stock market via Regulation NMS.

So regulators have left investors with the worse possible market structure. We no longer have liquidity obligations to make orderly markets as we had with the old model. Our current system is more complex due to some decentralization, but it is not so decentralized that it is robust (in technology-speak, a synchronized mesh network). The complexity of keeping the slightly decentralized model synchronized is what makes the system unpredictable and more fragile. This is not just an academic network construct. It is why we saw some exchange crashes recently (like Nasdaq) that were due to code changes in the linkages and feeds between exchanges.

Similarly, the value high speed traders provide is reestablishing the integrity of a single price in a centralized market after Reg NMS fragmented the market. But in reality, the buy side and all brokers are already sophisticated enough to use electronic routing to reestablish that centralized market, but not at sub-second speed. So the only service HFT time-based arbitrage provides is a sub second service. We’ve yet to see anyone make a credible case for the social utility whatsoever of sub-one-second execution. So since sub-second order execution fails to provide any social utility, it follow that any profits they extract are a dead weight loss on stock transactors. Those strategies, with the complex order types and the payment for order flow, should be eliminated.

Bear in mind: this problem is completely within the SEC’s purview. A simple rule change like a minimum resting time for orders would do. Yet the agency has done squat to address it.

Another proof of how little Mary Jo White cares about serving the public: the SEC launched an examination of alternative mutual funds, which bring hedge-fund type strategies to lowly retail investors. Mind you, all the SEC has done is request information; the Wall Street Journal account stressed that this initiative does not appear to be a precursor to enforcement actions. But if you only skimmed articles, it would be easy to see this move as more serious than it is.

And while this data-gathering exercise is underway, NC contributor and compliance expert Michael Crimmins pointed out that the SEC is about to authorize sales of risky products to retail investors, namely “nontransparent ETFs.” As he notes: “Complexity on top of complexity. What could go wrong?”

So Mary Jo White is no doubt doing her job. It’s simply, as with Obama, not the job the public was led to think she’d do.

Print Friendly, PDF & Email


  1. diptherio

    I wanted so much for your first take on White to be correct…oh well.

    Speaking of flash crashes and HFT, Conan O’Brien had Michael Lewis on his internet only show, Serious Jibber Jabber earlier this month. Just stumbled across it on the youtubes. Conan gives great interview, and is considerably more well-read than one would expect from a late-nigh talkshow host:

    Conan and Michael Lewis: Flash Boys

    1. susan the other

      Giving her the benefit of the doubt, Mary Jo was probably a pawn. She might be a tough litigator, but the world has almost passed that specialist by. The thing that strikes me about this post, it is way interesting, is that it is all becoming, as Lambert says, a case of code is law. But people do catch on to the reality that nothing seems to be working correctly. I loved the quotes above about how (paraphrasing with abandon here) highly decentralized networks are stable like highly simplified (spoke and hub) networks. But that (most interesting because this can be intentionally used to game the system apparently) partially decentralized networks are fragile because they are actually MORE vulnerable. Like a damaged ecosystem. So the SEC’s modernization is really a form of simplistic simplification, not a diverse and robust and complex simplification. I betcha Mary Jo just wants to finesse the whole thing and introduce Bitcoin as the feeder line between exchanges. Since there isn’t any social utility to HFT anyway. So we don’t know if Mary Jo is clueless, or subversive. Here’s a money quote from above, “The complexity of keeping the slightly decentralized model synchronized is what makes the system unpredictable and fragile.” Go Mary Jo. Hecka Vajob.

      1. Chauncey Gardiner

        Thanks for a great comment, susan. Heh, I’ll roll the dice for “subversive”.

        …”HFT has had adverse effects on market structure. Not only does it produce junk liquidity, as in more when markets don’t need it, it drains liquidity when participants need it most, when trading is thin and volatile.”

        Of course, there are always the “circuit breakers” to protect those in control.

  2. James Levy

    How does one demand change of a system that has no intention of changing? The ballot box? That’s the only instrumentality the “blessed” Founders gave us (barely, as they expect the President, Senate, and Supreme Court all to be appointed and not elective offices) and I defy anyone to explain how we use the ballot box when all the choices are fixed. I don’t buy the 2nd Amendment solutions talk–we’d be stamped out like ants. All I see left are networks of friends and neighbors hunkering down for the long run, either to aid one another when the system goes down of its own greedy and wicked accord or to keep as low a profile as possible and work around the system as much as we can if it endures and stays on its present trajectory. Begging, pleading, or demanding that the people who run the place “play fair” is now comically obtuse.

    1. Oregoncharles

      Transition Towns, you mean – could be described as left-wing, ecological survivalism.

      I can’t actually give up on politics; I think we at least need an organization in reserve, for when the brown stuff hits the fan, but I certainly see your point.

  3. profoundlogic

    Yes, I think I call this one early on. In this case my “cognitive bias” was well served. As the say…trust your instincts. Unfortunately, I think this will be a continuing trend going forward, as the decline of empire continues unabated, unless by chance the huddled masses miraculously awake from their drunken, surveillance-state stupor and decide they have had enough and push the reset button.
    To understand what passes for political and regulatory leadership these days, all you really need to do is follow the money. Once you understand where the profits and opportunities lie, you’ll get a better understanding of the ulterior motives of your various “public” servants.

    1. susan the other

      We have made the mistake of letting sovereign money be a government sponsored private enterprise. Which has failed like Fukushima. Money should be considered government itself. It is a sovereign creation. Not a private creation.

  4. Teejay

    I so wanted to believe that Mary-Jo would be the regulator we needed. The little I knew of her as a prosecutor in the southern district of NY was encouraging. Seeing her in the Frontline story of John O’Neil ” The Man Who Knew” gave me hope that she’d bring that kind of toughness and integrity the SEC needs. It’s very disheartening to find out she’s more of the same. I’ll be scratching her off my Christmas card list.

  5. jfleni

    RE: SEC director?

    “President Buttkisser” appoints a clone to run the SEC! Nothing new there, except the squirming to hide the real truth for a short time!

  6. The Derivative Project

    Thank you for this great post. Really appreciated the history on the SEC direction prior to 2008. Ms. White also has been very successful in neutering the Dodd Frank mandate for a bona-fide Investor Advocate and Investor Advocate office. Her appointment of “Advocate” Rick Fleming and the current direction has quashed all hopes of any meaningful reform for retail investors, mandated by Dodd Frank, as you point out in new WS push for “alternative mutual funds” that SEC is ignoring. Focusing on heart tugging stories of “elder abuse” at their most recent meeting, and how to train financial planners how to spot it—- when there are so many other pressing problems—alternative mutual funds, systemic risk with Blackrock, asset managers, voluntary recapture in money market funds, etc—was complete waste and echoed what you are saying about Ms. White’s Agenda…spineless. Last IAC meeting:

  7. Oliver Budde

    The stark and simple truth is that since the day he was sworn in our President has put the wrong people into every single one of the positions at Treasury, Justice and the SEC (maybe the Fed too) that were and are critical to both enforcement and real reform on Wall Street.

    Tim Geithner and Jack Lew? Wrong and wrong-er. Eric Holder, Lanny Breuer and yes Preet Bharara (many don’t know he was Schumer’s best boy on the Hill before being moved into position on Wall Street in 2009, Schumer of course being Wall Street’s best boy): wrong, wrong and wrong. (Busting insider traders is great, but like Madoff they had nothing to do with the financial crisis.) Mary Schapiro, Mary Jo White, Rob Khuzami, Lorin Reisner, George Canellos, Andrew Ceresney? In each case, couldn’t get more wrong.

    Every one of them is compromised; every one of them burnishing themselves for the big pay-off to follow their “public service.” Tim’s got his. Jack’s already had a healthy dose of the good stuff, but he’ll go back for more, just watch. Mary got hers both before and after; so did Rob. Lanny’s back at Covington, once again cashing the big checks; so too are the two gophers he brought over from Covington as soon as he got the Justice gig. Now there’s a whole lot more Justice-influencing “mojo” at Covington than ever before. As Lanny might say, “I lie awake at night, saying to myself, do you have any idea what that’s worth!?”

    And as I and many others here have known all along, White is simply more of the same. Her mission is to strengthen Debevoise, and strengthen Debevoise’s clients. Very gratified that Yves has finally seen the light.

    What are we to do? We must do something.

  8. craazyman

    Is it possible for somebody to be “fair”? I don’t know about giving witnesses heart attacks. That doesn’t sound to me like something a government should do to its people. Sometimes witnesses didn’t do anything. Mostly they didn’t do anything. That’s why they’re witnesses.

    The people who do things, usually they’re tough SOBs. They won’t have a heart attack no matter what you do to them. They’ll smile at you and let their lawyer talk. They’ll never be a witness. It’s either back to the mansion or over to Club Fed.

    there are only two kinds of people. Ambitious sadists and everybody else. Well, three kinds actually. Ambitious sadists, cannon fodder and martyrs. Creating a fourth kind of person, somebody who can look at the law and say “This doesn’t make any sense. It’s too ambiguous. It needs to be written so you know when somebody broke it. It can’t be something $5 million dollar lawyers use like a tool for their ambition or something wannabe politicians and ego giants use like a ladder, climbing over cannon fodder and martyrs.”
    That’s how it seems now. Who can look at this and not feel a sense of vomit climbing up their soul? I don’t know. It’s a rhetorical question. It always has been always will be. ecce homo. That’s why the heathen rage.

    1. flora

      Oh, that forth kind of person exists and isn’t that rare. But that forth kind of person is never ever given access to the big levers of power in this current climate of fraud.

  9. Jackrabbit

    > Most transparent Administration ever
    > Wall Street & NSA ‘reform’ *(lipstick on a pig)
    > 11-dimensional chess
    > ‘New beginning’ with the Arab World
    > ‘Reset’ with Russia
    > etc.
    Its one ‘con’ after another from the Best Government Money Can Buy(TM). As Lambert says: “pull the other one . . .”

    H O P

  10. Adam S.

    What strikes me is that even in the ’90s, the SEC was seen as a regulatory Goliath. I was recently re-watching several seasons of Law and Order (yes I realize it’s “pop law”), and I specifically remember an episode where a humorless SEC regulator was treated like she was “the big gun.”

    My point is that the SEC for a long time had the reputation of being one of the government agencies, like the IRS, that you “did not cross,” because if you did you probably were going to be hung up in the stocks and for good reason. These agencies had such a reputation that movies and TV played with their reputation on screen.

Comments are closed.