SEC Commissioner Kara Stein Fighting for Tougher Bank Sanctions, Stymies Bank of America Settlement

One of the things that continue to be a source of anger in the American public is the way that banks were rescued en masse without the perps, the managers and producers in the businesses that produced toxic product facing much if anything in the way of consequences. Another is that the banks pay fines that are inadequate relative to the amount of damage that they did.

SEC commissioner Kara Stein has been using her post as a surprisingly effective bully pulpit to pressure the agency and other regulators into upping their game. It’s unusual for an SEC commissioner to play that role; the post is typically a runway for becoming either a lobbyist or a director on financial services company boards. Even more rare is that Stein is regularly crossing swords with SEC chairman Mary Jo White, who is taking a much more industry-friendly line than she promised at the time of her confirmation. It’s virtually never done to have a commissioner from the same party buck the chairman.

Admittedly, Stein can’t attack the “no one goes to jail” problem, since the SEC lacks prosecutorial powers. But she’s pushing the agency to use tools that it has refused to pick up that can increase the pain level at banks that have misbehaved.

Her current fight is over a practice she called out in April, of the SEC giving waivers to sanctions that are supposed to kick in automatically when a financial firm enters into a settlement in court. Bloomberg explains:

At the SEC, there are three main penalties that banks seek waivers for when they settle cases, with the harshest a ban on managing mutual funds. Another prevents banks from raising money for private companies. The third, and most minor, takes away a privilege that allows a firm to issue its own shares or bonds without SEC approval.

Stein has opposed the practice of rubber-stamping requests to grant waivers. As we wrote in June:

Stein has called out numerous SEC failures of nerve in her brief tenure as commissioner. For instance, in April she issued a withering dissent on the SEC’s waiver of having Royal Bank of Scotland lose its status as a “well-known seasoned issuer” as provided in both legislation and SEC rules, when it convicted for interest rate manipulation. This standing is valuable because, among other things, it allows securities issues to float offerings at will, rather than wait for the SEC to review and approve their offering documents. Stein also said that the SEC had recently given kid-gloves treatment to another financial institution that had also engaged in criminal abuses. In a statement to the Huffington Post, Elizabeth Warren backed Stein’s position:

When the SEC waives automatic penalties for criminal misconduct by the largest banks, it sends a dangerous signal about how weak it is in its enforcement of the law,…We are still paying the price for a financial crisis that was caused in part by regulators looking the other way while big financial institutions broke the law. Big corporations should not get special treatment when they break the law, and the SEC needs to learn from its past failures in oversight, to demonstrate no one is above the rules, and to show some backbone.

Stein this time has managed to do more than just make speeches about not giving these waivers freely. She’s created some consternation by a bureaucratic maneuver to stymie giving Bank of America one for its $16.7 billion settlement for selling toxic mortgages. First, she and her pro-reform fellow Democratic commissioner Luis Aguilar forced a change in internal policies so that staff could no longer grant these waivers unilaterally; the commissioners had to sign off on them. Normally, that would be a no-brainer, since pro-industry Chairman Mary Jo White plus the two Republicans could be relied upon to approve them. But Mary Jo White has had to recuse herself for having represented the Charlotte bank. Stein and Aguilar teamed up to demand tougher punishments for this recidivist lawbreaker.

The sanction that Stein and Aguilar want to impose is that of barring Bank of America from fundraising for private concerns. That stings because Merrill, now Bank of America, has long been a leader in the low-risk, lucrative business of raising money for hedge funds and private equity funds. Of course, if you didn’t know better, you’d think this was a grave injustice being visited upon American engines of growth. From the Bloomberg piece:

“It seems to me it would be important for them to have that waiver,” said Richard A. Kline, a law partner at Goodwin Procter LLP in Menlo Park, California. When fast-growing companies are seeking to raise money from institutions, “there are often banks that will lead some of those private placements,” he said.

Yves here. While I don’t have a breakdown of Bank of America’s revenues in this segment, it’s a safe bet that raising money directly for what by implication are pre-IPO tech companies is less important than either of its hedge fund or private equity fundraising business. Moreover, it’s also likely that companies that re large and successful enough to be candidates for Bank of America’s private placement team would have plenty of other firms competing to get their mandate. In other words, putting Bank of America in this penalty box is extremely unlikely to prevent any promising business from getting capital on good terms.

As Dave Dayen pointed out at Salon:

This is actually pretty simple: Financial firms should have to bear the consequences that the SEC has had on the books for decades. This strengthens the impact of fraud sanctions, and creates greater deterrents to future misconduct. If Bank of America doesn’t want to lose access to profit-making opportunities for its business, it shouldn’t break the law in the first place. The SEC shouldn’t be obligated to do the bank a favor when it makes mistakes.

This is especially true when the lawbreakers return again and again for waivers to clean up their unending series of messes. Bank of America has agreed to 51 legal settlements and regulatory fines since 2008. You can see why officials would get the impression that the bank cannot manage its business properly. Adding regulatory scrutiny and effectively cutting the bank down to size serves as a good corrective to that, not to mention a bulwark against future misbehavior. If the law means nothing to Bank of America, perhaps the risk of losing future profits will.

Cynics may say this is only a small step in the right direction. But change typically comes about via a series of small steps rather than seismic shifts. The more that people like Kara Stein and Luis Aguilar show that the SEC’s leaders are willing to back tougher sanctions, the more that staffers in the agency will be emboldened to pursue misconduct more aggressively.

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  1. diptherio

    Putting on my cynic-hat (that’s a lie…I never take it off), I’ll just point out that historically, reform efforts have been more about maintaining the status quo—i.e. saving it from itself—than about changing anything fundamental about power arrangements. Without the New Deal relief programs, we might have had a socialist revolution in this country in the ’30s; FDR was showing enlightened-self-interest for the benefit of his class (the elites), not trying to fundamentally alter the power structure in the US. That latter goal is the one we should be aiming for, imho.

    So while it’s kind of nice to see a higher-up in the SEC actually doing their job a little bit, you’ll have to forgive me if I’m not jumping out of my seat. My guess is that this new-found courage on the part of the SEC will not turn into anything truly transformational in the long-run. They’ll throw a few bones to us plebes, but only enough to keep the pitchforks and torches at bay—that is, afterall, what most reform efforts in our history have amounted to. If they go much beyond that, the financiers who own our gov’t will push-back hard…right now the regulators are just playing around the edges, and it’s good PR for the system as a whole, so it can be allowed.

    I feel about our regulatory agencies the same way I feel about voting–if they could change anything, they’d be illegal.

    1. Xelcho

      Fantastic comment, thank you for making it!

      It is really surprising how few understand why FDR did what he did. Most I have spoken with mutter some trash about being a democrat etc. No matter how many times I explain the how and why with explicit evidence, it is lost. Lance Selfa’s book ‘Democrats: A Critical History’ does it justice.

      I concur with your opinions. It feels like we are re-arranging chairs on the titanic again. One instance that will make pariahs out of these two has no long-term benefits. Further as shown the financial press will crucify them and no more “mistakes” will be tolerated. I am sure the gold or lead discussion has been or is in the near future for both of these commishes.

    2. Yves Smith Post author

      If you don’t take notice, in a good way, of people who are trying to use positions of influence to change things for the better rather than sell out, why should they bother? They are giving up future cash and prizes. And in Kara Stein’s case, she’s only been there six months and she’s made a lot of trouble for someone in her position. I provided examples in this post, which is linked to in the story. Her speeches are regularly described as “blistering” which is not a word you ever hear used about regulators.

      1. PaulArt

        I agree with Yves although I agree with Diptherio too. I don’t think we have choice in this matter. These people who are speaking out and using their position to do something about the Wall Street cesspool in governance are sacrificing quite a bit and they need to be encouraged. One can have Diptherio’s cynicism but that should not prevent one from taking positive steps to make change possible however marginal it may seem.

      2. H. Alexander Ivey

        Change comes in small steps. Small steps that are easy to pooh-pooh by cynics (hat tip to diptherio for his pun!) and self-serving critics. But I agree with Yves, good people will try to do the right thing, so we, other good people – if I may be so bold, need to speak up and side with them.

        And for the record, FDR saved the institutions (banks) while letting the individuals go by the board. Banks and banking is a critical function of any society. As such it must be properly regulated by the correct regulator – which is the government, not the market (the “market” does not regulate, it exchanges, a totally different function).

      3. Jonathan Nguyen

        Yves and others,
        So glad to see this example of a public servant trying to make some sort of meaningful, if extremely incremental, change. What are the suggestions, if any, for ways to directly support this sort of behavior?

        As a student from a very politically active family, I really appreciate the thorough explanations and lucid commentary of this site, especially on the FIRE sector and the general complicity of both parties with regard to same. My parents do yeomen’s work (DFA, OFA, grassroots dems, etc), but I don’t have the stomach for that and this election I find myself desperately trying to fend off political apathy.

        Per Diptherio, I don’t harbor any assumptions of Kara Stein’s strong streak as a panacea, but any news nugget that helps chip away at our problems instead of adding to them is oh so welcome. Thanks as always for all the good being done here, cheers.

        1. Yves Smith Post author

          You can write Stein and tell her you appreciate her work. You could also write to Mary Jo White, stress that you DO come from a politically active family, and you are perplexed at some of the positions she is taking, and find that Kara Stein and Luis Aguilar have much sounder positions on SEC policies and enforcement. To Mary Jo White, you can add that you appreciated her tough words to Congress about the need for more budget to go after private equity misconduct, and you hope she follows through.

  2. evodevo

    Good on them! but I don’t expect it to last. And if the Senate falls to Repubs in the election, you can bet by Jan.1 that Congress will be trying everything they can to hamstring these two commissioners ….

  3. blurtman

    She’s a Yalie, but still…

    “Ms. Stein played a key role drafting several sections of the 2010 Dodd-Frank financial regulatory law, including provisions requiring registration of hedge funds and establishing a Treasury Department office to gather and analyze financial and economic data to help detect systemic risks to the financial system.

    More recently, Ms. Stein has organized several hearings on the securities industry, covering such topics as high-frequency trading and risks posed by an obscure but enormous corner of the financial system known as triparty repo.”

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