What Good Is the SEC?

By James Kwak

This week’s Atlantic column is my somewhat belated response to Judge Jed Rakoff’s latest SEC takedown, this time rejecting a proposed settlement with Citigroup over a CDO-squared that the bank’s structuring desk created solely so that its trading desk could short it. I think Rakoff has identified the heart of the issue (the SEC’s settlements are unlikely to change bank behavior, so what’s the point?) but he’s really pointing to a problem that someone else is going to have to fix: we need either a stronger SEC or stronger laws. I’d like to see an aggressive, powerful SEC that can deter banks from breaking the law, but we don’t have one now.

33 thoughts on “What Good Is the SEC?”

  2. Nihilists clamoring for the *rule of law*…?! Oh, the irony…

    Bur here we go, another *think tank* conversation about how to – theoretically – put the toothpaste back in the tube…

  4. Yeah, Annie, no kidding. The hypocrisy from the “personal responsibility” crowd is nauseating. But it’s not just the SEC and the financial industry. Medtronic just settled on a case of paying kickbacks to surgeons to implant their brand of defibrilators. One of the other manufacturers settled, too. So, this is just another page in the “pay-to-play” handbook. Since no one ever admits any wrong-doing, no criminal records ever exist, so all’s just hunky-dory, right? Except if the hapless consumer wants to do some homework on whom to do business with – the crooks look as innocent as the truly innocent, on paper anyway. It stinks.

  5. Just get rid of the SEC, there is no proof that they have prevented any fraud or ethical violations, in fact the more they fail to stop fraud the more money they get added to their budget from the Congress. How many of these SEC regulators later on become employees of the same institution that they are regulating, leave it up to the exchanges and the boards of directors to police their own companies and make it clear buyer beware and no bail-outs.

  6. The “system” is now so hopelessly poisoned and corrupt, no amount of hiring more CPA’s at the SEC, no number of new and “improved” financial-restriction laws, etc, are going to be effective in turning around this deviance from morality.

    There are extant criminal statutes addressing all these transgressions, but to what end, if no one in the government is willing to stand up to the monied interests, which now completely dominate?

    When you have a mayor that thinks a municipal police force is his private army, and uses it as such, don’t expect anything but more repressive police state legislation (and conduct) to shield the real criminals from the population-at-large.

  7. @woop – they’re going to get hung with their own rope with that tactic (police force as their own private army)

  8. We don’t really need stronger laws, just actual enforcement of the ones we have. The list of crimes that are known to have occurred with no attempt to prosecute during this whole fiasco is amazing.

  9. Much of this was set in place by people who are no longer in the room. They leave behind a legacy of laws, accountability, and 40-1 leverage anywhere they needed it, the SEC being no exception. Todays financial world would be in a totally different place, without this massive senior leverage. Etch-a-sketch is the only solution, embrace it, love it, wait for it. And begin again.

  10. James writes: What good is the SEC?

    It may function reasonably effectively in routine matters such as policing annual regulatory filings, but when massive frauds are taking place and the SEC was provided detailed forensic investigative reports, not once but twice, and FAILED to act, taxpayers have to question what the hell was going on, and why weren’t senior people let go in management?

    Too many clowns in “leadership” positions these days, and not enough people with the guts to deal with the enemy, that is, robbers, and thieves.

    I seriously doubt substantive changes have taken place at the SEC since Harry Markopolos detailed his findings about Bernie Madoff, that is, handed them sufficient information to obtain immediate injunctions.

  12. Sounds like a simple case of what Dredd Blog calls “plutonomy” (that is the plutocratically controlled economy) in which the violator knows that it can keep on keeping on doing what it’s doing because (a) the laws really aren’t stringent enough, and (b), because Congress has been short funding all of the regulators. Actually this goes a long way to explain why the Republicans in the Senate have been holding off on Richard Sounds like a simple case of what Dredd Blog calls “plutonomy” (that is the plutocratically controlled economy) in which the violator knows that it can keep on keeping on doing what it’s doing because (a) the laws really aren’t stringent enough, and (b), because Congress has been short funding all of the regulators. Actually this goes a long way to explain why the Republicans in the Senate have been holding off on Richard Cordray’s confirmation, and that is because they can’t control the funding of the CFPB because the law places that regulatory bureau beyond Congressional budgetary purview and they are not given any control whatsoever, since it falls inside the FED. So they are withholding confirmation in hopes that it will enable them to change the law that they passed last year. My guess is that if this continues, Cordray will become a “recess” appointment, and that will be that for now. As to Judge Rakeoff, I certainly hope that his withholding of approval of the meager, slim, scant settlement with the financial behemoth Citigroup will encourage the SEC to take a stronger run at these kinds of offenses. However, that will mean gaining access to greater funding, and somehow escaping the regulatory capture practices now a daily fact of plutonomy.

  13. The problem is our SYSTEM; on the one hand we have a regulator that can sling mud and levy fines, which has allowed creepy slimeballs like Angie Mozilo to pay a paltry fine from his stolen fortune and sail off to the south of France, LAUGHING at us looted fish.

    On the other hand we have the DOJ which *could* and *should* be indicting and *can* prosecute and jail the slimeballs that committed the massive amounts of fraud and conflicts of interest that are the biggest heists (yes, plural) in history. That the DOJ is as silent on the subject as Mozilo is now ironically shouts volumes and says tons about the corruption of congress, the courts, and yes, the presidency. And save for the anomalies in the mass media like Gretchen Morgensen, the fix is in like at no time in history.

    As Newton proved; it’s a law of the universe that every action has an equal reaction. Think about the absurdity of creating money out of thin air in the runup (securities in the form of MBSs, CDSs…) and then the equally absurd idea of printing fiat, digital dollars out of thin air by the Fed and the other central bankers. This is insanity folks, pure and simple, and if you can’t see the absurdity of that basic equation, well, good luck. You’re going to need it.

    Think the Economic Meltdown of 08 was wild? Most people have no idea that EM08 has NEVER stopped.

    Get ready — you ain’t seen nothing yet.

  14. First, full disclosure. I spent nearly 27 years conducting, supervising and managing SEC enforcement investigations before I retired 4+ years ago, so my bias, if there is one, is out there for you all to see. I worked on or directed cases from Milken/Drexel (the beasts that started much of this) to Arthur Anderson, Waste Management, Forbes, Shelton, Kozlowski, Schwartz, Tyco, Refco, etc.and assisted scores of criminal prosecutions and actions that put CPAs out of business.

    But that was the old SEC and criminal prosecutors. For the life of me I don’t understand why there haven’t been criminal prosecutions growing out of the 2007 – 2009 debacle. Would they be difficult prosecutions? Sure they would. I can’t think of any that are or were easy (except maybe Sandusky). But folks, we are looking at the result of 30+ years of deliberate deregulation, much of which drove the good guys out, and the takeover of the SEC enforcement program by seasoned federal prosecutors that apparently believe securities law is hard and that settlements, like plea agreements, count as much as convictions. To bring these cases you have to drill down to the folks on the frontline, who did the wrong thing because they were ordered or pressured to do so. Pressure and flip them on their bosses and follow the trail to the top. It takes time and much effort, and sometimes you lose, but the folks who caused this mess deserve to be hounded and chased to the gates of hell for the damage they caused. And the SEC and DOJ should be doing just that. There is no excuse for the fact that they aren’t. I like to think that this wouldn’t have happened 20 years ago, but today we are dealing with agencies that have rotted from the inside out over many years as a result of deliberate actions taken at the behest of the folks who benefit from ineffective regulation and law enforcement.

    Having said that, it is hard for me to cheer on Judge Jud Rakoff. He made his living for years attacking the agency as a lawyer in private practice. He knows precisely who will benefit from a weakened SEC and he understands better than most the consequences if the SEC is forced to abandoned it settlement practices, which he explicitly criticized, and thereby litigate cases that can and should be settled. That means that SEC lawyers are in court rather than investigating the wrongdoers that he built his fortune defending. While I share his and others’ frustration at some of the recent settlements, he doth protest too much. His path of action will not result in better enforcement. Rather, it will result in less enforcement, more high paying work for defense attorneys and much less protection for investors.

    But blaming the SEC is to miss the point. What happened in 2007 thru 2009 was made possible and often orchestrated by the Fed and other financial regulators. And many of the folks responsible, who were also ardent deregulators, are still in place, directing and implementing financial policy. Read the papers and you see that Big Finance has not only gotten bigger since 2008, its members cynically pay billions of dollars in settlements of regulatory and private actions (not unlike their counterparts in Big Pharma) and continue on their ways while lavishing lawmakers with millions, if not billions of dollars (now termed Free Speech by the Supremes) in order to continue to have their way.

    The SEC is merely one of the more recent, but hardly the most appalling example of a regulatory system that has been captured by the regulated. But be mindful folks. This is not the kind of passive regulatory capture akin to the Stockholm Syndrome or Patty Hearst. This is regulatory capture bought and paid for by the regulated. Such folks will not go quietly once their wrongdoing is explained to them. No, this could get ugly. As a Cambodian cab driver recently said to me, explaining why he couldn’t go back to Cambodia, “It’s too dangerous. Too many guns and too much inequality”.

  16. I’d like to see an aggressive, powerful SEC that can deter banks from breaking the law too. However it won’t happen as long as politicians stuff their pockets with Wall Street cash and Wall Street has the politicians in their pockets.

  17. Jim, drill down indeed. Venezuelans have probably discovered this fact and asked for their much of their money back, most likely in dollars. This is fun for the Fed and Treasury because the more dollars in circulation the more power the dollar has world wide. But the hyperinflation means fewer Americans (and without jobs, poorer) can afford products because other countries citizens are competing with them on a dollar per dollar basis. And the reality is that the separation of the classes is occurring rapidly. A new study says 1/2 of all Americans are now considered poor, which means there are fewer people willing to help more that need it.

  18. From the GATA

    With the gold price tumbling, along with silver, today King World News interviewed the man who told clients in 2002, when gold was $300, to put up to 50% of their assets into physical gold held outside of the banking system….. [NOTE, OUTSIDE THE BANKING SYSTEM, an ounce of physical gold today goes for 1800 bucks, paper, or ETF”s, gold is manipulated, and is currently at 1500 bucks and some change]…… Egon von Greyerz is founder and managing partner at Matterhorn Asset Management out of Switzerland. When asked about the 2002 call, Greyerz responded, “It was very clear to me, Eric, for quite a long time, well before 2002, that this was going to end badly. There was no chance the world would survive with the banking system intact or even the financial system intact.”
    “There were two alternatives, a deflationary collapse, which would mean that no bank would survive and that would be very good for gold. The more likely scenario, which I’ve been predicting for probably ten years, is we would have hyperinflation because governments need to print unlimited amounts of money.

    That was clear in 2002 and that’s why we told clients this is the only way to protect your assets, by putting up to 50% of your assets into gold and to store it outside the banking system because we don’t know if the banking system will survive…There is no alternative in my book, everything else is paper which will decline dramatically against gold.

    We have an unprecedented situation in the world. There has never been, in world history, a situation where all major sovereign countries are bankrupt. And, in addition, the whole financial system is bankrupt. As we know some countries can print money, like the US and the UK, so therefore their currencies are relatively stable now. It’s not going to last (their currency stability)….

  20. @Brian: That is (your link) precisely why the constitution is flawed. There are no clauses, or amendments, should even only one percent of the population vote during an election cycle. I know it a citizens duty to vote, [and there by approve of whatever it is that that party does], and we spend tons of money to have our voices heard. But even if 99% of the people were disgusted and disdain politics enough to not bother even voting (me), we would still be ruled by the tyrannical 1% who did vote themselves in, and then passed laws to ensure that it stays that way. Go figure, i support a constitutional convention to get the lawyers and money out of politics.

  21. Any organization charged with regulation missing any of the following: adequate training, enough competent personnel, ample funding, and the ability to due their charge without having to please political masters is almost assured to fail.

    There are only few thousand years of historical data to support my thesis and I may be wrong because my sample size may be too small.

  22. The comments and commenters here give me hope for the world.

    I’ve been researching EM08 — Econ Meltdown 08 — for 3+ years now, and the vast bulk of readers comments I come across have little clue as to what happened as well as continuing events. This list is an exception, and kudos to you all.

    In my previous comment I also neglected to say that a few other important elements are:

    1. Insuring banks. This is clearly the safety net that, in conjunction with de-reg, set up the wildest casino in history. Actually, that’s an insult to casinos which operate above board and fairly.

    2. Back in the day, investment banks were partnerships, forcing banks to have skin in the game by gambling with their own money. De-reg took out that risk for the banksters and with insurance socialized it.

    3. Key EM08 historical players: PHIL GRAMM and BILL CLINTON.

    Gramm is the puke who spearheaded the Gramm-Leach-Bliley Act which decimated Glass-Steagall and later, quaterbacked the Commodities Futures Modernization Act which completely removed ANY regulation from derivatives. His wife, a former Enron crook and CFTC thug, is a doozy too.

    Clinton signed both of these fateful acts into laws. Note: Gramm, a lapsed Democrat cum Republican, and Clinton, a Democrat. Both parties are in on this at ground level zero.

    For more, see: http://econmelt.com/?page_id=273

  24. Isn’t the fact that the SEC is involved with banks the initial absurdity?

    That is, the SEC is a trading watchdog, banks which are supposed to be “safe” institutions guarding our deposits, should not be involved in risky adventures where a watchdog like the SEC is required.

    In short, what “jp” said…

  25. Thanks Carl.

    Indeed, the snarl of conflicts of interests run deep in our system, and work toward the interests of the 1%.

    Look at the aforementioned Phil Gramm. Long gone from politics since his blowhard McCain campaign fiasco, most have no idea where he’s at now.

    He’s a banker, with one of the biggest thugs on the planet; UBS.

    It doesn’t end there, not by a long shot. Rather than me blathering on more, you can get a glimpse of some of the jerkoffs (with the exception of the heroes) running amok here: http://econmelt.com/?page_id=272

  27. What is your problem grasshopper? Okay, lets guess, you can’t remove that turn o kit from your neck, and you feel bad about it cause you are a certified doc. Whats up doc?? Carrots for sale. : > )

  28. Some suggestions:
    1) Anyone who takes a job with the SEC: Sign an agreement that for 5 years after leaving such employment, (a) no lobbying employment (b) No employment with any corporation whose case he/she came into contact with at SEC.
    2) No reimbursement of officers from corporate funds for fines/costs in connection with acts found to be criminal.
    3) No indemnification of corporate officers against civil judgments involving fraud or malfeasance
    4) Somebody needs to straighten out the mess as between SEC and DOJ. I get the strong feeling from Morgensen’s reporting that DOJ was left high & dry on this mess because SEC had not been doing its oversight job. Not cl;ear if this is a legal problem or bureaucratic turf-defense, but it should be fixed.

  29. or maybe just an altogether different kind of *regulatory* group…?

    (see if you can spot the *real* Jamie :-) when things don’t go his way)

  31. @woop – it’s all bs – especially in light of the Patriot Act

    Here’s what it is really about – from the American Enterprise Institute (interview on PBS News Hour):

    “EDWARD PINTO: Well, I think what they have concluded is that Fannie and Freddie — and you asked how big they were — back in 2008, they had about $4.5 trillion of single-family mortgages, which was a little under half of all the mortgages outstanding.

    It now turns out, based on the SEC analysis, which really corroborates analysis I did three years ago, that about a third of Fannie and Freddie’s exposure were these risky loans. Well, you couldn’t tell that from their disclosures. And that had an impact on the entire market because they were so huge. You’re talking about $1.5 trillion of very risky loans. And they were telling people, we don’t have that many risky loans.”

    Translation: What Ed KNEW was that 1.5 trillion of *very risky loans* were those that were targeted for fraudclosure based on the amount of jobs that he knew were going to be eliminated over that 7 month 2008-9 period – hence the amount of equity investors were going to garnish was going to be less than what was on the books because those people slated to be eliminated from the job market and be raped until totally broke had taken out credit on their home equity in order to compensate for 30 years of declining wages and rising prices.

    Simple – the credit card loans on home equity were not counted. Wow, what a *civil crime*…another math mistake by the wiz kids…

  32. Annie, that’s correct in its’ entirety, and goes to your oft-stated remark about “siphoning”…..indeed…..

    “More misery for others….more money for ME ME ME.”

    In the beginning there was Money, then came Life……spontaneous generation a la Lamarck….LOL

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