COMPLIANCE: SEC, Drugs, and Rock & Roll

We can’t define ineffectual regulatory oversight, but we know it when we see it.

We are mystified by the discussion about a new Consumer Protection Agency as part of the proposed financial regulation non-overhaul process. We do not have the ear of Washington, but before yet more ineffectual legislation gets passed, perhaps someone can point out to Washington & Co. that we already have several consumer protection agencies. They include the SEC, the Federal Reserve, the Controller of the Currency, and such quasi-governmental oversight bodies as FINRA. (Full disclosure: We continue to be big fans of FDIC Chair Sheila Bair, so we exempt her from the following lambasting.)

We think Arthur Levitt’s tenure as Chairman of the SEC was the last time anyone in a position of authority accomplished the job they were assigned in the world of financial regulation. Levitt’s pugnacious approach blew transparency holes in the business of Wall Street and opened the markets to domestic and overseas investors alike. Admittedly, even Levitt allowed his pro-market judgment to be co-opted when he became part of the anti-Brooksely Born cabal, but his tenure at the helm of the Commission made the markets perceptibly safe for investment and contributed directly to the explosion in equity values that created actual wealth for individual investors.

Since then it’s been seriously downhill as successive senior regulators were appointed primarily for their ability to mind their own business. It was reported this week (WSJ Blog Real Time Economics, 20 April, “As Lehman Fell, Fed Recruited SEC Officials”) that when the major Wall Street firms moved from SEC oversight to Fed oversight in 2008, the Fed tried to hire away senior SEC officials with direct knowledge of the firms they had just inherited.

Christopher Cox, who was SEC Chairman at the time, recently testified that he had to negotiate a “no poaching” agreement with the New York Fed. The agreement was ultimately abandoned, and the Fed did, in fact, procure a few key SEC staffers.

Cox was apparently named to the SEC post for the express purpose of not interfering with Wall Street. While he failed both the investing public and the markets in spectacular fashion, he appears to have executed his brief brilliantly. Indeed, if Cox was charged with doing nothing at the SEC, we wonder why he would care that some other agency was taking his most knowledgeable staffers. There is no better way to prevent an agency from doing anything than to get rid of their personnel altogether. Our only thought is that Cox must have seen his role not merely as preventing the SEC from doing anything, but preventing any financial regulatory body from intervening in the financial markets. He served his master well.

Alas, the punishment for destroying the markets is not losing one’s job, not being docked on one’s paycheck, and not being blacklisted. Former SEC Enforcement Chief Linda Chatman Thomsen, on whose watch the Agency blew one of its largest ever investigations, is now a partner at the law firm of Davis Polk. Chairman Cox, on whose watch the SEC steadfastly refused to exert its authority, is a partner at the law firm of Bingham McCutcheon.

How are the fall’n mighty!

Meanwhile, current SEC Chair Mary Schapiro, who has the luxury of not having been at the SEC during the Dark Decade, testified this week that the Agency had neither the expertise nor the resources to handle the problems of Bear Stearns of Lehman Brothers.

And exactly what was the Agency able to handle?

The SEC’s Office of the Inspector General recently conducted internal investigations of Agency employees who routinely accessed pornography from their offices at the SEC.

At the top of this naughty heap is a male identified in media releases as a “senior attorney at SEC’s Washington headquarters” (WSJ LawBlog, 23 April, “Morning Goldman Roundup: Porn at the SEC, More”). He allegedly spent as much as eight hours a day accessing internet porn. He used up all available storage space on his Agency computer storing the images he downloaded, giving new meaning to the idea of a Hard Drive.

The investigation, undertaken at the request of Republican Senator Chuck Grassley, has turned up 31 “serious offenders” in the last 2 ½ years. The report has not yet been released, so we don’t know what metric the IG’s office applies in calling internet porn use by government employees – on government time and using government computers – “serious”. ABC news points out that the “serious offenders” constitute less than one percent of the SEC’s 3500 employees. But seventeen of the alleged “serious offenders” are senior SEC officials earning six figures.

We think this is as good a place as any to reiterate the notion we have proposed numerous times. The SEC, instead of wasting its money on hiring yet another batch of recent law school grads, should hire a team of fifty senior Wall Street risk and compliance professionals, pay them Wall Street salaries, and turn them loose on the nation’s financial firms. Rather than having bureaucratic lifers telling junior lifers-in-training how to prepare a forty-page audit checklist, these Wall Street pros would assess the issues in the firms they are sent to audit, and would then give the staff attorneys and accountants a road map for analyzing possible problems.

As we have seen over and over again, most regulatory examiners don’t recognize even the most basic problems when staring them in the face. Hiring more trainees for this pathetic system is literally a criminal misappropriation of taxpayer money, and both the legislators and the regulators who are responsible should be held personally to account. Unfortunately, our system of laws does not provide a mechanism for punishing lawmakers who abuse their position by taking large donation from special interests, nor does it hold them personally accountable for egregious incompetence in the exercise of their legislative duties.

As a “consequence” of its abysmal failure, the SEC is not being disbanded, nor even spanked or sent to bed without supper. It is getting a new budget, and the likelihood that it will be self-funding. This merely perpetuates the pathetic joke that Washington is playing on the markets.

Chairman Schapiro should say “enough is enough.” If she wants an effective Agency, she should go for a team of professionals, pay them market salaries, and pay bounty to staffers who actually nail the bad guys. There is only one way for her agency to be effective. Chairman Schapiro, we urge you to call top Wall Street professionals and say “I wanna SEC you up!”

Moshe Silver
Chief Compliance Officer

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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