It’s a rule.
Someone’s got to be the fall guy.
[img]527|left|||no_popup[/img]
Someone’s got to take one for the team.
This time it looks as if it could be the Securities and Exchange Commission, the SEC.
Since the economic crisis went public, the SEC, the federal agency theoretically responsible for enforcing securities’ laws and overseeing the securities industry, has taken repeated body blows.
The first shot was the failure of Bear Stearns. The implosion of Lehman Brothers was a left to the head, quickly followed by the Bernie Madoff haymaker.
Just as the SEC is being given a standing 8-count, comes the stunning revelations that the agency’s top enforcement attorneys may be federally prosecuted for insider trading. Apparently, when they weren’t busy cracking down on white collar miscreants, the agency’s Nos. 1 and 2 lawyers were trading stocks for their personal gain.
How Could They Have Been Clueless?
By all accounts, the 75-year-old SEC, chartered to oversee Wall Street and safeguard investors, missed the warning signs of the incipient financial crisis and had repeated warnings about Madoff’s long-running Ponzi scheme but simply was asleep at the switch. This is akin to the CIA missing the fall of the Berlin Wall.
Much of the criticism has been aimed at the laissez-faire management style of Christopher Cox, the former Congressman from Newport Beach appointed by President Bush to head the agency. Following the lead from his boss, and with philosophical encouragement from former Fed Chair Alan Greenspan, Cox was known for his disdain for regulation.
Riding the wave of record profits and the unprecedented expansion of wealth, Cox was loathe to fiddle with a winning formula. Like Greenspan, he assumed that securities firms and investment banks that he was charged with regulating would keep the party going because it was in their own best interests.
Obviously, he was wrong.
[img]528|left|||no_popup[/img]
The appointment of Mary Shapiro to replace Cox was widely hailed. As the immediate past Chair and CEO of the(Financial Industry Regulatory Authority, the self-regulatory organization for broker-dealers and the stock exchanges, and former head of federal Commodities Futures Trading Commission, Shapiro was viewed as an ideal replacement for Cox.
Shapiro’s appointment to run the SEC was unanimously confirmed by the U.S. Senate.
Despite her pledge to overhaul the securities industry watchdog, Shapiro has been conspicuous by her absence from key meetings held by the President’s chief economic advisors. In sharp contrast, former SEC Chair Arthur Levitt frequently has been seen in the company of Treasury Secretary Tim Geithner, National Economic Council Director Lawrence Summers and ex-Fed Chair Paul Volcker.
Will the Agency Vanish?
According to the rumor mill that is Washington, several proposals to limit the authority of the SEC or to eliminate it entirely are being floated. In addition to ending the SEC charter entirely, various proposals include giving the Federal Reserve more authority to supervise financial firms with other agencies inheriting the remaining SEC functions. Oversight of mutual funds could be ceded to the federal bank regulators with a wholly new federal agency being formed to police consumer finance products.
Any move to rein in or eliminate the SEC is likely to provoke a battle in Congress, which would need to approve the changes. Such proposals will also draw the ire of union pension funds and other advocates for shareholders.
Right now, the guy packing the real punch is H. David Kotz, the newly appointed SEC Inspector General. He has been saddled with investigating the recent spate of agency gaffes. Kotz’s findings, especially those relating to possible insider trading by the agency’s top enforcement lawyers, could be the knockout blow that sends the SEC sprawling to the canvas.
In meantime, get out the smelling salts. This is likely to get bloody.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
