Federal oversight of Wall Street used to be like watching an episode of “Barney & Friends.”
Just in case you don’t remember, Barney was the furry purple T-Rex more bent on dancing and hugging than he was on finding his next meal.
Like Barney, former Securities and Exchange Commission Chair Christopher Cox was a swell guy. Everybody on Wall Street liked him. He was on everyone’s Christmas list, especially the investment banks.
Cox was more like the commodore on the Good Ship Lollipop than admiral of the battle group that was supposed to defend American investors against corporate misdeeds and fraud.
It was on his watch that Merrill Lynch tanked and convicted Ponzi schemer Bernie Madoff hoodwinked his clients out of billions. Cox was the Big Kahuna when Lehman Brothers imploded like a pin-popped balloon.
Enforcement What Is That?
Taking cues from his boss, Cox never saw a financial regulation he wanted to enforce. He preferred to do lunch.
There’s a new sheriff in town and her name is Mary Schapiro.
Schapiro is no newcomer to financial regulation. Prior to becoming SEC Chairman, she was CEO of the Financial Industry Regulatory Authority (FINRA) — the largest non-governmental regulator for all securities firms doing business with the U.S. public. Chairman Schapiro joined the organization in 1996 as President of NASD (National Assn. of Securities Dealers) Regulation, and was named Vice Chairman in 2002. In 2006, she was named NASD’s Chairman and CEO.
Chairman Schapiro previously served as a Commissioner of the SEC from December 1988 to October 1994. She was appointed by President Reagan, reappointed by President George H.W. Bush in 1989, and named Acting Chairman by President Clinton in 1993. She left the SEC when President Clinton appointed her Chairman of the Commodity Futures Trading Commission, where she served until 1996.
Even though the Madoff and Lehman debacles didn’t happen when she was in the wheelhouse, she is stuck with the SEC’s old image as a toothless regulator. The only people most Americans trust less than Wall Street bankers are the yahoos who were supposed to protect them from their unchecked greed and avarice.
The SEC’s recent lawsuit against Goldman Sachs is an apparent attempt by Schapiro to show that as the head of the frontline agency charged with protecting investors, she means business. The problem may be that she picked the wrong fight with wrong guys.
Warming up for the Pushback
If there were such a thing as warlocks and witches on Wall Street, Goldman Sachs would fit the bill. Goldman runs a black magic cabal, and always seems to be several furlongs ahead of the pack. When all others are losing their shirts, the alchemists at Goldman are spinning gold out of sackcloth.
Goldman is already signaling it will fight the SEC lawsuit over subprime mortgage instruments the same way Bank of America Corp.’s Merrill Lynch unit and UBS AG have challenged similar claims, by invoking the concept of caveat emptor: Latin, for buyer beware.
By insisting that purchasers of collateralized debt obligations knew what they were getting into, Goldman Sachs is following a well-traveled legal path. Both Merrill and UBS won dismissal of similar claims that they misrepresented the risks of such assets by saying the buyers were sophisticated enough to know better.
Unfortunately for Schapiro, Goldman’s strategy may work.
Without admitting guilt, Goldman has acted fast. It has distanced itself from Fabrice Tourre, the 31-year-old executive director, accused in the suit of misleading investors by placing the London-based employee on paid leave. Tourre has also been de-registered from the Financial Services Authority, the U.K. equivalent of the NASD.
The SEC’s case is going to come down to a factual fist fight. It will hinge on what Tourre remembers versus the recollection of the folks on the other side. This is not exactly the type of case on which Shapiro can rely to burnish the tarnished image of the SEC.
The timing of the SEC suit is also suspect. Even though the agency is supposed to be non-partisan, the lawsuit has been filed just when the President and Congress are taking up a legislative overhaul of financial regulation.
Spokespersons for both the White House and the SEC have said that the tming of the action against Goldman is coincidental. But Goldman and its fellow mega-banks are wasting no time exploiting the perception that they’ve been targeted just as the President and the Democrats are trying to build their case for stricter oversight.
Recent disclosures to the Federal Elections Commission have shown that six of the top 10 U.S. banks, by assets, including Goldman Sachs, have ramped up donations to lawmakers from their political action committees in the last month, just ahead of the lawsuit. According to reports filed with the election watchdog, banks like Goldman have spent significantly more on lobbying in the first quarter of 2010 than they during the same period last year.
Along with Goldman Sachs, the U.S. Chamber of Commerce, the nation’s largest business group, spent $25 million on lobbying during the first quarter, more than double what it allocated in the first three months of 2009. The Chamber’s focus has been on influencing the direction of the financial re-regulation debate. It has wasted no time coming to the defense of Goldman Sachs.
Schapiro should be applauded for her temerity in going after Goldman. It’s the type of high profile case that can restore investor confidence in the integrity of the SEC. But just as quickly, an early dismissal or loss could give the much maligned agency another black eye.
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
