The U.S. Securities and Exchange Commission, a once-proud agency with an impressive history as the top cop on Wall Street, finds itself increasingly conducting autopsies of leading financial institutions after failing, in the first instance, to perform adequate biopsies.
The latest black eye for the commission came when it was disclosed that inspectors and agency lawyers had missed a series of warning signs at Bernard L. Madoff Investment Securities. If it had checked out the warnings, the commission might well have discovered years ago that the firm was concealing its losses by using billions of dollars from some investors to pay others.
The firm was the subject of several inquiries over the years, including one last year that was closed by the agency’s New York office after it had received a referral of potentially significant problems from the Boston office.
Similarly, the commission’s chairman, Christopher Cox, assured investors nine months ago that all was well at Bear Stearns, which collapsed three days later.
Um, when you relentlessly cut the budget of the SEC and thereby reduce the number of enforcers, and then put people in charge who don’t believe in enforcing anyway, the result is hardly surprising.
Perhaps # 1 is right but I am not convinced. The question is whether the SEC needs to be a federal agency at all. It would be perfectly feasible to farm out its supervisory function on a contract to a large auditing firm, and to pay bonuses for discoveries under due disclosure. Then we would see some action. I simply do not think that public servants are capable of the complex, specialised task any more, and that most senior managers are more concerned with ticking the boxes and protecting their backs.
#2 – I find it difficult to believe that in these times, above all, there are still people who claim vital public functions (like regulatory oversight in financial markets) ought to be farmed out to private industry, because they would somehow be better, more efficient. You know, which private entity would be trusted to police Wall Street? Remember Arthur Andersen? Do you realize how massively the credit rating agencies failed the public in the current crisis? All around us we see failure after failure in corporate leadership in the US. I don’t think that’s where you need to go find the watchdogs to keep the public safe.
#1 is correct, and frankly it fits the shameful pattern of government dealings with Wall Street for the past 16 years.
The SEC has had two basic problems:
1. Commissioner Paul Atkins
2. Commissioner Cynthia Glassman
They have repeatedly hamstrung needed action.
TV # 3, point taken. But I would remind you that when the SEC was set up in 1934, it was devised and first chaired by Joe Kennedy. Roosevelt deliberately gave the role to Kennedy in the belief that a poacher turned gamekeeper would be the best person to establish a system with some teeth in it. Your point about the failures of the ratings agencies is well made. But my point would be that it might be time for a complete overhaul of the system. You omitted consideration of my point that there should be financial incentives for successful policing and penalties for failures. Irenaeus, the man of peace, has elsewhere accused me of an anti-government rant on this issue. Since then the SEC has admitted that it fell asleep on the job. I was arguing that to give a failed agency yet more money to do better the job that it could not do in the first place is like rewarding failure.
Terry [#5]: I favor major simplification of U.S. financial regulation, including major consolidation of U.S. financial regulators.