Just to be clear, despite this being college football bowl season, this is not a diary about the Southeastern Conference. Sorry y'all Gators and Crimson Tide and whatnot.
This is a diary about the U.S. Securities and Exchange Commission.
In light of the current financial meltdown AND the Bernard Madoff scandal estimated to have cost investors worldwide potentially $50 billion, along with other calamities conspiring to create this huge crisis of confidence in the markets I really think the DKos community should devote a little more thought about who Obama may have in mind (and who he should have in mind) to be Wall Street's new top cop.
Now because the SEC is an quasi-independent agency the chair cannot be fired by the president, as was somewhat amusingly pointed out during the presidential campaign, however former Republican Congressman Christopher Cox has signaled he will resign at the end of Bush's term, though his own post is scheduled to last until June 2009.
Who is Chris Cox? Some blame him for playing a huge role in this financial crisis by sticking his head in the sand when it comes to corporate cronyism and high-risk shenanigans and even pursuing rules and lifting restrictions to enable this fraud and failure to take place by not doing enough to stop naked shortselling by bear raiders driving down stock ruthlessly. One of the ways Cox abetted the bear raiders was by eliminating the uptick rule on July 26, 2007. The uptick rule had been in place since the late 1930s when it was instated by the first SEC commissioner, Joseph Kennedy.
CNN puts Cox in the top ten list of people most responsible for the current financial meltdown.
Obviously, no matter what affinity Barack Obama has for his fellow Harvard grads, he must find a new SEC chairman.
Who should that be? Who could it be? Let's find out.
- Brooksley Born - In a dream world, this former chair of the Commodity Futures Training Commission who warned of the dangers of unregulated credit default swaps and collatoralized debt obligations some ten years ago would be charged with leading an empowered SEC that would partner with the CFTC, the Fed and the Treasury to develop regulatory measures that would restore faith in the markets.
As Bloomberg news noted last month:
While leading the CFTC in 1998, Born declared that the unregulated contracts could ``pose grave dangers to our economy.'' Born, a lawyer who according to futures attorney Dan Roth battled fellow regulators with the ferocity of a courtroom litigator, lost a turf fight with Alan Greenspan and Robert Rubin over policing the deals.
After Congress exempted the contracts from U.S. oversight in 2000, the market swelled from about $100 trillion to $684 trillion by June 30. The growth included credit-default swaps and collateralized debt obligations, custom-made products barely in use under Born's reign. They played a part in almost $1 trillion of global bank losses and are prompting lawmakers to seek controls on the complex deals.
``Brooksley has been vindicated,'' said John Tull, a CFTC commissioner from 1993 to 1999. ``Had they listened to her, I think this catastrophe could have been averted.''
Alas, Born has not commented at all on the current crisis and given her past clashes with Rubin and also Larry Summers, it's unfortunately unlikely she would be successfully drafted back into service by the Obama administration.
- Roel Campos - Campos is a Democratic member of the Transition Economic Advisory Team and a former SEC commissioner from 2002-2007 so is touted as a possible pick to chair the SEC in an Obama administration, but he has said he is not sure whether he will seek the position.
During his tenure on the SEC, Campos fought for shareholder rights to information about the companies in which they have a stake. During this financial crisis he has spoken forcefully about more policing of the derivatives market and finally forcing hedge fund managers to open up their books more in having to register with the SEC with Congress giving the agency more authority to regulate that part of the market, as MarketWatch reports.
"All synthetic securities, all derivatives should be overseen by the SEC or an organization the SEC morphs into," said Roel Campos, a former Democratic SEC commissioner and member of Obama's transition team. "Disclosure, transparency, counterparties, leverage, positions and derivatives should be well known so people aren't fooled into thinking that they are entering into a safer situation than they have entered into in the past."
Campos spoke at a Chartered Financial Analysts Institute event. At issue are trillions of dollars of derivatives, including cash settled equity swaps, which give buyers an economic interest in the company but not a direct ownership stake. They are contracts between investors and bank derivatives dealers where a shareholder takes or gives a payment equal to the increase or decrease in the underlying share price by a certain date.
Under so-called 13D rules in the U.S. investors are required to disclose when they own more than 5% of a company. But equity swaps give buyers an economic interest in a stock, not the right to vote or the ability to sell the securities. That means these positions don't have to be disclosed when they rise above 5%.
The swaps are controversial because they can allow a hedge fund or rival firm secretly to build a stake in a company they are pressing for into acquisitions or other actions.
Campos joins a bipartisan array of officials, including former SEC Chairmen Richard Breeden, Arthur Levitt, and William Donaldson, in seeking greater disclosure of swaps and other derivatives.
- Mary Schapiro - Schapiro would seem to be a logical candidate based on her diverse experience in the public regulation of the markets with both the SEC and the CFTC, followed by her stewardship over self-regulating bodies first as CEO of the National Association of Securities Dealers (NASD) and when that merged with the NYSE's self-regulating body she became CEO of the Financial Industry Regulatory Authority (FINRA). She is also currently a director on the boards of both Duke Energy and Kraft Foods.
What worries me the most though is that so many of these problems in the current market seemed to have occured on her watch. Through her involvement with the NASD, she also would have somewhat close ties to the Madoffs and faces tough questions for FINRA's failures to detect the Madoff fraud.
The SEC wasn't the only regulator to be criticized over the Madoff affair. Bill Singer, a securities lawyer in New York who represents investors and firms, cited the role of the Financial Industry Regulatory Authority, the securities industry's self-policing organization.
The organization, known as FINRA, only has authority to inspect and discipline securities firms and brokers; its jurisdiction doesn't extend to investment advisory firms.
"Everything ... apparently went on right under the nose of FINRA," Singer wrote on his blog. "When its staff did its yearly examinations, either things were disregarded, missed or overlooked."
Other potential SEC candidates I have seen mentioned include:
- Gibson Dunn LLP partner John Olson (who was right about Enron's shadiness)
- former Democratic SEC Commissioners Harvey Goldschmid (an expert on antitrust issues)
- Annette Nazareth (who was a product of Wall Street before coming to regulate it as an SEC lawyer and then commissioner)
- former Republican SEC Chairman Harvey Pitt (who was SEC chairman in the early 2000s but resigned under Democratic criticism for joining other Republican members in hewing to the accounting industry's demands post-Enron)
- Gary Gensler, a senior Treasury Department official during the Clinton administration (who is another Goldman Sachs person who came to work in treasury and later advised Paul Sarbanes on the Sarbanes-Oxley Act passed in the wake of Enron and other corporate scandals)
- Robert C. Pozen, chairman, MFS Investment Management Inc., Boston (who worked under Mitt Romney when he was governor and recently served on an SEC advisory council)
- Damon Silvers, associate general counsel of the AFL-CIO, Washington (who has been a strong voice for labor's concerns on issues of pensions, shareholder rights and corporate governance in general)
- Mellody Hobson, president of Ariel Investments LLC, Chicago (who works closely with Obama friend and Ariel CEO John Rogers and has been described by some as the financial world's Dr. Phil for her promotion of investment to panicky clients, many of them African-American, and through a platform on ABC news).
While some of these candidates I find a lot more appealing than others, who the new pick of Obama's may be is not as important to me as what they do now.
Because as logical as it may seem to many of us that more regulation is needed in light of what has happened this year (let alone this decade), unfortunately there still will be Republicans... and maybe even some Wall Street Democrats... that just don't get it. These people may still cling stubbornly and stupidly to the Greenspan delusion that less regulation is always for the best and may still be bitching that Sarbanes-Oxley is driving American investment overseas.
What these people fail to realize is how much faith has been lost in the Wall Street wizards in the last decade or so and if capitalism is to continue, it's imperative that faith and trust in our financial institutions be restored through very tough enforcement of existing regulations as well as the imposition of more regulations and disclosure requirements.
If we let even more Madoffs happen on our watch, whatever confidence investors have left in America will dry up and thus so will their money.
In case you haven't seen a rundown of the wreckage Madoff left in his wake, here's a link to a
fairly comprehensive list compiled by Bloomberg (their total is $32 billion and counting worldwide).
We as a community need to hold the feet of Obama and Congress to the fire so that this crap cannot happen again even if it's not our ideology that is responsible for this stuff happening. And one of the best ways to ensure this doesn't happen again is to heed the words and vision of that great Democrat, Franklin Delano Roosevelt.
You know he said a whole lot more than that the only thing we have to fear is fear itself in that first inaugural address. He also offered a ringing indictment for the well-heeled Wall Street tycoons that resonates astonishingly (and unfortunately) well still today.
In such a spirit on my part and on yours we face our common difficulties. They concern, thank God, only material things. Values have shrunk to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side; farmers find no markets for their produce; and the savings of many years in thousands of families are gone. More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return. Only a foolish optimist can deny the dark realities of the moment.
And yet our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils which our forefathers conquered, because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply.
Primarily, this is because the rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.
[...]
We must act. We must act quickly.
And finally, in our progress towards a resumption of work, we require two safeguards against a return of the evils of the old order. There must be a strict supervision of all banking and credits and investments. There must be an end to speculation with other people's money. And there must be provision for an adequate but sound currency.
Here's the whole thing in text and in audio:
Let's hope the folks looking to understand how and why the SEC went wrong look to history to better understand how and why it was created by the FDR administration in the first place.