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In a new column in the New York Times, Simon Johnson points out that Obama is likely to be appointing a new SEC chairman soon. He describes two alternatives: choosing a friend of the industry versus someone who might actually be willing and able to regulate it. Johnson believes that a tough-minded chairman should not only enforce the rules but “actively seek to change the conventional wisdom around finance.”
While I like Johnson’s recommendations (former Delaware senator Ted Kauffman, Neil Barofsky, and Dennis Kelleher of Better Markets), I’m not sure I agree with his emphasis on changing the discourse. When I worked on Wall Street, the SEC was feared, and it was feared because it had an effective enforcement department, the legacy of the legendary Stanley Sporkin. A reader provided some corroborating detail in comments on a post over the summer:
I was an SEC enforcement attrorney during the generally-regarded halcyon days of the Sporkin era, and I can tell you, we kicked ass and took names. I myself was involved in many cases involving some of the biggest names on Wall Street, and was instrumental in several cases that eventually resulted in the enactment of the Foreign Corrupt Practices Act. We had a trial unit back then that was quite busy actually trying, and, more often than not, winning cases. We referred many cases for criminal prosecution (including for perjury), not having prosecutorial authority ourselves.
Back then, the industry quaked in its boots when we came calling. The only partially apocryphal story about Stanley is that, during an investigation he was leading (before he became the head of enforcement), he had a group of witnesses waiting to give on-the-record testimony. When the witness he had been deposing had a heart attack during the deposition (a not-infrequent occurrence), the ambulance attendants wheeled the stricken witness out of Stan’s office on a gurney, with Stan close behind, announcing to the waiting group of witnesses, “alright, who’s next.”
By contrast, the SEC chairman is not in a great position to change public perception. Yes, any agency head has some media access, but the SEC chairmanship is not a great bully pulpit unless its chief makes the agency worth paying attention to. And the SEC, unlike banking regulators, has to go hat in hand to Congress for budget approval. Wall Street friendly Congresscritters regularly threaten to cut SEC budgets when the agency looks like it might get serious about its job. So for a new SEC head to surmount this obstacle, it needs to start with enforcement and public interest. And the public is all in favor of having banks obey the rules just like everyone else; the departure of retail investors from the stock market is in part due to widely held and largely correct perceptions that they are at a serious disadvantage versus the pros. Conventional wisdom will be slow to change in the elite echo chamber because a critical mass of incumbents are bought and paid for by the financial services industry.
So the most dangerous choice is the one who would be the most effective, and my bet would be on Neil Barofsky. His background as a prosecutor would be enormously helpful in helping the SEC strengthen its enforcement department, tee up significant cases, and some of the time, put the miscreants through the wringer of a trial . If the SEC starting showing it could litigate something other than insider trading cases effectively that would change the dynamic with securities firms, both on a day to day basis and in those cases it did decide to settle. And an aggressive SEC chief might even find creative ways to pressure the DoJ when it passed on cases for prosecution that it thought were viable that the DoJ ignored (I’m assuming the DoJ continues to be as inactive as it has been under Holder). Making the SEC a highly regarded agency alone would change the dynamic; it would demonstrate that regulators can wield power and command respect. That alone would change conventional wisdom.
But of course, Johnson’s recommendations to Obama will never go anywhere. Even though Wall Street shifted its campaign dollars away from Obama to Romney, the President has other reasons not to ruffle their feathers. As Matt Stoller wrote in 2011:
Political analysts tend to gloss over what I would call hedging behavior on the part of political elites. While elections are somewhat random, the fact that you will be on the losing side of an election at some point is guaranteed. So politicos don’t ask: What’s the best way to win an election? Rather, they ask: What’s the best way to preserve my risk-adjusted position in the political ecosystem of influence and money? This means setting yourself up to win an election if possible, but not in an especially populist manner that could increase the downside of losing or falling into the minority…
I sometimes see Wall Street titans or wealthy people bemoaning the corruption in DC. Hedge fund manager Michael Steinhardt, for instance, says that he wants his taxes raised. This may be laudable, but it ignores the basic hedge in DC. If a politician votes against special interests, he will face enormous bitter attacks, and should he lose, he will fade into obscurity. If a politician votes for special interests, the converse dynamic will kick in. In such an environment, you wouldn’t expect brave politicians or staffers to last very long. And they don’t.
Obama’s likely post-presidential life is likely to look something like Clinton’s: give highly paid speeches, write yet another biography, maybe set up a foundation. Most of the interesting things he could do depend on not unduly annoying the top 0.1%. So no matter how badly Wall Street has treated him recently, the odds that Obama would appoint anyone who would endanger his end game are awfully low.