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Mary Schapiro Still Not Being Questioned; Independent Investigation Still Required

Posted by Larry Doyle on May 21, 2009 5:45 AM |

When you are the head of the SEC and you do not get invited to a dinner to discuss investor protections and financial oversight, you know you have a problem.

As the Wall Street Journal reports, SEC Objects to Idea of Shifting Oversight:

SEC officials have expressed concern that the administration’s plans are proceeding without much SEC input. Some top Obama officials, including Treasury Secretary Timothy Geithner, National Economic Council Director Lawrence Summers and former Fed Chairman Paul Volcker met Tuesday night over dinner to discuss the regulatory revamp.

Is this a power play by “the boys?” Was Ms. Schapiro merely a figurehead in the first place? Her confirmation process was the highway equivalent of an E-Z pass. The Wall Street investment banking model was laid to waste in 2008 and Ms. Schapiro was treated with kid gloves during her confirmation. On January 16, 2009 I wrote, Let’s Really Question Ms. Schapiro:

The WSJ did yeoman work yesterday in highlighting that under Ms. Schapiro, the number of cases and collection of fines by FINRA has diminished by 30% and 36% respectively. The WSJ did not expose any info, though, from FINRA’s financials. The $2.1 billion in equity in this tax exempt entity that paid Ms. Schapiro $3 million dollars is invested in a variety of sectors, including common equities, fixed income, private equity, hedge funds, and fund of funds!!! Additionally, as of the end of 2006, FINRA acknowledged that the assumed portfolio held a cool $647 million dollars in Auction Rate Securities!!!

Perhaps Ms. Schapiro knows too much information or is too close to the financial industry as many maintain. That said, she has not distinguished herself in her first few months at the SEC. She has held a series of perfunctory meetings and is seemingly involved in an internal turf war with the DEA in regard to the Stanford Financial investigation.

Add it all up and in the space of 4 months, Mary Schapiro has effectively been relegated to a figurehead.

While Ms. Schapiro has clearly been frozen out, the SEC as a whole is also shown no respect. As the WSJ reported:

The SEC is one of the federal agencies most at risk in the regulatory revamp under study by the administration and Congress. Its reputation suffered a blow from its failure to catch money manager Bernard Madoff’s Ponzi scheme and its light regulation of Wall Street investment banks during the boom.

Closed door sessions without full representation does not engender confidence as to the motivations of those involved. I am not a Mary Schapiro fan, but for Obama and team to comport themselves in such a fashion smacks of “insider dealing” and “Chicago-style” politics. We need total transparency and integrity in our regulatory review. I have been calling for that, as evidenced in my piece Future Financial Regulation: Not A Question of Sufficiency, But of Transparency and Integrity.

In fact, let’s go one step further with our review process and fast track to what we really need, an Independent Investigation Required.

For those who have read this review, I hope you find it further insightful in light of current developments. For those reading it for the first time, I hope it makes you ponder as to what is really going on behind the closed doors at Finra, the SEC, on Wall Street and Washington.   

How does our economy and country move forward after having experienced rampant abuses throughout our financial industry? It is disheartening that we have not already seen an aggressive pursuit and prosecution of many involved in these financial improprieties. Bloomberg releases a story today indicating House Speaker Pelosi Wall Street Probe Modeled on Pecora After Wall Street Crash.

While a thorough investigation is critically important to improve the health and well being of our markets and economy, I would propose we employ an independent investigation. Why?

Our financial industry is intertwined with the regulatory and political oversight which is supposed to monitor it. If we employ a currently sitting legislative body to investigate Wall Street, can or will we receive a truly unbiased analysis? Do we recall Franklin Raines of Fannie Mae being questioned by members of Congress who had received significant campaign contributions from Fannie? The “investigation” of Freddie and Fannie was certainly more theatre than true investigation. Will we get the same with Ms. Pelosi’s probe? Bloomberg offers:

House Speaker Nancy Pelosi plans to push for a comprehensive inquiry, saying that three-quarters of Americans want to know what led to the bankruptcy of Lehman Brothers Holdings Inc. and the collapse of Bear Stearns Cos. and Merrill Lynch & Co. She favors one patterned after Senate Banking Committee hearings led by Ferdinand Pecora starting in 1933, according to her spokesman, Nadeam Elshami.

The Pecora review “was probably the single most important congressional investigation in the history of our country, except perhaps the Watergate hearings,” Donald Ritchie, associate historian for the U.S. Senate, said in an interview.

Congress is reacting to an economic collapse that has generated $1.3 trillion in financial industry losses, $700 billion in U.S. taxpayer cash infusions and loans, and $37 trillion in destroyed world stock market value since 2007. The Pecora Commission generated public support for creating the Securities and Exchange Commission and laws that governed financial services for seven decades.

Pelosi, a California Democrat, will speak about hearings this week to lawmakers, including Representative Barney Frank, chairman of the panel that writes banking law, Elshami said.

“I think it’s useful to have it, but that should not be a reason to hold off on legislating,” Frank, a Massachusetts Democrat, said of Pelosi’s proposal after a speech in Washington yesterday.

Prior to this review by Congress, I believe we should ask those who have received campaign contributions from the financial industry to reveal the level of those contributions. None other than current head of the CIA, Leon Panetta, and former U.S. Senator Chuck Hagel (R-NE) have impugned many members of Congress of engaging in Legalized Bribery. A public airing of that “bribery” should be included in an investigation of Wall Street.

Over and above that angle, the oversight of Wall Street itself needs to be addressed and changed. How is it that an SRO (self-regulatory organization) such as FINRA, funded by Wall Street, can then in turn oversee Wall Street? That model presents enormous conflicts of interest. The WSJ investigated FINRA this past January when FINRA’s then head Mary Schapiro was nominated to head the SEC. The WSJ reported that in 2008 under Schapiro, FINRA saw a greater than 30% decline in cases and fines. Is FINRA too cozy with Wall Street? Former bank regulator Wiliam Black believes so.

In addition to FINRA’s “cozy” relationship with Wall Street, FINRA itself has an internal investment portfolio of approximately $2 billion. The presence of this portfolio also creates significant potential for conflicts of interest. Those monies should be placed under management outside of FINRA to eliminate that conflict.

FINRA is conflicted in both regards. In my opinion, Wall Street should not directly fund FINRA, nor should FINRA oversee its own investment activities.

Can Washington divorce itself from the incestuous nature of these relationships? Can we expect real investigations with real change? Unless and until we have an independent investigation by outside counsel, I have serious reservations. As Bloomberg reports, none other than Chris Dodd said:

“Certainly we want to examine what happened, but also we need to move forward.”

Why do I suspect Senator Dodd has little serious interest in these investigations? As the beneficiary of enormous political campaign contributions from Wall Street, he may be exposed as part of the problem. Bloomberg addresses this very point:

Members of Congress may be reluctant to tackle the recommendations of such an inquiry because of financial industry donations to political campaigns, said Wall Street historian Charles Geisst.

Financial services has been the biggest contributor in every U.S. election cycle in the last 20 years, according to the Center for Responsive Politics, a Washington research group that tracks campaign money. Its individual and political action committee donations in 2007 and 2008 totaled $463.5 million, compared with $163.8 million from the health-care industry and $75.6 million from energy companies.

Individual and PAC donations from Goldman Sachs Group Inc. which totaled $30.9 million, and Citigroup Inc., at $25.8 million, were higher than those from any other company except AT&T Inc.’s $40.9 million over the last 20 years, the center’s compilation of Federal Election Commission data shows.

“How can you seriously propose a law when you’ve been taking money from ‘The American Poodles for Wall Street’ or whatever fund for the past 10 years,” said Geisst, a professor of finance and economics at Manhattan College in New York and author of “Wall Street: A History.”

I concur!!!

For newer readers, you may also care to read:

How Wall Street Bought Washington: a review of the massive money spent by Wall Street to buy favor in Washington.

Let’s Really Question Ms. Schapiro: a review of the nomination of Mary Schapiro to head the SEC along with addressing investment activities of FINRA.

Does The Palace Guard Have No Clothes?: a review of FINRA’s investment in Auction Rate Securities and assorted other stories on the ARS travesty!

LD

  • coe

    LD – To me, the SEC is just one of many participants jockeying for position and purpose in the alphabet soup of programs and agencies deeply involved with the capital markets crisis..my sense is that there are two distinct but somewhat overlapping powerful dynamics involving the SEC – the first being regulatory reform, the second involving leadership in setting accounting standards…on the first score, it’s pretty easy to step back and review the legacy and current inclinations of the FED, OCC, OTS, NCUA, FDIC, FHFA, FINRA, FHFA, SEC, among others…and toss in the Treasury and the Administration and the Congress for good measure …and simply wonder how this group of well intentioned but often confused and conflicted constituencies can possibly work together to get things right…on another level, much has been written about the anomalies of the accounting model – with its own stewpot of mismatched letters – FASB, EITF, OTTI and yes, pay no attention to the man pulling the levers behind the curtain – our friends at the SEC…my take is that the challenge to collaborate on and improve the regulatory and accounting oversight of so many having a huge impact on our economy and our lives is difficult enough in dealing with the very humanly flawed agencies themselves, and when you sprinkle in the the politicized element of strong personalities with, let’s say, somewhat curious agendas (Schapiro, Dodd, Obama, Geithner, Pelosi, Frank, Bair are just a few of the “usual suspects”) as Emeril says, “Let’s take it up a notch”…great job trying to keep all of us informed and abreast of the ongoing shenanigans, LD!

  • Coe…outstanding review of the numerous legs to this “spider” that has us tangled in its web!!

    We’ll work our way out of it yet but hopefully are not poisoned in the process.

    Thanks for the tremendous insights.

  • LD,

    Financial Advisor Magazine has an article entitled “RIA’s Hard to Police, Expect FINRA to Step In.” http://www.fa-mag.com. I can easily see what is happening here. FINRA is putting the sales pitch on behind the scenes by using so-called independent research firms like the Tower Group to push for their case of regulating Registered Investment Advisers (RIA’s). This is how powerful lobbying organizations get what they want.

    Hard to Police? Like RIA’s are criminals or something. I do not like the tone of that at all. Then, add that FINRA has to step in and save the day? What a joke.

    With FINRA, it is all about their power and the additional regulatory fees they would receive from regulating RIA’s. Think about it. A ton of FINRA reps are leaving to be RIA’s and they are losing that revenue. If FINRA can pull back all of those RIA’s by being the regulator, then walla! Their revenue drain problem is solved.

    The RIA’s better get it in gear and fight FINRA.

  • Rick,

    Great color. Looks like FINRA has an axe to grind and a financial motive along with it.

    Thanks for trying to keep them honest!!






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