Mary Jo White is being heralded as a top prosecutor who's going to take the business world to task for its misdeeds. That's a great narrative, but it's not true. The last time White acted on the public's behalf was back in 2002 -- more than a decade ago. Since then, she has had a very successful career defending Wall Street banks and employees from charges leveled by the SEC. So, on the plus side, she probably already knows some of the commission's employees. That should cut down on the need for nametags.
The appointment is just another straw on the backs of ordinary investors, who have been left cold and alone in a market that had all the self-discipline needed to bring the world to its financial knees. The penalties the SEC has handed out recently aren't even really penalties; most of the time, the companies that get fined are simply paying back customers they screwed in the first place. The combination of these three problems should ensure that the future SEC looks much like the past SEC -- weak.
The funding problems
First and foremost, let's address the problem of funding. In 2011, the House Appropriations Committee kept the commission's funding at its 2010 level while adding the burden of Dodd-Frank. In 2012, the committee rolled out the same rhetoric, arguing that the SEC had plenty of cash but did a poor job spending it. The approved 2013 budget leaves the SEC about $250 million short of its requested budget. One of the biggest problems with the SEC is that it's fighting the elite.
As a parallel thought experiment, imagine what the U.S. budget for defense would look like if our enemies weren't second-world countries and terrorist organizations. Imagine if there were another U.S. and it hated us. We're already at the top of the defense-spending chart: We spend more than the 17 countries behind us combined. The SEC, on the other hand, polices 35,000 entities, from public companies to personal advisors. And those guys spend more money than the SEC could ever hope to see.
In the third quarter last year, JPMorgan Chase (JPM -0.19%) set aside $684 million for legal costs. That's about half of the SEC's entire budget. If the government isn't going to fully fund the SEC, investors might as well give up on the idea of a level playing field. If the point needs to be driven home anymore, just look back at the lobbying effort Wall Street put together last year in order to delay the reform of money market funds. If you're one of those people who are always on the lookout for the next big problem, money market funds could be worth investigating.
The political problem
The fact that the SEC can come up with a good plan for a big problem, only to see the plan fall apart due to frighteningly inept officials, is the second strike against the commission. The problem is that political parties are bankrolled by big firms, which want the SEC to sit in its little corner and stay there. Last year, Wall Street spent more than $150 million on both political parties.
The funding problem is compounded by the fact that the four current commissioners are evenly split between Democrats and Republicans. While the fifth vote is usually supplied by the head of the SEC, White may not be in a position to make many rulings. As The New York Times recently pointed out, under President Obama's ethics pledge, White may often have to recuse herself. This owes to the pledge's requirement that appointees do not get involved in matters that involve their former clients for two years. Gridlock, thy name is SEC.
The appointment
Remember how I mentioned that JPMorgan was spending a huge amount of cash on legal expenses? If so, then you'll surely be relieved to hear that JPMorgan CEO Jamie Dimon thinks White is the perfect choice for the SEC post. I know that for a minute there you were worried that Wall Street wouldn't be happy with the appointment of a woman who has spent the last decade defending JPMorgan, Goldman Sachs (GS -0.50%), HSBC (HSBC -0.85%), and Bank of America (BAC -0.02%).
In a perfect world, Wall Street would hate White. That's the sign of an effective policy or nomination. If big banks come out with money blazing and try to shut the nomination down, then you've picked the right person. If instead they clap you on the back and ask when the next shindig is, then you did it wrong. Obama and his team struck out on this opportunity. White is a gamekeeper turned poacher turned gamekeeper, and she's going to have a hard time overcoming the challenges laid at her feet.
The bottom line
While White may not be the worst choice, she certainly doesn't seem to be the best. If the SEC just had to deal with her appointment and everything else was running smoothly, we might be OK. If we just had to deal with some politics or overcome a funding problem, we might be OK. But all three problems combine to paint an ugly picture of the future. As investors, it's more important than ever to understand the hidden risks in the market and to have a strategy in place to deal with potential systemic failures. For now, it looks like we're all alone out there.
