The Impotence of the SEC

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  (NYSE: JPM  ) 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 (NYSE: GS  ) , HSBC (NYSE: HSBC  ) , and Bank of America (NYSE: BAC  ) .

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.


Read/Post Comments (5) | Recommend This Article (22)

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  • Report this Comment On January 30, 2013, at 11:27 PM, vireoman wrote:

    A very good article, Andrew. Thanks for your perspective. All sad but true. We continue to pay only lip-service to restoring fairness to the marketplace.

  • Report this Comment On January 31, 2013, at 6:55 PM, celosage wrote:

    More invisible hands in my portfolio.

  • Report this Comment On February 02, 2013, at 1:19 AM, dgmennie wrote:

    Now that the DOW has just closed over 14,000, getting us back to where we were in 2007 (oh goodie), the bleating of the investment community has started up once again in ernest. How many of the gullible (Lucy snatching the football from an ever-trusting Charlie Brown) will be sucked in this time? With 60% and more programmed trading going on every day, where are the gains and who gets them? Conservative 'value' investors looking for generous dividends and modest growth, or speculators painting some obscure high-tech wrinkle as the new Apple, Google, or Microsoft?

    Why do so many highly-paid investment manager types get it wrong for their clients? Do dealers and brokers really need to be dishonest to play the game on the winning side, or just be among those who accept the status quo and remain unwiling to look into dark corners for their clients' benefit?

    Unfortunately, the SEC is light years behind in its ability to understand and modify bad practices. It is completly unable (be the reasons political or otherwise) to punish the guilty traders and bankers who game the system or make violated investors whole.

  • Report this Comment On February 04, 2013, at 3:23 PM, profittkr wrote:

    EEIIKKKK, Janet Reno has a sister?

  • Report this Comment On February 04, 2013, at 3:40 PM, stan8331 wrote:

    I agree that the SEC has been and continues to be weak, but I think it's too soon to say that White will be a protector of the investment banks and other corporate interests. When you're hiring a watchdog, there are two ways to go. You can either hire an outsider who owes no allegiance to any of the players but may lack critical detailed knowledge of nefarious practices, or you can hire an insider who knows where all the bodies are buried but may be too sympathetic toward her former employers.

    This is obviously an inside hire, but there's no way to know for sure how it will play out. If White is really interested in reform, versus working to maintain the status quo, she could end up being a brilliant choice and Mr. Dimon could end up ruing the day he supported her. Admittedly, that is the less likely possibility.

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