New Financial Sheriff in Town, Part III

Times highlights SEC’s latest crackdown—on an Estonian brokerage

The Times continues the business-press tradition of hailing new regulators as saviors from the previous bad regulators.

“S.E.C. Enforcers Focus on Avoiding Madoff Repeat”

The problem is, as we’ve said, that we usually hear about the badness of the previous regulators only after they’re already gone.

Don’t get me wrong; the Times’s focus on the SEC’s new enforcement staff is welcome.

There was a time when the SEC’s Enforcement Division was actually feared on Wall Street and its chief a household name. That’s no longer true, and that’s to no one’s benefit.

Some will find the macho photos of the new chief Robert S. Khuzami and staff a bit over the top, but let’s give them all the benefit of the doubt. To his credit, the new chief seems to get it (my emphasis):

The S.E.C. has been criticized for meting out relatively light punishments in some recent cases. The commission also has not satisfied critics on Capitol Hill — and many ordinary Americans — who had hoped to see charges leveled at banking executives after the financial collapse.

Mr. Khuzami recognizes that the cases the S.E.C. brings, or does not bring, will define his tenure and, possibly, the future of the commission. “It’s all about the cases in the end,” he said.

True, it is a bit unnerving that the main anecdote supporting the idea of a new, tougher SEC involves a crackdown on an Estonian brokerage.

After poring over thousands of trading records, S.E.C. investigators found a pattern of rapid buying and selling a brokerage firm in Estonia. Then they mined trading data from the firm and discovered that two traders had hacked into Business Wire, letting them see news releases involving a wide range of companies before they were released. With enough evidence to charge the traders with securities fraud, the S.E.C. quickly froze more than $32 million in 200 accounts at the Estonian brokerage firm.

“We need to sustain what we learned from that case,” Mr. Hawke said.

That’s putting it mildly.

It’s also not heartening to me that memories of the Madoff failure are the new leadership’s guiding motivation. Madoff was surely bad, but you’d hope the financial system meltdown would be the agency’s lodestar.

The Times story also wisely reminds readers that when the new SEC leadership presented its Bank of America settlement to a federal judge, it was embarrassingly rejected and continues to cause problems:

On Monday, what S.E.C. officials had hoped might be a quick victory in a prominent case instead turned into another potential headache. Mr. Khuzami and a squadron of S.E.C. lawyers filed into a New York courtroom where the commission was trying to end its long investigation into the takeover of Merrill Lynch by Bank of America. But District Judge Jed S. Rakoff — who last September rejected as too low an earlier $33 million settlement that the S.E.C. had reached with Bank of America — again raised questions about the commission’s handling of the case. If he rules against the second settlement, for $150 million, the case is set to go to trial on March 1.

It’s just that we’ve seen this kind of story before. As we’ve noted, when John Dugan took over as comptroller of the currency in 2005, he was treated as a savior, too, by the WSJ:

Bank Regulator Cleans House —- New Comptroller of the Currency Makes Supervision a Priority

Dugan was a savior only in comparison to his predecessor, John D. Hawke, and that’s not saying much. And like Hawke, Dugan, too, actively fought to block states from policing predatory lending. It is now fair to say in retrospect that the OCC, again, to the say the least, did not make “supervision a priority.”

In October, the WSJ hailed the arrival of Daniel Tarullo to head the Fed committee that oversees bank supervision.

The rise of Daniel Tarullo, a lawyer with a longstanding interest in bank regulation appointed to the Federal Reserve Board by President Barack Obama, is a sign the era of light-touch bank regulation is over.

These stories, while fine, are no substitute for sustained regulatory coverage of the type that was lacking during the pre-crisis era, a time of virtual regulatory collapse amid many credible warnings from state officials and other credible sources.

Here’s hoping we’ll be hearing more of Khuzami, whatever happens.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.