We’ve wondered often just what it is that makes our financial regulators so toothless in the wake of the widespread fraud and chicanery that helped crash the financial system.
This, reported in The New York Times this morning, obviously isn’t the main problem, but it sure doesn’t help:
On a recent trip to New York to tour a trading floor, a group of employees from the commodities watchdog rode Mega Bus both ways, arriving late to their meeting despite a 5:30 a.m. departure. The bus, which cost $30 a person round trip, saved the agency roughly $1,000 over Amtrak.
Now, I’ve taken the Megabus, as well as BoltBus, DC2NY, and Fung Wah, countless times between DC and New York. But never on a business trip, and never in a suit.
Try to envision a gaggle of Commodity Futures Trading Commission agents headed for a meeting with some Goldman Sachs sharps. The CFTCers scrunch into two rows of the bus, briefcases on their laps, as the DC2NY driver gets on the PA to go over the bus rules, which include “No No. 2 in the bathroom!”
The Times‘s story this morning is clearly one of those that crop up around budget-cutting time as bureaucrats unleash sob stories about their funding woes. But this one is wholly believable.
The Megabus anecdote is killer. But this one’s pretty good, too:
Until recently, employees from the commission were instructed not to order certain office supplies — items like three-hole punches and heavy-duty staplers.
These anecdotes are important. Compare how this story catches your attention versus how this December Wall Street Journal story on the same topic doesn’t. It’s that extra time spent reporting that turns what could have been a run-of-the-mill budget piece into something more.
And the Times reports that there are much more serious consequences of the funding shortage than stapler shortages and bus tickets: The SEC is cutting back on using expert witnesses in trials. It sends just one lawyer to depose witnesses. The CFTC quit hiring people for a year. Its chairman had to pay to Brussels help devise derivatives rules. And then there’s this:
The agency only recently started to again examine investment firms and public companies in some Southern states, after postponing reviews to avoid paying for plane fares.
That’s just outrageous.
Nor is this underfunding a new phenomenon. Here’s my friend Moe Tkacik two years ago on a report from the Government Accountability Office on the woes at the SEC pre-financial crisis:
Investigative attorneys with whom we spoke concurred that having little or no administrative or paralegal support causes them to spend considerable time on non-legal duties such as copying, filing, document-scanning, preparing exhibits, making travel arrangements, soliciting bids for court reporters, and logging and processing documents submitted by respondents. For example, one attorney told us such duties can take 2 to 3 hours daily. Another, who joined the agency from private practice, said that investigative attorneys can spend up to half their time on tasks handled by support staff in their previous position. One attorney told us of plans to spend a day assembling document storage boxes. Because there is insufficient in-house copying capability, confidential documents sometimes are sent to non-secure outside copy shops. Frequent equipment breakdowns mean attorneys must search for working copiers and scanners, a number of attorneys told us…
Several attorneys said that another significant shortcoming is that the investigative staff does not have access to real-time trading information…Currently, when attorneys need such information, they manually query hundreds of broker-dealers, a process that initially produces only incomplete records. Or, they might request data from a regulated entity such as FINRA.
As the Times reports, the SEC lately has been bringing in more money than it spends, despite the ridiculously lowball fines it issues.
It misses by not reporting on a possible solution to these woes—one that many have proposed for years: self-funding.
That doesn’t mean the SEC and CFTC would have to go out and slap fines on people to cover their costs. But they would require the institutions they regulate to pay for their oversight, much like the FDIC does.
And I would have liked to see some context on this reporting:
Some Republicans argue that the regulators’ cries of poverty are overblown. The S.E.C.’s budget this year is $1.18 billion, up 6 percent over 2010 — and nearly triple what it was a decade ago.
The Times should have given us a sentence or two on why the SEC is still struggling despite the big budget increases of the last ten years. Presumably, it’s mostly because its mandates have increased.
But this is good reporting on a serious problem.
You have to bet those besuited regulators on the Megabus sit there daydreaming about the revolving door for much of their four-hour ride. This one anecdote tells you all you need to know about the disparity of resources between Wall Street and the government types trying to regulate it.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.