Corporate Governance

The SEC and Responsibility for the Financial Crisis (Part 1)

By J. Robert Brown

We are examining the top ten corporate governance agenda items for the SEC under the Obama Administration.  We will continue this tomorrow (with #5) but today have a slightly different mission.

The NYT contains an editorial titled "The End of the Financial World As We Know It."  The editorial discusses a number of the causes of the current financial turmoil and places some of the blame on the SEC.  The blame, however, is not a result of bureaucratic ossification or lack of resources.  Instead, the article claims that the SEC, specifically the Division of Enforcement, has an excessively cosy relationship with Wall Street.  As the editorial describes:

• Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

The basis for this extraordinary assertion?  The editorial contends that the SEC has an incentive not to "roil the markets" by bringing cases that might affect the "share price of any given company."  To do so would roil "the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined."

The other reason?  A desire to curry favor with Wall Street in order to obtain high paying jobs.

• It's not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

And the evidence for this assertion?

• The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.

As we will explore in the next several posts, these are cheap shots taken at the Commission.  They are also unsupported by the available evidence.  There are unquestionably problems at the Commission and reforms that are necessary.  There are also reasons to believe that the problems rest not with the staff but with ideological commissioners like Paul Atkins, who fought the imposition of penalties on corporate wrongdoers.

Full post as published by The Race to the Bottom on January 05, 2009 (boomark / email).