A Tame Regulator for the SEC

President-elect Obama's appointment of Mary Schapiro to chair the Securities and Exchange Commission does not augur well for Obama's commitment to get at the roots of the financial crisis. Schapiro, who heads one of our broken financial system's main institutions of self-regulation, the Financial Industry Regulatory Authority, is known as a technically competent and politically moderate regulator who does not make waves. She served on the SEC beginning in 1988, having first been appointed by President Reagan.

The agency she heads is not a public agency at all. It is an industry trade association with quasi-regulatory functions delegated by the SEC. Under our ineffective system, a lot of regulatory authority is delegated to private institutions, such as the New York Stock Exchange, which is supposed to police the conduct of its members. We can see how well that worked out. When the exchange turned itself from a nonprofit into a for-profit company in 2006, its pseudo-regulatory functions had to be split off into a second private institution, the one that Schapiro heads, which was created in 2007 out of a merger with the National Association of Securities Dealers.

But the "Financial Services Regulatory Authority" is not a public body; it has little transparency, and if you have not heard of Mary Schapiro, it is because she has not been much of a player, much less a crusader, in the struggle for reform. She is the kind of Democratic appointment that allows Wall Street to breathe a huge sigh of relief.

And of course, her appointment is no accident. There were much tougher, more public minded appointees for SEC chair on the short list, but they were blocked by fierce industry lobbying warning that tough regulators would be divisive or controversial -- which they indeed would, if they did their jobs. Wall Street fundraisers for Obama used their ample access to resist a tough appointee. People in other power centers, like the Treasury and the White House, did not want a tough and independent SEC. If you think the appointment process exists in some kind of platonic post-ideological vacuum, get real.

The rejected finalists include Harvey Goldschmid, the brilliant and public-minded former SEC commissioner, now a professor at Columbia Law School. During a brief golden moment for reform after the Enron mess, Goldschmid as the senior Democrat on the commission worked closely with the then-chairman, Bill Donaldson, an old-school Republican patrician who was disgusted by the corruption. Until lobbying by the U.S. Chamber of Commerce forced Donaldson out, actual reforms ensued.

Another person on the short list, James Cox, a distinguished expert on securities law at Duke University (and no relation to the present chairman), has long been the choice of reformers for an SEC seat. He was up for one of the Democratic seats earlier in this decade (the custom is that the opposition party in Congress designates the minority seats and the president goes along), but his appointment was blocked by Sen. Chuck Schumer in favor of a tamer Democrat.

This is the same Schumer whom the New York Times recently revealed to have blocked innumerable pieces of regulation that might have prevented much of the crisis. Schumer, an omnivore when it comes to defending Wall Street, was taking no chances with the SEC, either. Schumer, incidentally, praised the Schapiro appointment as ""the kind of strong and experienced regulator that we very much need in these times." In a just world, that endorsement would be the kiss of death.

Irony of ironies, it could well be that the SEC under Bush, during the brief Donaldson-Goldschmid period, will be remembered as a more public-spirited SEC than under Mary Schapiro. People, this is the SEC -- the regulatory agency now disgraced once again by its failure to notice the Madoff Swindle, an agency in need of radical rehabilitation if investors and the entire economy are to be protected from future meltdowns.

There have been a lot of words exchanged lately about what it means that President Obama considers himself "post ideological." Steve Hildebrand, writing on Huffington Post, warned progressive critics of Obama's economic appointments to quit carping and to get with the program: "Some believe the appointments generally aren't progressive enough. Having worked with former Senator Obama for the last two years, I can tell you, that isn't the way he thinks and it's not likely the way he will lead." Obama, he declared, will "surround himself with the most qualified people to address these challenges. After all, he was elected to be the president of all the people -- not just those on the left."

The fallacy, of course, is that some highly qualified people are defenders of the status quo while others are true reformers.

Paul Waldman, writing on TAP Online, dismissed much of the debate about ideology and concluded, "Some on the left aren't sure they can trust Barack Obama, worrying that his inclusive rhetoric might lead to compromise on fundamental principles. But the proof of his progressivism will be in the policies -- no matter what we call them."

Quite so. And appointing a safe, Wall Street favorite like Mary Schapiro to chair the SEC at a moment like this is precisely a compromise on fundamental principles. Underneath the entirely misleading debate about Obama's style of governing and whether it's possible to be "post ideological," there is a real debate about whether the new president will be a tough-minded radical reformer in areas that cry out for radical reform and whether he will take on very powerful entrenched interests such as the Wall Street gang that created this mess.

There is no way that this isn't an ideological battle. Obama might have appointed Goldschmid or Cox. He might have characterized a tough appointment, in his way, as aw-shucks pragmatism, given the new needs of the times. But he didn't. On this round, the very week that the Madoff scandal is dominating the headlines, Wall Street won again.

This article originally appeared on American Prospect.

Comments

[schatsie]

this is absolutely HORRIBLE for investors...just someone else to sit on their hands and say 'oh my' like Dorothy in the Wizard of Oz....

Reform requires reformers...my money is sitting under my mattress and will stay there...

[mtdon]

wow now we get a reaganite to oversee the financial industry - what happened to change - the only i see is how truely pathetic the democrats are - i myself have about reached the limit of my being a lifelong democrat -

[DavidRedstone]

The Schapiro appointment is sickening.

If Obama was serious about cleaning up the financial system he would not have picked a good old girl to run the SEC. Not someone like Mary who (at best) has been asleep at the wheel at FINRA while the ship went down and the naked shorts and other crooks MadeOff with our money. Not someone like Mary who has decades of favors to pay back on the Street.

Image and tone matter. The SEC position requires the biggest, baddest, meanest, toughest, bulldoggiest SOB that Obama can get. Someone who hasn't been a member of the club for decades. Not Milquetoast Mary.

I'd pick someone like Spitzer for SEC. Leaving aside his personal problems, he is just the kind of bulldog I want in that job. I want a "loudmouth" who has a record of going after wall street crooks. As NY Attorney General he went after them more than anyone in recent memory. They FEARED him.

The guy for CFTC looks like another weakling.

[Rog49Thomas]

Yes, Robert, but when will the voice of the rich be heard in our great country? How much longer will they have to struggle against centuries of imagined oppression before they are granted some small measure of their rights?

I have a dream that one day people will be judged by the content of their wallet not that of their minds. That one glorious day a rich white male will be elected president and that our congress will have more rich white male faces in it.

I have a dream.

And today that dream one tiny step is closer to fulfillment ... (even with a woman in the position)

[plumnelly]

She's part of the SEC club that looks the other way. Hopefully, I'm wrong. The country can't afford the same tactics. We're reaching the point of you can't draw blood from a turnip in our economy.

[mikekc]

sorry folks, I meant for the sentence above to say:
It's certainly making the case in a very indirect way that SELF-regulation does not work.

oh and p.s. Jim Cramer would have made a great SEC secretary, he's been the only person I know of beating up on the SEC in the mass media since everyone realized our financial system was the proverbial unclothed emperor this past fall.

[mikekc]

I will try to be optimistic: Wall Street is a huge source of campaign funding right now. Better to split the difference at this point and keep the Wall Street money from all going to the Republicans. If Obama follows through on health care reform, he's already going to see a backlash and huge amounts of money going to the Right from the insurance and pharma companies. If Wall Street was likewise spurned then the Dems would be destroyed in 2010. In some ways it might be better to let Wall Street go on like it has. It's certainly making the case in a very indirect way that regulation does not work. If they tried to regulate right now, then I could say the pundits, pols, and lobbyists blaming the regulation instead of the system itself for it's problems.

[mikekc]

sorry folks, I meant for the sentence above to say:
It's certainly making the case in a very indirect way that SELF-regulation does not work.

oh and p.s. Jim Cramer would have made a great SEC secretary, he's been the only person I know of beating up on the SEC in the mass media since everyone realized our financial system was the proverbial unclothed emperor this past fall.

[Spud777]

I am becoming increasingly more disappointed in Obama. He appears to be backtracking on his campaign promises. I guess the story goes as follows, promise them anything to get elected and then only do things that will get you re-elected.

[particleswaves]

The SEC has proven to be a cruel enemy of small investors and should be abolished along with the Not-So-Federal "Federal" Reserve.

[Kassandra]

I sure hope Obama's balancing act doesn't plunge US into the abyss. (or farther therein)

[Aaror]

An odd thought...
Are we being played by Obama?
Now please stop the rant you want to write me, and listen, cause I don't mean what you think I mean, and if he is doing what I think he is (he may not be), it is a good thing, but we need to be "played," for it to work.
There is a tendancy for the populace to elect a reform politition, and then assume their work is done, and abandon that politition to the sharks. The Liberal Pol comes in, tries to clean up, and it stymied at every turn. They quickly become disillusioned and powerless.
However, if that Pol was smart, he would "move to the center," and create massive outrage. People protesting, writing letters to him and congress, etc. Then with millions of progressives pushing him to be more liberal, he and the establishment will have no choice but to follow. Of course, Obama may be winking while he tells the old guard that he has no choice but to push a progressive agenda, but he can do it.
So stop whining and arguing about whether he has sold us out, and start agitating for your goals. Write your senator, write your representative, get on Obama's web site and keep talking. Push your goals and "force," Obama to do what he wants to do anyway.

[joebaggadonuts]

Good advice, Aaror. I'm going to send notes to Obama and Biden in reply to their emails to me.

[JJay]

Agreed. I wasn't expecting or wanting a lot of controversial appoitments or for obama to appoint rabblerousers with little experience, but I was hoping for a few more really bold out-of-the-box appointments to shake things up. This idea that "change will come from the top" is getting to be a patronizing platitude to explain appointments of people that have been responsible for the problems we're now in.

[ScottontheSpot]

I was hoping for Jim Cramer. Yes, I know the madman doesn't fit with Obama's staid image, but he's been pro-consumer, and knows Wall Street's tricks better than anyone, since he ran a hedge fund for over a dozen years.
Obama is not just reaching across the aisle, he seems to be making a home there. Is there no hope for real change? :(

[Stashpanache]

Just one more in what is beginning to be a stream of "NO CHANGE" appointments and actions by O. Of course, his supporters will post here with a million excuses why this appointment is not what it looks like. The Republicans are still running the country and will continue to do so no matter who "wins" the elections. Clinton gave into them and so is Obama.

[wendynyc]

Boot him out! He has sold us out!

2010 will be here soon!

[Javani]

One difficulty I have found in discussing these issues is defining "Wall Street." Wall Street popularly means all the big companies traded on New York City exchanges. I think "Wall Street" better indicates, today, the trading houses, brokers and investment banks. The Democratic Party has been the "party of Wall Street" since the mid-80's, if we define Wall Street as signifying the financial services sector. They are the party of finance capital, party of the financial house bailout, of passing state laws upending credit card usury for the "good of the consumer."

Every election of late I get a chuckle hearing news comments showing "surprise" that "Wall Street" is donating to Democratic campaigns. Then they list Goldman Sachs, Merill Lynch, etc. as if their donations were sacrifices rather than self-interested. The smokestack management class is still Republican.

Watch out when politicians say "new rules for the 21st century" or "new economy." This is a signal that they are not going to reimpose the old rules that served us well.

And respectfully, I disagree with the suggestion Obama was forced to do this. He is solidly in the fold. Next up, Wall Street's dream come true, cap and trade.