The longest-running scandal in our financial markets is the indulgence shown banks and other wrongdoers by federal law-enforcement and regulatory agencies, which love to settle criminal cases with little more nebulous admissions of wrongdoing, if that, and modest financial settlements. (Yes, even a multibillion-dollar penalty can be modest for a huge Wall Street firm.)
Among the chief culprits in this orgy of wrist-slapping is the Securities and Exchange Commission under its current chair, Mary Jo White. On Tuesday, Sen. Elizabeth Warren, D-Mass., excoriated White with a 13-page letter that accused the SEC chair of slow-walking desperately needed rules and regulations, reneging on her commitments to ride herd on criminal activity by corporations, and even lying to Warren about the status of upcoming regulations.
"When the SEC falls down on the job, the impact is felt throughout the economy, and it touches every American family," Warren told White. "I am disappointed that you have not been the strong leader that many hoped for--and that you promised to be" during confirmation hearings in 2013 and other testimony.
Warren's main complaints are these:
--White's SEC still hasn't issued a rule mandating corporate disclosures of the ratio of CEO pay to the average earned by a firm's workers, as required under the 2010 Dodd-Frank reform act. Warren implied that White lied to her at a recent meeting by promising that the rule was on track for completion this fall, since other government filings imply it's not expected until sometime next year.
--Despite White's promises to the contrary, the SEC still fails to require admissions of guilt from most corporations settling cases. The agency required such admissions in only 19 of 520 settlements from June 2013 through September 2014, Warren calculated, and in most of those the admissions were so vague they essentially let the corporations off the hook.
--The SEC is far too free and easy with waivers of rules revoking "well known security issuer" privileges of companies with criminal convictions or anti-fraud violations. WKSI companies are afforded shortcuts through SEC rules on issuing stocks and bonds.
Just in the last few weeks, the SEC has allowed several banks convicted of manipulating the foreign currency markets, including JPMorgan Chase, to keep their WKSI status. Warren quoted a dissent by Democratic SEC Commissioner Kara M. Stein from a waiver decision in which Stein asserted that such waivers effectively made those convictions "largely symbolic."
Responding to Warren's letter, White said, "Senator Warren's mischaracterization of my statements and the agency's accomplishments is unfortunate, but it will not detract from the work we have done, and will continue to do, on behalf of investors." The SEC says the CEO pay rule is moving ahead on the timeline White gave Warren.
Much of the press coverage of Warren's letter focused on the optics of firebrand Democratic senator vs. Democratic-appointed regulator. "Did Elizabeth Warren go too far this time?" Politico asked, citing a "backlash on Wall Street" over Warren's charge that the SEC has gone too easy on, er, Wall Street.
What that overlooks is that disaffection with White's performance has been spreading through the community of Wall Street watchdogs. Just last week, three former SEC commissioners--Bill Donaldson, chairman 2003-2005; Bevis Longstreth, commissioner 1981-1984; and Arthur Levitt, chairman 1993-2001--flayed White for failing to advance the rule requiring corporate disclosures of political spending. (That's two Republicans and a Democrat.)
They reminded her that Supreme Court Justice Anthony Kennedy, in his egregious 2010 Citizens United ruling opening the floodgates of corporate political cash, stated that the necessary counterbalance was to "pair...corporate independent expenditures with effective disclosure," so "citizens can see whether elected officials are in the pocket of so-called moneyed interests."
Given that Citizens United was five years ago and the proposed disclosure rule filed four years ago, the former SEC members wrote, "the Commission's inaction is inexplicable. Its failure to act offends not only us, who are alumni of this agency struggling to retain our deep pride of association, but investors and the professionals who serve them."
And on May 4, SEC Commissioner Stein issued a potent dissent from the agency's 3-2 vote to grant Deutsche Bank a WKSI waiver. (Her fellow Democrat Luis Aguilar was the only other dissenting vote; White voted in favor.)
"Deutsche Bank's illegal conduct involved nearly a decade of lying, cheating and stealing," Stein observed. "The conduct is appalling. It was a complete criminal fraud upon the worldwide marketplace." Such waivers were not granted for criminal misconduct, Stein noted, until 2013; since then they've become almost routine. Wrongdoers, she said, "are now emboldened by an unofficial Commission policy to overlook widespread and serious criminal conduct — and ensure that the largest companies retain their array of advantages in our capital markets."
Warren's broadside, the ex-commissioners' letter, and Stein's dissent (and other statements) all hint that critics of Wall Street who thought White might make good on her promises to be a tougher regulator have become profoundly disillusioned. They should be, and so should you.
"After being approved based on the promise that she'd reinvigorate a diminished agency via her chops as a former highly respected federal prosecutor," writes banking critic Yves Smith, "White instead [has] specialized in empty promises, foot dragging and financial services cronyism."
Warren is merely putting on the record what other watchdogs know. The difference is that her words get attention.