The craven SEC, part 196

By Felix Salmon
February 3, 2012
Edward Wyatt makes a very good point today -- why is the SEC doing big favors for big banks, every time it slaps a fine on them?

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Edward Wyatt makes a very good point today — why is the SEC doing big favors for big banks, every time it slaps a fine on them?

If a bank settles a fraud case, it automatically loses certain privileges, like the ability to issue debt securities opportunistically, without going through laborious SEC filings, and the ability to shelter forward-looking statements against lawsuits from investors.

It’s worth noting here that no company has any kind of right to these privileges. If a company tells lies to investors, those investors should be able to sue it. And if a company wants to issue securities to the public, it’s the SEC’s job to examine the proposed offering first.

But somehow, along the way, a handful of very big companies — especially banks — managed to persuade the SEC that they were trustworthy corporate citizens, and that they didn’t need to be bound by those rules.

That’s a little bit suspicious just for starters. But it gets much worse. The SEC, quite naturally, put in place a policy which said that if any of those companies ended up being fined by the SEC for violation of securities laws, then it would lose its special privileges.

And then the SEC proceeded to ignore that policy.

An analysis by The New York Times of S.E.C. investigations over the last decade found nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions. Those instances also include waivers permitting firms to underwrite certain stock and bond sales and manage mutual fund portfolios.

JPMorganChase, for example, has settled six fraud cases in the last 13 years, including one with a $228 million settlement last summer, but it has obtained at least 22 waivers, in part by arguing that it has “a strong record of compliance with securities laws.” Bank of America and Merrill Lynch, which merged in 2009, have settled 15 fraud cases and received at least 39 waivers.

Wherefore these waivers? Former SEC chairman David Ruder says that were it not for their privileges, these poor banks might have difficulty staying in business. Which, it seems to me, is a very good reason to remove those privileges. Too-big-to-fail banks should be rock-solid, with fortress balance sheets, able to withstand big and unexpected shocks. If their ability to operate as a going concern would be threatened by forcing them to comply with standard SEC regulations, then there’s something very wrong with them indeed, and they don’t deserve special waivers at all. Instead, they require extra-close scrutiny.

But in fact losing the privileges is not the end of the world for a bank. Look at Citigroup, which lost its privileges for three years in October 2010, and is certainly in poorer financial shape than, say, JP Morgan. It’s still chugging along quite happily, making a net profit of well over a billion dollars per quarter.

The SEC does seem to be far too cozy with America’s biggest banks, going soft on them when they commit fraud just because it fears for their livelihood if it gets tough. That’s wrong. America can live without big banks; what’s truly dangerous is a world where too-big-to-fail banks have de facto impunity and can do what they like. Right now, the fines banks pay to the SEC are like protection money: they pay a few million bucks here and there every so often, and in return get to continue doing whatever they like. It’s time the SEC put a stop to this. But I’m not holding my breath.

Comments
6 comments so far

The same pattern held during the 2003-2004 mutual fund late trading scandal. The SEC granted numerous exemptions under Section 9(c) of the Investment Company Act. The exemptions enabled enabled offending investment management firms to escape the automatic bar from the industry that would otherwise be imposed by Investment Company Act Section 9(a).

Posted by mrnoir | Report as abusive

The same pattern held during the 2003-2004 mutual fund late trading scandal. The SEC granted numerous exemptions under Section 9(c) of the Investment Company Act. The exemptions enabled enabled offending investment management firms to escape the automatic bar from the industry that would otherwise be imposed by Investment Company Act Section 9(a).

Posted by mrnoir | Report as abusive

It’s called regulatory capture, folks!

Most of the people who work for the SEC are former Wall Street employees who are more than happy to do favors for their old buddies.

Posted by mfw13 | Report as abusive

mfw13 said, “Most of the people who work for the SEC are former Wall Street employees who are more than happy to do favors for their old buddies.”

And their former and future bosses as well… I would just like to add.

http://www.pogo.org/pogo-files/reports/f inancial-oversight/revolving-regulators/ fo-fra-20110513.html

Posted by youniquelikeme | Report as abusive

The SEC has shown, time and again, that it protects the ‘industry’ while not protecting those whose funds finance the ‘industry’. But, anyone familiar with why the SEC was established, is well aware that it was ‘producer’ malfeasance–not consumer–that created it.

Regulating the ‘industry’ without protecting a vital component of all industry–namely its consumers by regulating products–is nonsense. One protects consumers by regulating what can be brought to market.

And, entering into ‘settlements’ at any cost is too high a price for consumers to have to pay. A settlement cannot substitute for due process when the terms of such settlements seem always to abrogate due process.

Posted by larrymotuz | Report as abusive

This point of view is much too simplistic. The SEC is obviously not perfect, but this is just overblown. Dealbreaker’s take on it is a good counterpoint.

http://dealbreaker.com/2012/02/if-the-se c-really-wanted-to-get-tough-on-securiti es-fraud-it-would-have-added-some-minor- inconveniences-to-its-multi-hundred-mill ion-dollar-fines/

Posted by pessimist2 | Report as abusive
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