Sallie Krawcheck should not run the SEC
The New York Times reported on Wednesday that Sallie Krawcheck, formerly of Citi and Bank of America, is the leading contender to be named chairman of the Securities and Exchange Commission. Let‚Äôs hope that President Obama comes to his senses and names someone more fit to the post. From the Times:
With Ms. [Mary] Miller withdrawing, Sallie L. Krawcheck, a long-time Wall Street executive, has emerged as a potential front-runner. Over the last year, she has become a familiar face in Washington, making the rounds with lawmakers to discuss consumer issues.
In my time working with the agency over a number of years I have been involved in multiple rounds of rule writing about the regulation of credit rating agencies. There are some particular kinds of personality traits that are necessary to herd and motivate an agency of over 1,000 lawyers. Based on my reading of her record, Ms Krawcheck is not qualified to take on this role.
The SEC has two primary functions. To write rules for the financial markets, an especially onerous task under the Dodd-Frank law, and to enforce those rules. The SEC also regulates several ‚Äúself regulatory organizations‚ÄĚ (SROs) such as FINRA, which oversees broker-dealers and the MSRB, which is responsible for the municipal bond market.
The SEC also works closely with the Commodities Futures Trading Commission (CFTC), Congress, the Federal Reserve, the Office of Comptroller of the Currency and foreign securities regulators through its membership on the International Organization of Securities Commissioners (IOSCO). The SEC also coordinates its works with the Financial Accounting Standards Board, a private sector group, to create authoritative public company accounting standards.
Running the SEC, a complex, challenging job, requires the highest ethics to coordinate these many roles in financial regulation.
Krawcheck, while chief financial officer of the giant bank Citi, was at the heart of the largest scandal of the financial crisis. Her performance suggests that she does not have the skills or the temperament to run our nation‚Äôs primary financial regulator.
Krawcheck was appointed CFO of Citi in 2004, and she was asked to step out of the role in March 2007. As CFO, she was responsible for overseeing the accounting of the firm‚Äôs assets, the largest portion of which were asset backed securities. Just 20 months after her dismissal, Citi was a hair‚Äôs breath away from collapse. The Federal Reserve had to guarantee over $300 billion of Citi‚Äôs assets. Here is the what the Fed guaranteed from the term sheet:
Asset pool consisting of loans and securities backed by residential real estate and commercial real estate, and their associated hedges, as agreed, and other such assets as the U.S. Government (USG) has agreed to guarantee. Each specific asset must be identified on signing of guarantee agreement. Assets will remain on the books of institution but will be appropriately ‚Äúring-fenced.‚ÄĚ
On November 15, 2008 the New York Times wrote:
Many analysts came to believe that Ms. Krawcheck did not handle that post [CFO] well, especially after the bank began posting titanic losses and suffering downturns in some of its key businesses.
‚ÄúThere was not an appropriate amount of understanding of the risks they bore,‚ÄĚ said Gary B. Townsend, who heads Hill-Townsend Capital, a firm that invests in the financial services industry, when asked about Ms. Krawcheck‚Äôs tenure. ‚ÄúThe chief financial officer has to be able to assess the myriad risks that a large financial institution faces.‚ÄĚ
In March 2007, Mr. Prince pushed Ms. Krawcheck out of the CFO.‚Äôs office and sent her back to lead the wealth management division ‚ÄĒ a very public demotion. ‚ÄúBeing moved down a peg makes it hard to move back up,‚ÄĚ said Jeffrey Harte, a banking analyst at Sandler O‚ÄôNeill. ‚ÄúIt probably meant that the promotion ladder at Citi had come to an end for her.‚ÄĚ
Forget the promotion ladder. Krawcheck was CFO of the largest stinking mess of asset backed securities this nation has ever seen. Luckily for her, she was removed before the rickety Citi balance sheet nearly brought down the global financial system.
The same Times article goes on to highlight Krawcheck‚Äôs mercurial temperament over her demotion to the wealth management group from CFO (emphasis mine):
What infuriated Ms. Krawcheck was that the bank moved up its announcement without telling her, according to a person with direct knowledge of her thinking who, like top Citigroup officials, would not agree to be quoted by name. This person requested anonymity in order to preserve professional relationships with Citigroup.
Returning to her Manhattan office the next Monday, Ms. Krawcheck listened to a voice-mail message formally notifying her that the timing of the announcement was being accelerated. She immediately told the bank she was leaving. Within minutes, the news was on CNBC.
This episode certainly shows Krawcheck‚Äôs short fuse and her ability to play the media, but those are not important skills for running a law enforcement agency. Here is what the SEC does:
The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.
If Krawcheck had left Citi and informed the Federal Reserve Bank of New York of the true condition of the company‚Äôs balance sheet, we may have avoided the greatest financial crisis since the Great Depression. Instead, she took her millions in severance and moved on. This is not the type of person we need to restore trust and transparency to financial markets. Please keep searching, President Obama.