On the face of it the U.S. Securities and Exchange Commission is getting some tough nuts. President Barack Obama has nominated a former prosecutor to be its next head while the agency itself is expected to appoint a criminal investigator as its top internal watchdog.
Mary Jo White, a former U.S. Attorney for the Southern District of New York – its courtroom is just up the road from Wall Street – comes with a reputation as an aggressive prosecutor of high-profile terrorism, mafia and financial cases during her time in New York. Her new inspector general is expected to be Capitol Police Inspector General Carl W. Hoecker. As well as having 30 years of experience of criminal investigations for government agencies and the Army, Hoecker is a certified public accountant and fraud examiner. Both potential appointments, along with the renomination to confirm the recess appointment of another former prosecutor, Richard Cordray, as director of the Consumer Financial Protection Bureau, are meant to promote the notion of a shift towards a much tougher approach by the Obama administration towards financial regulation.
Few doubt White’s prosecurial toughness. Several leading Wall Street figures underlined the value of having her in their corner by hiring her as their defense attorney after she left government employ in 2001. She may be able to turn that to her advantage as gamekeeper-turned-poacher-turned gamekeeper again. Cracking down on the banksters, notably not cracked down on in the U.S. since the subprime mortgage crisis turned into the financial meltdown that nearly dissolved the global financial system in 2008, is an image the Obama administration wishes to project. Yet the truth is that it is the more prosaic process of making financial rules and regulations – and then enforcing them – that imposes more prudent regulation on financial institutions.
The U.S. Congress has kept the SEC on a short budgetary leash. As well as leading to lax enforcement of what regulations there are, that has also encouraged the agency’s investigators to pursue lots of small cases and few big, expensive, time consuming ones against financial institutions that have powerful friends in the Capitol.
Most SEC’s investigations end up in civil settlements with fines paid but no wrongdoing on the part of the financial institution or individual admitted. High-profile criminal proceedings against bigwigs might have more deterrent effect. Charging too-big-to-fail financial firms with criminal violations raises significant difficulties, but the failure to charge executives who could be said to fall into the category of having bonuses bigger than the agency’s budget means there are few meaningful consequences for excessive risk-takers.
Even punishments imposed by the Dept. of Justice on banks such as UBS, HSBC and Barclays on serious charges involving money laundering, terrorist financing and interest-rate rigging have resulted in fines equivalent to only a few months earnings, also insufficient to serve as a serious deterrent. The pattern of regulatory lenience and relatively lax enforcement is well-established in Washington. The cost has been a repeated failure to force a culture change at financial institutions. It is now too late even for a couple of tough nuts to change that.