Securities & Exchange Commission Chairwoman Mary Schapiro has kicked off a campaign to save her agency and her reputation by promising a skeptical convention of financial journalists that the SEC will begin prosecuting cases again.
And she has a chance, thanks to the ham-handed, duplicitous, and possibly illegal handling of Bank of America’s takeover of Merrill Lynch last December by then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. They gave her the gift of a coverup to unravel.
“The rules,” she said, “are pretty meaningless if there is not the threat of enforcement.”
Now she has ammunition to fight off the weasel lobbyists of the financial industry, who plan on using the SEC’s failures as a reason to get rid of the agency—the only one charged with protecting investors. We will soon find out whether she can bite with the big dogs.
In a keynote speech Monday to the Society of American Business Editors and Writers convention in Denver, Schapiro never mentioned her SEC predecessor, Christopher Cox. Still, she managed to convey the impression that Cox was incompetent, the cop on the beat who fell asleep in the patrol car drinking decaffeinated coffee and eating too many doughnuts.
Schapiro—a one-time SEC board member, former chair of the Commodity Futures Trading Commission, former NASD CEO, and, most recently, the head of the Financial Industry Regulatory Authority—was part of the insiders’ squad that allowed the era of deregulation to happen. A man she knew and was on industry committees with, Bernard Madoff, skated by, undetected by Schapiro and fellow regulators for decades.
So now that she’s in the top job at the SEC, can she stand up to the biggest bullies on the block: the chairman of the Federal Reserve and the secretary of the Treasury? Can she reassert the long-forgotten legal protections that are supposed to be accorded to investors?
Schapiro says her agency must survive, in part to protect investors from other federal government agencies.
New York Attorney General Andrew Cuomo last week made documents public that seem to show that Paulson and Bernanke deliberately kept Cox in the dark last December about the possibility that BofA might pull out of the merger as a result of escalating losses at Merrill.
So on Monday, Schapiro’s get-tough speech amounted to a declaration that she intends to save the asleep-at-the-switch SEC from irrelevance and extinction in the wake of the financial meltdown and calls for new regulators. She said enforcement actions by the SEC will be the key.
Then she delicately took on the question raised by Cuomo: Did BofA CEO Kenneth Lewis and Paulson and Bernanke violate the law by failing to disclose to investors what was going on in December?
“I find it troubling,” Schapiro said, “that the SEC might have been deliberately excluded.”
She said the SEC is looking closely at the Merrill-BofA bonus questions, though she declined to offer details. While claiming she was “not opining” specifically about the BofA and Merrill, Schapiro continued: “The obligation to disclose rests squarely on the shoulders of the company.”
(Simultaneous translation: Lewis should not have succumbed to Paulson and Bernanke telling him to keep quiet.)
Then Schapiro put out that delicate request—without mentioning Congress and the need for hearings—for some air freshener: “The decision to disclose or not disclose does not necessarily rest with the Treasury secretary or the chairman of the Federal Reserve. That begs the question of why they explicitly excluded the SEC chairman.”
A follow-up question about whether the new meltdown-inspired federal ownership of financial institutions and car companies creates government conflicts gave Schapiro the opportunity to plant her flag as a tough new enforcer.
An independent agency like the SEC is now “absolutely essential,” she said. “We are not conflicted. We do not own the stock of any financial institution. It is more important than ever that there be an independent agency that is refereeing disclosure obligations.”
Schapiro also provided the expected mea culpa, gently admitting, without being further pressed by the reporters, that in her previous regulatory capacities she and other officials in securities enforcement had totally missed the Madoff case.
Finally, without mentioning Cox by name or trashing Congress and Wall Street for thrusting the era of alleged “self-regulation” and “market discipline” on the trusting public, she said what many of us on Main Street have known for a long time.
“The rules,” she said, “are pretty meaningless if there is not the threat of enforcement. Enforcement has got to be real.”
Schapiro even said she wants new congressional authority to enlist whistleblowers and the private bar in the search for financial miscreants.
So let’s start watching now—the meter is running. Schapiro has started to talk the talk. Soon we will know whether it will be more government by press release—or whether there will be prosecutions and changes in laws and regulations to protect us from more undisclosed backroom deals and fancy financial instruments.
Allan Dodds Frank is a business investigative correspondent who specializes in white-collar crime.