Tuesday, April 7, 2015

What happened to our New Deal SEC?

(William Douglas (middle) was the longest-serving U.S. Supreme Court Justice in American history, and an avid environmentalist. Many might not know that he was also chair of the Securities & Exchange Commission (SEC) from 1937-1939. In the photo above, Douglas oversees the swearing in of a new SEC member. Photo courtesy of the Library of Congress Prints and Photographs Division.)
Yesterday, we learned that, "Senate Democrats are losing patience with the Securities and Exchange Commission over the agency's failure to implement a new CEO pay rule." In 2010, Congress required that the SEC make a rule that "would mandate that companies publicly disclose the ratio of their CEO's pay to the median earnings of workers at the firm." This congressional action was part of the supposed Wall Street reform (if you recall, millionaire CEOs were getting gargantuan bonuses even as the economy around them fell apart, workers lost their jobs, people lost their homes, etc., etc.). Why is the SEC delaying the rule? Well, maybe because "Corporate executives from dozens of different industries have pressured the SEC to delay the rule." (See, "Senate Democrats Are Getting Fed Up With The SEC's Delay On CEO Pay Rule," Huffington Post, April 6, 2015)

This isn't the first sign that the SEC has been commandeered by Wall Street.

When James Kidney, a well-respected lawyer at the SEC, retired he said the SEC had become "an agency that polices the broken windows on the street level and rarely goes to the penthouse floors. On the rare occasions when enforcement does go to the penthouse, good manners are paramount. Tough enforcement, risky enforcement, is subject to extensive negotiation and weakening" ("SEC Goldman Lawyer Says Agency Too Timid on Wall Street Misdeeds," Bloomberg, April 8, 2014).

When the SEC has gone after big financial institutions for securities fraud, they often reach settlements that allow the institutions to avoid admissions of wrongdoing. This helps to keep things hush-hush, so the public will be kept in the dark as to just how bad the actions of our big financial institutions really are. When the SEC brought such a settlement to U.S. District Court Judge Ned Rakoff in 2011, for review, Rakoff rejected the settlement, writing:

"...in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances."

  (SEC Chairman William Douglas (at the head of the table) holds a press conference in 1937. Photo courtesy of the Library of Congress Prints and Photographs Division.)

When New Deal policymakers created and ran the SEC in 1930s they were in no mood to play footsie with Wall Street. For example, when a big wig lawyer from Wall Street, William Harding Jackson, spoke to SEC Chairman William Douglas, in an attempt to weaken new rules, the following exchange occurred:

Jackson: "Have you read our proposed statement?"

Douglas: "The SEC has read it, and it is not satisfactory. The negotiations are off."

Jackson: "Well, I suppose you'll go ahead with your own program?"

Douglas: "You're damned right I will."

Jackson: "When you take over the Exchange, I hope you'll remember we've been in business one hundred and fifty years. There may be some things that you will like to ask us."

Douglas: "There is one thing I'd like to ask."

Jackson: "What is it?"

Douglas: "Where do you keep the paper and pencils?"

(From Michael Hiltzik, The New Deal: A Modern History, New York: Simon & Schuster, Inc., 2011, pp. 409-410)

Unfortunately, New Deal-type policymakers are few and far between today. Throw in an apathetic electorate, and you have the recipe for continued greed, corruption, and crime on Wall Street. And this is why Jaime Dimon, CEO of J.P. Morgan Chase, can smile at a U.S. Senator and say, "So hit me with a fine. We can afford it" ("Guess What Happened When JPMorgan's CEO Visited Elizabeth Warren's Office," Huffington Post, March 31, 2015).

The New Deal created the SEC to be tough on the misdeeds of Wall Street, for the benefit of investors and also for the benefit of the broader public. But today, one has to wonder: Who is the SEC working for?

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