STOCK MARKET WATCH -- Friday, 7 December 2012

[Demeter]

43. A dream SEC chief By Matt Stoller

http://www.salon.com/2012/12/06/a_dream_sec_chief/

With a record of challenging Wall Street, Neil Barofsky says he'd take it "in a heartbeat." Here's what he'd do....The stakes are high. In the 1930s, the SEC cleaned up a stock market that had gone out of control, rigged by insiders and ultimately wrecking the economy. During this most recent financial crisis, the SEC operated as Barofsky put it, as a “backwater.” SEC Chairman Chris Cox was known as a passive regulator who did not understand the markets. Whistle-blower Harry Markopoulos later embarrassed the SEC by revealing he had tried to tell them about Bernie Madoff’s $20 billion-plus fraud for eight years, to no avail. Obama appointee Mary Schapiro has done marginally better, but the SEC has still been battered in the courts and in Congress. And Schapiro recently lost a high-profile fight to regulate money market funds, which were a key part of the highly vulnerable shadow banking system.

Most significantly, the SEC has no high-profile court wins against key players in the financial crisis. The SEC charged Goldman Sachs in 2010 with defrauding its customers in the mortgage-backed securities market, the centerpiece of the crisis. But it later settled with the company, not forcing Goldman to admit or deny wrongdoing. In fact, settling with corporations without forcing them to admit wrongdoing is policy at the SEC, under former Deutsche Bank executive turned SEC Chief of Enforcement Robert Khuzami. This policy is so ingrained that when Judge Jed Rakoff invalidated a settlement between the SEC and Citigroup on selling toxic mortgage bonds and ordered a trial, Khuzami fought bitterly to have the judge overruled. Fortunately, this is something Barack Obama can fix in his second term. The banking system is now stable enough to withstand legal challenges, and there’s a clear opening to change directions at the SEC. But what does the next SEC chair need to do to restore credibility to the agency?

Barofsky is uniquely positioned to comment on this, as a Democrat in public office who became one of the Treasury’s most high-profile critics, who received significant support from Democratic and Republican critics of the bailouts. He was a staunch ally of Elizabeth Warren, but conservative bank analyst Chris Whalen also says Barofsky would be “an excellent choice” for SEC chair, and says he was one of the “few advocates for the public” during the bailouts. Liberal economist Jane D’Arista calls him “the obvious first pick” for the job. Barofsky has a background in prosecuting complex financial frauds, having done so as an assistant U.S. attorney in the Southern District of New York. He also has a clear policy profile as a foil for Tim Geithner during the bailouts, when he ran the Special Inspector General Office for the Troubled Asset Relief Program (or SIGTARP).

A big change he’d make is in the enforcement area. He says it’s time to reexamine the policy of settling with corporations without forcing them to admit wrongdoing. He’d fight hard for more transparency within large financial institutions, and for reform of the money markets. Barofsky also believes that the next SEC chairman could make the Financial Stability Oversight Council, a council of regulators established by Dodd-Frank with the power to break up the banks, a real forum for action....

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