Sunday, January 04, 2009

Fixing the Financial System

Michael Lewis and David Einhorn have an essay in the New York Times today, "The End of the Financial World as We Know It," which is one of the very best I've found on the current financial mess and how not to repeat it.

Actually we already know one way out of the mess, which is already happening because of the change in administrations: get rid of the appalling head of the SEC, Christopher Cox. In recent days, Cox has actually admitted that one of the centerpieces of his agency's reaction to the financial crisis, its assault on short-sellers, was a crummy idea.

His excuse was, in effect, that he was too weak-kneed and cowardly to put up with pressure from the Treasury and Federal Reserve, which in turn were no doubt knuckling under to pressure from Wall Street. Read all about this disgraceful bureaucrat's mea culpa here.

Indeed, Lewis and Einhorn note that "The task [the SEC] has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse."

The prescriptive part of their piece, broken out separately here, makes several excellent recommendations, among them that the government simply nationalize banks that are otherwise "too big to fail."

Their two final observations are less ambitious:

Close the revolving door between the S.E.C. and Wall Street. At every turn we keep coming back to an enormous barrier to reform: Wall Street’s political influence. Its influence over the S.E.C. is further compromised by its ability to enrich the people who work for it. Realistically, there is only so much that can be done to fix the problem, but one measure is obvious: forbid regulators, for some meaningful amount of time after they have left the S.E.C., from accepting high-paying jobs with Wall Street firms.

[I'd add to that a restriction on jobs with public companies, as they are regulated by an increasingly narcoleptic SEC.]


But keep the door open the other way. If the S.E.C. is to restore its credibility as an investor protection agency, it should have some experienced, respected investors (which is not the same thing as investment bankers) as commissioners. President-elect Barack Obama should nominate at least one with a notable career investing capital, and another with experience uncovering corporate misconduct. As it happens, the most critical job, chief of enforcement, now has a perfect candidate, a civic-minded former investor with firsthand experience of the S.E.C.’s ineptitude: [Bernie Madoff would-be whistleblower] Harry Markopolos.

Sure, but how likely is it that Obama is going to do that? His choice for SEC chairman, FINRA chief Mary Schapiro, was an appalling endorsement of the status quo. That does not bode well for future SEC appointments.

As Susan Antilla pointed out at the time, "Schapiro comes to the job with the mindset that financial industry members should be part of the policing process." Her appearing on the cover of the penny stock-pumping organ "Equities" magazine, which she went out of her way to heartily endorse, indicates to me that she is more part of the problem than the solution.

As the lamentable Schapiro appointment indicates, it appears that Obama has surrounded himself with advisors that makes any significant change in market regulation unlikely. Still, I'd be delighted to be proven wrong.

© 2009 Gary Weiss. All rights reserved.

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