February 5, 2009
It all started with Bill Richardson. On January 4, New Mexico Governor Bill Richardson announced that he was withdrawing as nominee for the position of Commerce Secretary, due to an investigation into allegations of influence peddling.
Then there was a brief moment of concern over the fact that Treasury Secretary nominee, Timothy Geithner, was a little late with some self-employment tax payments. Since his new position would put him in charge of the Internal Revenue Service, many people found this shocking. Even more shocking was his admission that he prepared his income taxes using the TurboTax software program. That entire controversy was overlooked because Geithner has been regarded as the only person in Washington who fully understands the TARP bailout bill (as Newsweek‘s Jonathan Alter once said).
On February 3, two more Obama appointees had to step aside. The first was Nancy Killefer, who had been selected to become “Chief Performance Officer”, in which role she would have been tasked with cleaning up waste in government programs. Her situation didn’t sound all that scandalous. The Wall Street Journal explained that she “… had a $946.69 tax lien imposed on her home by the District of Columbia for unpaid taxes on household help, a debt she had satisfied long ago.” Later that day, Tom Daschle had to withdraw his nomination to become Secretary of Health and Human Services. It seemed that his failure to timely pay over $100,000 in taxes was just part of the problem. As the previously-mentioned Wall Street Journal article pointed out, the Daschle nomination provided additional embarrassment for President Obama:
Beyond the tax issue, Mr. Daschle was increasingly being portrayed as a Washington insider who made a fortune by trading on his Beltway connections — an example of the kind of culture Mr. Obama had pledged to change.
Meanwhile, many Democrats were expressing dismay over the February 2 announcement that Republican Senator Judd Gregg had been tapped to become Commerce Secretary. Back in 1995, as United States Senator representing New Hampshire, he voted in favor of a budget measure that would have abolished the Commerce Department. To many, this seemed too much like the George W. Bush tactic of putting a saboteur in charge of an administrative agency. Nevertheless, Senator Gregg was ready to address those concerns. As Liz Sidoti reported for the Associated Press:
In a conference call with reporters, Gregg dismissed questions about the vote.
“I say those were my wild and crazy days,” he said. “My record on supporting Commerce far exceeds any one vote that was cast early on in the context of an overall budget.”
Gregg said he’s strongly supported the agency, particularly its scientific initiatives, including at the agency’s largest department, the National Oceanic and Atmospheric Administration.
Finally, on Wednesday February 5, those who concurred with President Obama’s appointment of Mary Schapiro as Chair of the Securities and Exchange Commission (SEC) had good reason to feel anxious. That day brought us the long-awaited testimony of independent financial fraud investigator, Harry Markopolos, before the House Financial Services Committee. Back in May of 2000, Mr. Markopolos tried to alert the SEC to the fact that Bernie Madoff’s hedge fund was a multi-billion-dollar Ponzi scheme. As Markopolos explained in his testimony, he repeatedly attempted to get the SEC to investigate this scam, only to be rebuffed on every occasion. Although his testimony included some good advice directed to Ms. Schapiro about “cleaning up” the SEC, this portion of his testimony, as discussed by Marcy Gordon of the Associated Press, deserves some serious attention:
While the SEC is incompetent, the securities industry’s self-policing organization, the Financial Industry Regulatory Authority, is “very corrupt,” Markopolos charged. That organization was headed until December by Schapiro, who has said Madoff carried out the scheme through his investment business and FINRA was empowered to inspect only the brokerage operation.
So Schapiro’s defense is that FINRA was empowered to inspect only brokerages and Madoff Investments was not a brokerage. This doesn’t address Markopolos’ testimony that FINRA is “very corrupt”. Mary Schapiro was the Chair and CEO of that “very corrupt” entity from 2006 until December of 2008. Let’s not forget that during her tenure in that position she appointed Bernie Madoff’s son, Mark Madoff, to the board of the National Adjudicatory Council. The Mark Madoff appointment was discussed back on December 18 by Randall Smith and Kara Scannell, in The Wall Street Journal. At that time, they provided an informative analysis of the SEC nominee’s track record, which should have discouraged the new President from appointing her as he did on his second day in office:
She was credited with beefing up enforcement while at the National Association of Securities Dealers and guiding the creation of the Financial Industry Regulatory Authority, which she now leads. But some in the industry questioned whether she would be strong enough to get the SEC back on track.
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Robert Banks, a director of the Public Investors Arbitration Bar Association, an industry group for plaintiff lawyers . . . said that under Ms. Schapiro, “Finra has not put much of a dent in fraud,” and the entire system needs an overhaul. “The government needs to treat regulation seriously, and for the past eight years we have not had real securities regulation in this country,” Mr. Banks said.
Since Ms. Schapiro took over Finra in 2006, the number of enforcement cases has dropped, in part because actions stemming from the tech-bubble collapse ebbed and the markets rebounded from 2002 to 2007. The agency has been on the fringe of the major Wall Street blowups, and opted to focus on more bread-and-butter issues such as fraud aimed at senior citizens.
Out of the gate, Ms. Schapiro faces potential controversy. In 2001 she appointed Mark Madoff, son of disgraced financier Bernard Madoff, to the board of the National Adjudicatory Council, the national committee that reviews initial decisions rendered in Finra disciplinary and membership proceedings. Both sons of Mr. Madoff have denied any involvement in the massive Ponzi scheme their father has been accused of running.
I would be much more comfortable with a small-time tax cheat in charge of the SEC, than I am with Mary Schapiro in that position. As his testimony demonstrates, Harry Markopolos is the person who should be running the SEC.