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.
The SEC Is Out To Lunch
August 27, 2009
Back on January 5, I wrote a piece entitled: “Clean-Up Time On Wall Street” in which I pondered whether our new President-elect and his administration would really “crack down on the unregulated activities on Wall Street that helped bring about the current economic crisis”. I quoted from a December 15 article by Stephen Labaton of The New York Times, examining the failures of the Securities and Exchange Commission as well as the environment at the SEC that facilitated such breakdowns. Some of the highlights from the Times piece included these points:
I then questioned the wisdom of Barack Obama’s appointment of Mary Schapiro as the new Chair of the Securities and Exchange Commission, quoting from an article by Randall Smith and Kara Scannell of The Wall Street Journal concerning Schapiro’s track record as chair of the Financial Industry Regulatory Authority (FINRA):
I also quoted from a two-part op-ed piece for the January 3 New York Times, written by Michael Lewis, author of Liar’s Poker, and David Einhorn. Here’s what they had to say about the SEC:
Keeping all of this in mind, let’s have a look at the current lawsuit brought by the SEC against Bank of America, pending before Judge Jed S. Rakoff of The United States District Court for the Southern District of New York. The matter was succinctly described by Louise Story of The New York Times:
To make a long story short, Bank of America agreed to settle the case for a mere $33 million, despite its insistence that it properly disclosed to its shareholders, the bonuses it authorized for Merrill Lynch & Co employees. The mis-handling of this case by the SEC was best described by Rolfe Winkler of Reuters. The moral outrage over this entire matter was best expressed by Karl Denninger of The Market Ticker. Denninger’s bottom line was this:
On a similarly disappointing note, there is the not-so-small matter of: “Where did all the TARP money go?” You may have read about Elizabeth Warren and you may have seen her on television, discussing her role as chair of the Congressional Oversight Panel, tasked with scrutinizing the TARP bank bailouts. Neil Barofsky was appointed Special Investigator General of TARP (SIGTARP). Why did all of this become necessary? Let’s take another look back to last January. At that time, a number of Democratic Senators, including: Russ Feingold (Wisconsin), Jeanne Shaheen (New Hampshire), Evan Bayh (Indiana) and Maria Cantwell (Washington) voted to oppose the immediate distribution of the second $350 billion in TARP funds. The vote actually concerned a “resolution of disapproval” to block distribution of the TARP money, so that those voting in favor of the resolution were actually voting against releasing the funds. Barack Obama had threatened to veto this resolution if it passed. The resolution was defeated with 52 votes (contrasted with 42 votes in favor of it). At that time, Obama was engaged in a game of “trust me”, assuring those in doubt that the second $350 billion would not be squandered in the same undocumented manner as the first $350 billion. As Jeremy Pelofsky reported for Reuters on January 15:
Although it was a nice-sounding pledge, the new President never lived up to it. Worse yet, we now have to rely on Congress, to insist on getting to the bottom of where all the money went. Although Elizabeth Warren was able to pressure “Turbo” Tim Geithner into providing some measure of disclosure, there are still lots of questions that remain unanswered. I’m sure many people, including Turbo Tim, are uncomfortable with the fact that Neil Barofsky is doing “too good” of a job as SIGTARP. This is probably why Congress has now thrown a “human monkey wrench” into the works, with its addition of former SEC commissioner Paul Atkins to the Congressional Oversight Panel. Expressing his disgust over this development, David Reilly wrote a piece for Bloomberg News, entitled: “Wall Street Fox Beds Down in Taxpayer Henhouse”. He discussed the cynical appointment of Atkins with this explanation:
Regulated by whom?