Why The SEC Hasn’t Moved Against Financial Institutions

The Article: In defense of the SEC– no, really by Finance Addict.

The Text: “’We do not admit the allegations,’ Karp said, to laughter in the standing-room-only courtroom. ‘But if it’s any consolation, we don’t deny them.’”

Some consolation. This statement was made last week by a lawyer that Citigroup hired to defend itself against SEC allegations of fraud. The SEC maintains that Citi stuffed a CDO with mortgages that it knew would go bad, sold the CDO to investors without revealing the extent of its role and then set up a $500 million trade for itself that would pay off once the expected losses occurred. The CDO investors eventually lost $700 million. But rather than taking Citi to trial, the SEC would prefer to settle the case for $285 million and assurances that Citi won’t do it again.

The SEC is being forced by New York federal judge Jed Rakoff to defend this approach. While judges typically rubberstamp these settlements, Rakoff has a reputation for putting the SEC on the hot seat. His pointed questions highlight the abysmal job that the SEC has done in holding serial offenders to account. Why doesn’t the SEC ever go to trial to get to the bottom of its claims? How can justice be done if the offenders never admit wrongdoing? According to BusinessWeek:

Rakoff also asked why he should endorse a provision barring Citigroup from violating securities laws in the future, when the SEC hasn’t filed civil contempt proceedings against a major financial institution, including Citigroup, for violating such a provision in at least 10 years.

The SEC answer boils down to: we don’t have the resources to fully investigate and build a case against these fraudsters. Pathetic, right?

Well, as maddening as that is, it is true that the SEC seems to be run on peanuts. It budget was a paltry $1.2 billion this year. And even though it’s got tons of new responsibilities under Dodd-Frank, its budget will remain flat next year: a request to increase it by a paltry $223 million was turned down by the Senate Appropriations Committee. As the New York Times points out,

“By way of comparison, in 2009 Citigroup and JPMorgan Chase, two institutions the S.E.C. regulates, spent $4.6 billion each — four times the S.E.C.’s entire annual budget — on information technology alone.”

There seems to be a vicious cycle at play here. The SEC has powerful enemies in Republicans like Spencer Bachus, Darrell Issa and Chuck Grassley. They kneecap the agency by witholding the funds needed to get to the bottom of suspected frauds and other violations. And then they use the agency’s failure to catch crimes in action–Bernie Madoff being a case in point–to argue that the SEC is a useless organization that doesn’t deserve funding.

To be sure, the SEC gives its enemies plenty of help along the way. Its accounting systems seem to consist of nothing more than a few Excel spreadsheets, giving rise to serious questions about its own financial credibility. It was certainly not helped by last year’s revelations that dozens of senior staffers were watching porn on company time while the financial markets melted down. And I think it’s likely that, as stretched as it is, it certainly could go a lot further than doling out slaps on the wrist and fines that the big banks have come to see as nothing more than the cost of doing business. But if money is the ultimate measure of worth then we need to put our cynic hats on and start questioning why it is that the SEC isn’t getting any. My guess–it’s no accident.


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