Delamaide: White House to blame for SEC failings
WASHINGTON – In an unusually frank letter earlier this month, Sen. Elizabeth Warren, D-Mass., called out Mary Jo White for her "extremely disappointing" performance as chair of the U.S. Securities and Exchange Commission.
"I am disappointed that you have not been the strong leader that many hoped for — and that you promised to be," Warren said in her letter, citing White's failure to implement key rules mandated by the Dodd-Frank financial reform legislation, among other concerns.
Predictably, the empire struck back, and a bevy of former SEC chairs dashed off a letter to The Wall Street Journal complaining that the criticism from Warren, a former Harvard law professor, "reflects a misunderstanding of how collegial agencies function."
But Warren understands perfectly well how these regulatory agencies function — or, in the case of the SEC under White, don't function.
"Independent" commissions like the SEC are structured so that the party holding the White House has a 3-2 majority among the five commissioners, guaranteeing that administration policy can be followed even in the face of opposition from the other party.
The problem under White is that she has sometimes voted with the two Republican members of the panel, as she did in May when she backed a waiver for Deutsche Bank to keep its eligibility to issue securities with minimal vetting despite a criminal conviction for one of its units as part of the bank's $2.5 billion settlement for manipulating benchmark rates.
Equally bad, as documented in Warren's letter, White's former activity as a corporate lawyer and her husband's continuing work as a defense attorney for many corporations affected by SEC rules have led her to recuse herself from several dozen cases.
This can lead to deadlocks among the remaining four commissioners that block action in the case or result in lower fines.
Warren said she raised her concerns about such conflicts of interest with White in a meeting before voting to confirm her. "You assured me that potential recusals would lead to minimum disruption," Warren said in her letter. "But this does not appear to be the case."
The letter from former SEC chairs in support of White preaches that a "collegial agency" liked the SEC "requires a willingness to accommodate views with which individual commissioners may not always agree" in order to be effective.
Four of the five signatories were Republicans appointed as chairman by Republican presidents — David Ruder by Ronald Reagan; and Harvey Pitt, William Donaldson and Christopher Cox by George W. Bush.
They did not hesitate to water down SEC enforcement and rulemaking in numerous 3-2 decisions reflecting the preference of Republican administrations for deregulation.
After collectively presiding over the descent of the SEC into virtual irrelevance as a financial regulator — this was the agency that missed Bernie Madoff's $50 billion Ponzi scheme despite numerous red flags and a persistent whistleblower — these former chairs would be better off quietly enjoying their retirement rather than pontificating about effective financial regulation.
The fifth signatory, Elisse Walter, was appointed to one of the Democratic slots on the commission by the younger Bush and elevated briefly to the chairmanship until the Obama administration nominated White.
Warren's criticism of White for breaking promises she made during her confirmation hearings — to implement Dodd-Frank rules on executive pay disclosure, curb the use of waivers to allow repeat violators of securities laws to continue doing business, requiring companies to admit to guilt when they settled cases, and the recusal issue — are amply justified by White's record.
But the issue is ultimately not about White or the continued decline of the SEC as a financial regulator.
It is a political issue that depends on what priority effective financial regulation has for an administration. And in the case of President Obama's administration, that has simply not been very high — particularly under his first Treasury secretary, Timothy Geithner.
It was Obama, after all, who appointed White, even though her career as a corporate defense lawyer easily outweighed her time as a criminal prosecutor. His first appointment to SEC chair, Mary Schapiro, came from the industry's "self-regulatory organization," which has an uneven record in its enforcement efforts. (Walter, too, came from that organization, now known as the Financial Industry Regulatory Authority.)
White will finish her tenure at the SEC sooner or later and return to her lucrative corporate practice, not with a tarnished reputation on Wall Street but perhaps with a pat on the back for keeping the SEC at bay.
The Obama administration will have missed the opportunity to appoint a strong regulator at a critical juncture in the industry's reform, as delay and the dilution of restrictions slow the momentum stemming from Dodd-Frank.
Warren's letter was directed at White and her personal accountability for the agency's lack of drive under her leadership.
But the same words could well be applied to Obama and Geithner, whose legacy from their kid-glove handling of wrongdoing by financial institutions to their fainthearted commitment to financial reform has also been "extremely disappointing."