Regulatory Theater at the S.E.C.

November 7th, 2013  |  Published in Political Economy, Politics

Lately the Securities and Exchange Commission has been in the news for its newly aggressive enforcement stance. Most prominently, JP Morgan is reportedly settling for $13 billion to end investigations of its mortage-bond sales.

Discussion has tended to center on the particular details of this and other enforcement actions. Was it enough money? Will they admit wrongdoing? Will it be enough dissuade future transgressions? But the profile of S.E.C. chair Mary Jo White, by Nicholas Lemann in the current New Yorker, suggests that flashy enforcement actions may be a distraction from a different problem.

White is a career litigator, who has worked as the U.S. Attorney for the Southern District of New York (which includes Manhattan), as well as in private practice for some of the same Wall Street firms she faced off against in her government capacity. This led many to criticize her appointment for its apparent conflicts of interest.

This is certainly a problem. The response, presented in Lemann’s article, is that lawyers like White are part of a “Killer Elite”, too proud and arrogant to be open to corruption by private interests. This is self-serving to say the least. But even if true, Lemann suggests a bigger problem with appointing an enforcement minded litigator like White—a “cop on the beat”, as President Obama said when he nominated her.

The problem is that “the S.E.C. doesn’t just enforce rules that have been broken. It also writes rules to govern future activity.” This rule-writing process has gone into overdrive with the passage of the Dodd-Frank law, and it is an enormously complicated undertaking. Three years after Dodd-Frank’s passage, much of it hasn’t been implemented because the S.E.C. and other agencies haven’t finalized the rules. The issues involved in just one aspect of the law, the Volcker Rule, are so complex that the “Occupy the SEC” group produced a 325 page comment letter about it.

Mary Jo White’s predecessor, Mary Schapiro, was by Lemann’s account more of a regulator than an enforcer, while White is the opposite. The danger, therefore, is that even as the agency starts taking more high profile wins with headline-grabbing prosecutions, the important rulemaking side of the agency’s mission will fall into neglect or be captured by industry lobbyists. “It’s entirely possible”, writes Lemann, “for the government to become a tougher prosecutor and a more lax regulator at the same time.” And he suggests that’s more or less what White and Obama want.

But strict enforcement of the law is of little efficacy if all the truly dangerous behavior has been rendered legal. An overemphasis on enforcement also fosters a “bad apples” theory that blames financial instability on individual bad actors rather than systemically corrupt institutions. How else to explain the preoccupation with pursuing irrelevant bagmen like Wing Chau and Fabulous Fab Tourre?

Bruce Schneier coined the term “security theater” to describe practices that give the flamboyant appearance of protection against terrorism while doing little or nothing to address real threats. Think of the ritual inconveniences of the airport security line—when as we now know, the people most in danger may be the TSA employees, one of whom was gunned down at Los Angeles airport by a right-wing militant.

The shift in emphasis at the S.E.C. suggests a kind of regulatory theater (a phrase I’m not the first to think of), which produces satisfying headlines of bankers laid low, while failing to write rules that address the real failures of of regulation and oversight in the financial system. The danger is that even some liberals will be bought off by a seemingly populist gesture, even as the emphasis on individual wrongdoers deepens the carceral turn in liberalism while failing to address the inherent contradictions of capitalist finance.

And just as the failure to prevent terrorism merely becomes the pretext for further elaborations of the anti-terrorism bureaucracy, so the lack of sound financial regulation can be a pretext for more of the punitive enforcement actions that White seems to relish. While reassuring the industry that she wants to avoid imposing “unnecessary burdens or competitive harm”, she remarks to Lemann at the article’s close that with regard to systemic risks in the financial system, she sees “any potential risks as a problem that needs to be solved”.

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