When the UK Government sat down to ponder the performance of its regulator, the Financial Services Authority (FSA), which had conspicuously failed to prevent key UK banks from blowing their feet off through idiotic acquisitions and foolish trading, it decided that the FSA was not fit for purpose and that the simplest approach to reforming regulation in the UK would be to scrap the FSA and hand its duties back to the former regulator, the Bank of England.
In this account we will pass lightly by the fact that the previous government had been instrumental in plunging Lloyds bank into crisis by seducing it into a truly mind-bogglingly stupid merger with Halifax Bank of Scotland, which ended up with both merged entities having to be nationalized. It did not require the wisdom of hindsight to see that BoS had got itself into vast amounts of debt, much of which was hidden from sight, and that any acquisition of such a poisoned chalice would destroy the acquirer. Many in the media, including my colleague and fellow blogger Ian Fraser, who has written cogently and frequently on this theme from its beginnings, saw perfectly well that a merger with BoS would bury Lloyds in far more debt that it could dig its way out of unaided. And so it proved. Anyway, governments can get away with that sort of thing, regulators certainly can’t. Except in the States, it seems.
Across the pond
Many in Congress wanted to scrap the Securities and Exchange Commission after its horrendous failings through the crash of 2008. Then the most highly-publicized of these failings was probably the way the SEC ignored persistent warnings that Ponzi scheme king Bernie Madoff was a crook on a grand scale. However, one could just as well point to a thousand other failings, all adding up to the SEC sitting on its hands while America burned.
In the end, after considerable huffing, Congress decided to reform rather than scrap the SEC. President Obama appointed Mary Shapiro to head up the reform process and consultants were duly called in to examine and report. I’ve already commented on the uselessness of that classic “cover-your-rear” exercise. Umpteen change management workstreams of the “steadily progressing in a positive direction” variety may fool some of the people some of the time, but they will not shift an inertia-bound behemoth like the SEC.
Which leaves Shapiro with a problem. Many inside and outside Congess are starting to notice that the SEC appears to be plugging on much as before. Pens and knives are being sharpened.
Shapiro has a reputation as a hard-headed manager who can get things done. She proved this by coming away from a hearing before a House subcommittee which had been minded to cut the SEC’s budget having won an increase in that budget. However, that reputation will not survive long if she fails to make far-reaching changes at the SEC. Writing in the Washington Post, David Hilzenrath summed it up by saying that Shapiro’s efforts so far “offer a Washington lesson”. The lesson is this:
“Even when epic crises create a sense of urgency, it is tough to tighten the reins on powerful industries. Dramatic results can prove elusive.”
What began the murmurings against Shapiro was a spate of settlements by the SEC on her watch which seemed to let alleged “corporate wrongdoers” off extremely lightly. That does not look from any perspective like a successful reinvigorating of the behemoth. If the regulator can’t spread fear in the hearts of miscreants, what is it for? Why is it being so lenient? The answer, Hilzenrath suggests, is that it remains “too close to the world it oversees.” His judgement?
“The SEC remains overstretched, short of expertise and at a technological disadvantage. Though Shapiro has fought for funding to narrow the gap, glaring administrative blunders have weakened her hand and undermined the agency’s moral authority, lawmakers say.”
Can Shapiro survive this kind of scrutiny? Very probably. Her reputation will vanish but her tenure at the SEC will probably outlive that loss. At bottom, it is likely that very few “lawmakers” ever thought the SEC would spring forth revitalized and fit for purpose. Everyone is so used to compromising – the Dodd Frank Act itself is one huge exercise in expediency – that muddling along has become the established norm. Against that background, the spectacle of Shapiro wrestling with the inertia of the SEC is merely business as usual, hardly a scandal at all…
Further reading on financial regulation:
- US Financial Regulation: A Hopeless Tangle, or Complexity for a Purpose? by Lawrence J. White
- Review of 2010: Shaking up Regulation by Ian Fraser and Tony Harrington (blog)
- It was not lack of regulation, but lack of ethics, that killed The Street by Ian Fraser (blog)
Tags: Bernie Madoff , David Hilzenrath , Dodd Frank , Dodd-Frank Act , financial regulation , financial sector reform , Financial Services Authority (FSA) , Halifax Bank of Scotland , HBOS , Ian Fraser , Lloyds Banking Group , Madoff , Mary Shapiro , Ponzi scheme , regulation , SEC , Securities and Exchange Commission , UK , UK banks , US Congress , Washington Post