Cohan & Taibbi: Shut Down The SEC And Start Over

SEC Chief Mary Schapiro demonstrates the size of the problem with her agency.
William Cohan and Matt Taibbi are proposing that we scrap the SEC and create a new enforcement agency with new rules, an idea that is long overdue given the overwhelming failure of the financial watchdog to police Wall Street and watch anything other than porn.
Just yesterday the Washington Post reported that despite warnings from Congress, the SEC is STILL shredding documents related to criminal investigations, leaving no paper trail for future discovery.
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Read Cohan's proposal at Bloomberg...
Taibbi's reaction with additional detail...
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Cohan Excerpt
The SEC has long had a too-cozy relationship with Wall Street. Witness Robert Khuzami, the SEC’s director of enforcement, who used to be the general counsel for the Americas at Deutsche Bank in New York, a firm that issued one fatally flawed mortgage-backed security and collateralized-debt obligation after another during the early part of the last decade. (A Senate subcommittee report on the financial crisis devotes 45 pages to Deutsche Bank’s squirrelly securities business and the role it played in fomenting the meltdown.)

Targeting Goldman

Is it any surprise that Khuzami set his sights on Goldman Sachs, rather than on his old company, in trying to create some accountability for the mortgage mess? Deutsche Bank was a bigger player in the mortgage-securitization and CDO markets than Goldman Sachs was, yet it was Goldman that the SEC ended up going after in April 2010 when the agency filed -- to great fanfare -- a politically useful civil suit related to a synthetic CDO that Goldman created and sold in April 2007. (Deutsche Bank did many similar deals.) Goldman Sachs settled the accusations in July 2010 for $550 million, more to make the bad publicity go away than because it did anything different from any other Wall Street firm.
There’s no evidence of impropriety on Khuzami’s part, but it should hardly give investors confidence that someone with such an obvious conflict of interest could bring a suit against a competitor of his old employer. (Schapiro, meanwhile, was previously head of the Financial Industry Regulatory Authority, and was paid almost $9 million when she left to join the SEC.) It goes both ways: For years, top SEC officials have been turning in their regulatory credentials for compensation bonanzas at the very companies they were once charged with overseeing.
A new SEC would pay its top officials much higher salaries (in line with top private-sector attorneys) but not allow any of them to have previously worked on Wall Street or to go there for five years after they leave the agency. It would have genuine law-enforcement power, as opposed to the SEC’s civil-suit-only mandate, and be able to indict a firm and its top executives for wrongdoing. In other words, the agency would have the chops to regulate a powerful industry badly in need of it, free of conflicts of interest.
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Taibbi Excerpt
Cohan’s proposal would do an awful lot to clear out two of the agency’s main problems, the revolving door and its impotence to properly (and speedily) combat criminal wrongdoing. As it is, the SEC can only refer criminal cases to the Department of Justice for prosecution, which a) slows down an already slow enforcement process to an absurd degree and b) is one of the reasons that people like ex-SEC enforcement lawyer Jacob Frenkel can claim with a straight face that the SEC is “not a law enforcement agency.”
Frenkel said this yesterday in an on-air discussion with me and Michael Smallberg of the Project on Government Oversight on the Kojo Nnamdi show in Washington, and to me this symbolizes the attitude among some people in the agency. If even people from the Enforcement Division deny they’re in the "enforcement" business, you know the agency has issues.
As it is, ex-SEC officials don’t have to wait even ten minutes to start whoring for the banks after they quit the SEC. Incidentally, Frenkel had an amusing answer when asked about that yesterday on the Nnamdi show by Washington Post reporter Marc Fisher:

Fisher: In the past five years, there have been more than 400 cases of SEC enforcement employees going right to work for outside companies that had business before the SEC. Jacob Frenkel, is there a problem with that?
Frenkel: Well, federal regulations permit it. 

If “federal regulations permit it” is the best justification for allowing instant-lobbying by former SEC officials, that’s a pretty clear signal that it’s time for the policy to change.
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