May 07, 2009
"The SEC is beyond spoiled. It's rancid."
Posted by Gordon Smith

David Weidner is not at all happy with Mary Shapiro, new Chair of the SEC, and he is trying to rekindle the fire of reform:

From systemic risk to Bernie Madoff, the failure of the SEC is now an accepted truth on Wall Street. The commission not only whiffed on its duty to protect investors, it allowed the speculation-addicted culture of Wall Street to put the nation and its taxpayers at risk.

The SEC's failings were made so plain that almost everyone -- including its former chairman, Christopher Cox, and his successor, Mary Schapiro -- seemed resigned to radical reforms that would either eliminate the SEC, or more likely, make it an arm of a stronger institution such as the Federal Reserve or Treasury Department.

But now that the worst of the crisis appears to have passed, Americans are feeling less angry and more optimistic about their investments. Barring another collapse that sends banks tumbling, unemployment skyrocketing and 401(k) values even lower, the window for reform is closing fast.

As a result, the drumbeat for change at the SEC is growing fainter. The House Financial Services Committee is more occupied with credit card rates, Internet gambling and executive compensation than with remaking Wall Street's rules. Once promised radical structural changes, we are instead getting the kind of reform normally enacted by career bureaucrats such as Ms. Schapiro: None.

Weidner's right about the SEC's failings and the perceived inevitability of reform a few months ago, but he is wrong in asserting that the window for reform is closing. Even if he were right about that, he fingers the wrong culprit. It's silly to blame the failure to pursue the radical reforms that Weidner was expecting -- eliminating the SEC or making it an arm of a stronger institution -- on Mary Shapiro. Why would she campaign to eliminate her own agency? If anyone were to blame here, it would be Congress, which was making all sorts of noises last fall about the need for a revamped financial services regulator. But Weidner knows that this story is far from over. He simply doesn't want us to lose sight of the idea that substantial reforms of the SEC are in order.

Reform is coming, but Congress is right to hold off for a while. For the first two months of the Obama Administration, capital markets were tumbling, in no small part because of the profound uncertainty surrounding Treasury Secretary Timothy Geithner's next moves. Then, on March 10, the markets seemed to turn. (On that day, I wrote, "it's time to get bullish again," and since that day the DJIA has risen almost 25%.) Reforms of the sort that Weidner is imagining would be intensely destabilizing right now, and Congress should wait until the market has recovered its footing. I suspect we will see some action on this front in the fall of this year, after we have a clearer sense of where the automobile industry and banking are headed.

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