S.E.C. Chairwoman Needs to Bust Out the Great Books

That's Mary L. Schapiro. She's the chairwoman of the Securities and Exchange Commission and this article is astounding. In it she defends the S.E.C.'s practice of slapping Wall Street firms on the wrist and absolving them of wrongdoing.

The chairwoman of the Securities and Exchange Commission defended the agency’s record of settling fraud cases with Wall Street companies, saying on Wednesday that she believed the agency’s practices “clearly have deterrent value,” even though firms were often charged repeatedly for violating the same securities laws.

Mary L. Schapiro, the S.E.C. chairwoman, added that repeat offenders remained a problem because “people have short memories” on Wall Street. That forces the commission to bring many of the same types of cases “so that people don’t forget that they have these obligations and that somebody is watching and somebody is willing to hold them accountable.”

"Clearly have deterrent value" for whom?

According to a New York Times analysis of enforcement cases, nearly all of the biggest Wall Street firms have settled fraud cases by promising never to violate a law that they had already promised not to break, usually multiple times. In addition, the Times analysis showed, those settlements also repeatedly granted exemptions to the biggest Wall Street firms from punishments intended by Congress and regulators to act as a deterrent to multiple fraud violations.

Matt Taibbi has a couple blog posts about federal Judge Jed Rakoff putting the kibosh on a fraud settlement the S.E.C. was making with Citigroup.

Here, Citi similarly told investors a package of mortgages had been chosen independently, when in fact Citi itself had chosen the stuff and was betting against the whole pile.

Judge Rakoff balked at the settlement and particularly balked at the SEC’s decision to allow Citi off without any admission of wrongdoing. He also mocked the SEC’s decision to describe the crime as “negligence” instead of intentional fraud, taking the entirely rational position that there’s no way a bank making $160 million ripping off its customers can conceivably be described as an accident.

If you take Citi’s $160 million profit on the deal into consideration, what we’re talking about then is a $125 million fine for causing $700 million in damages. That, and no admission of wrongdoing.

Just imagine a mugger who steals $70 from some lady’s wallet being sentenced to walk free after paying back twelve bucks.

Going back to the S.E.C.'s excuses:

Ms. Schapiro said that she believed recidivism among Wall Street firms was so common “in part because these firms are enormous.”

Isn't there some pithy phrase about doing the same thing and expecting different results? Why are my taxes still paying this woman's salary? There's this wonderful American intellectual tradition called pragmatic liberalism. The foundations were laid by Charles Peirce, William James, and John Dewey. Former UW prof Charles W. Anderson is a proponent. Here's how Anderson introduced the concept to the class of his that I was in: If something doesn't work, do something different.

If slapping these enormous firms on the wrist doesn't deter illegal behavior, then try something different. Maybe if the consequences of repeatedly committing the same offense over and over after saying that they'd never do it again were enormous, then something might stick in the institutional memories of these big firms. Perhaps multi-billion dollar fines and/or hauling C.E.O.s out of their offices in handcuffs before TV cameras might help jog their collective memories.