Mary Schapiro, Obama's choice to head SEC
The two issues everyone is talking about this week are (1) financial market regulation and what President-elect intends to do about it, and (2) editorials from the Washington Post and the New York Times opposing Obama’s intention to nominate Mary Schapiro as next Chairman of the Securities and Exchange Commission. There is a third related issue that no one is talking about: Barak Obama’s reliance on economists and shunning of finance/accounting types for advice.
This matters a great deal. Our system of financial markets can be likened to a fragile china shop chock full with expensive dishes and figurines displayed in the most unpredictable manner. A blind person wandering about is sure to bump a display and cause a dish or figurine to crash to the floor, irreparably broken and lost for eternity. President-elect Barak Obama is that blind person. He lacks any formal education in business or the economy or even in regulatory law. Nor does he have experience Thus he does not have the world view needed to govern the U.S. world of business. Consequently, there are a lot of highly educated people who are extremely fearful for the china shop.
My own take is that we’re heading for a disaster of unimaginable magnitude. This is how I get to that conclusion.
Is president-elect Barak Obama a bull in a china shop?
Fast forward to weekly event #1, a House Financial Services Committee hearing devoted to exploring what is wrong with the SEC and what should be done about it. At the current time, there is simply angry gnashing of teeth and politico posturing. Two comments from a Bloomberg News article bear repeating.
Whether the agency should be beefed up or dismantled will be a likely topic at meetings this year about the SEC’s future. “It would be a big mistake for the hearing to start focusing on throwing more money at the SEC, until the question has been answered about whether the agency is using the resources that it has adequately,” said Jacob Frenkel, a former SEC attorney now at Shulman Rogers Gandal Pordy & Ecker in Rockville, Maryland.
“The SEC will have to defend its existence,” said Donald Langevoort, a former agency attorney who teaches securities law at Georgetown University in Washington. The meeting is “a way of sending a message to the SEC of Congress’s anger and dismay that this happened, especially given all the things that have happened in the last six to eight months,” such as the collapse of investment bank Lehman Brothers Holdings Inc., he said.
Personally, I believe we are less in need of reform of the SEC, and more in need of a good SEC chairman. There are many, especially Ed Ketz of Penn State, who call Christoher Cox the worst chair in the history of the SEC. Having read his and other arguments, I wholeheartedly agree.
Obama, of the “I don’t know nothing, but I’m going to make the right changes,” seems to prefer changing the commission, and not changing the type of person heading the commission. What is this change likely to be? First of all, the House Financial Services Committee, like all committees, will be ineffective in coming up with its own plan, and will simply rubberstamp what Obama passes its way. Second of all, there are some preliminary signals, as reported on by Jim Hamilton’s World of Securities Regulation. There are three posts I wish to call atention to:
- President-Elect Obama Details Key Principles to Guide Federal Financial Regulation Reform – a key point mentioned is the need for one agency that integrates the functions of several existing agencies. A second key is to intervene before a problem (good luck with this one, it takes guts and politicians/regulators lack guts or else they’d never get elected/apointed.
- Obama Choice of Schapiro for SEC Chair Should Facilitate SEC-CFTC Merger – this seems to be what Obama has in mind with a one agency approach. The CFTC is the Commodities Futures Trade Commission, and is not nearly as high profile as the SEC. Obama/Schapiro believe that an agency merger will give the survivor sufficient clout to prevail in international negotiations for forming a global regulatory framework.
- Historic Securities Regulation Reform Coming in 2009; But Will it be Globally Integrated – relying on global allies is Obama’s answer for everything, terrorism, defense, and now securities regulation. His answer is driven primarily by the need to free up funds for domestic purposes. The wars in Iraq and Afghanistan are too expensive. Solution? Turn them over ot our allies, and save precious U.S. dollars.
I’ve been arguing for three months that Obama’s globalization push will have unintended consequences in the financial markets ares. The most significant problem will be in the adoption of IFRS and the ditching of U.S. GAAP. This will cause U.S. executives to run wild with repect to earnings manipulation. In effect, it will grant governmental permission to smooth income. Eventually this will cause a $five trillion charge to the economy. Secondly, there is no world-wide market system. There are many national markets that suffer the same ups and downs. However, there is no unified market, and there never will be as long as we have different countries and different cultures. Why, even Christopher Cox recognized this. Here are his comments from Monday, November 18, 2008:
“But it is unrealistic to think we could or should make [international securities regulation] identical, because of differences in national laws, economic conditions, and objectives. These differences are healthy and normal. It is entirely reasonable for a nation to view its responsibility to its own citizens and markets as paramount. The Securities and Exchange Commission is responsible for the protection of American investors, and it will never compromise that mission. Nor should any other national regulator. One of the reasons for the remarkable success of IOSCO is that it understands this very well.
“There is yet another reason that global consultative bodies should not aspire to become global regulators. As we have learned to our misfortune time and again, international agencies often are forced to regulate to the lowest common denominator. Of necessity, they must yield to the average rather than the highest standards of their members in order to achieve consensus. Worse, the tensions that every national regulator is bound to reconcile – of factions and stakeholders, not to mention of parliaments, legislatures, and executive authorities – are multiplied a hundredfold in international bodies. These are concerns that should be considered seriously before assigning the function of global systemic risk “czar” or any similar responsibility to an international body
So, Obama’s solution will essentially be to keep the economist foxes in charge of the henhouse. The difficulty with economists such as Paul Volcker and Austan Goolsbee is that they think in terms of mathematical theories and have no awareness of the nuts and bolts of the real world. To them, details are trivial and will work themselves out. A finance/accounting type, however, realizes that a devil lives in the details, and it is there job to root out the devil. The economist solution to the SEC problem is to put an economist in charge. Fast forward to criticism, the pace of which is quickening this week. I’ll cite three opponents to Obama’s choice to head the SEC, one Mary Schapiro.
- Dan Solin, Huffington Post - Mary Schapiro Should Not Be Confirmed as SEC Chief, and Mary Schapiro Will Protect Investors the Same Way Willie Sutton Protected Banks. He argues that she has ties to industry groups (not investors), her FINRA experience has been unimpressive (and even missed the Madoff scandal), and her desire to move to arbitration boards instead of judicial prosecution of securities violations will only lead to a disaster where investors are the last group protected.
- Steven Pearlstein, Washington Post – Obama’s SEC Pick Is No Joe Kennedy. He says, “For the top SEC job, Obama needed to mount a determined search outside the current establishment — someone willing to take no prisoners and question everything about the way the industry does business and the way the government regulates it, someone so capable of channeling the outrage the country now feels that he or she would have industry insiders quaking in their hand-made wingtips. Instead, what we got was someone who not only has been at the very center of a failed regulatory process for the past two decades, but has emerged from it well-liked and acceptable to everyone.” And finally, to the point, “The problem is that there is nothing in her record to suggest that she is likely to clean house at the agency and launch a brutal and sustained assault on Wall Street culture.“.
- Editorial, New York Times – Starting the Regulatory Work. The problem is clearly laid out, “The outlines of the challenge are clear. The decades-old ways in which the Treasury and other federal regulators have relied less on rules and enforcement and more on faith in market discipline to limit risk to the system have been a manifest failure. Anything less than a new rules-based regime would be inadequate to the task of restoring confidence and, eventually, reviving the economy.”. Schipiro will add to the problem, “Mary Schapiro, … is best known for her support of self-regulation and a greater role for principles-based regulation basically, the opposite of clear rules.”
My own criticism with the Schapiro nod for SEC chair really is an integration of there factors: (1) SEC reform push is led by economists with a disdain for accountants and accounting standards, Obama and Schapiro will follow their lead, (2) a reliance on globalism, and (3) reliance on principles. All of this leads inevitably to the adoption of IFRS as the accounting standard of the land. It will be a perfect storm, and a disaster of unimaginable magnitude.
Over and out – - David Albrecht
President-elect Barak Obama is that blind person. He lacks any formal education in business or the economy or even in regulatory law. Nor does he have experience Thus he does not have the world view needed to govern the U.S. world of business. Consequently, there are a lot of highly educated people who are extremely fearful for the china shop.
For which president could you write the above to say?:
President-elect XXX is that experienced person. He has the formal education in business, the economy and even in regulatory law. He has all the right experience Thus he has the world view needed to govern the U.S. world of business. Consequently, there are a lot of highly educated people who are extremely comfortable with him in the china shop.
Let’s just take the previous president, George W. Bush. He certainly is much more knowledgeable about the world of business. He has an awareness of accounting and its use in business. Moreover, he’s familiar with typical scenarios in which biz execs feel hamstrung by the rules. It is not that I dispute that he has a world view, it is that I dispute his choice. He’s pro business and is doing what he can to gut accounting rules that have hamstrung execs for years.
Immediately following 9/11, George W. Bush supported Sarbanes Oxley. by 2004, he regretted it because of the significant costs it imposed on businesses, as well as a loss of flexibility. It has been said that he’s been trying to make it up to business ever since. Dispensing witih GAAP is one major way he can square the ledger with business.
Clinton had his own issues, but one thing is for certain–the excesses and scandals of the dot.com boom/bust can be laid partly at his feet. Clinton is the epitome of a “if it feels good, do it,” mover and shaker. Never one to be tied in by morals, ethics or even laws, he helped set the national tone that contributed to so many dirty corporate deeds.
Will Obama be another Bush? No. He does not have a passion to protect business (but then he has no passion to protect investors). Will Obama be another Clinton? No. Presidents as morally bankrupt as Clinton don’t come along very often. But, Obama will create his own special set of issues. He has no personal frame of reference, so he must rely on others. He doesn’t appear to have the skills to evaluate what they say in business issues. I hope I’m wrong.
David, great job on the blog. I linked into the RSS feed so will be checking in on a regular basis. Right now I agree that this country needs some savvy, tough minded CPAs that know what their doing. I call it the “dutch uncle” talk. In other words, sit down and listen to what I say and this is what we are going to do.
I agree that we are in for some interesting times on IFRS, the SEC, and taxes. I lived through the SOX transition, still living it, and wrote a book on it. A transition to IFRS will not be an easy journey.
Keep up the good work!
Rachelle Younglai of Reuters reports that failure to catch Madoff was partly FINRA’s (as in Schapiro) fault. This will give Schapiro difficulty in confirmation process.
http://www.reuters.com/article/vcCandidateFeed2/idUSTRE50A1SP20090111
I do agree with you for most of the time, but about barack being a cow who knows nothing about economics, I dont because thats why he is relying on economists
Thanks for reading my blog. I’m flattered that you agree with me most of the time. Perhaps I have things figured out, after all.
Obama’s reliance on economists to the exclusion of accounting and finance types is going to be a really bad thing for the economy. The problem with this, as it relates to the topics I blog about, is that economists have great disdain for accounting and finance. To them, accounting rules simply don’t matter because investors value firms intrinsically, seeing past the numbers. In other words, the market is perfectly efficient and stock values are completely unaffected by the form/structure and composition of accounting rules. Enough research has been done by accounting and finance academics to debunk the notion that markets are efficient and investors can see through the reported numbers. Actually, investors can’t, that’s why executives go to such length to jimmy the numbers. Obama’s ignorance (and that of his economic advisors) is really going to hurt on this. Bush pushed for IFRS, desiring to create a pro-business legacy. Obama’s advisors take the view that IFRS is not pro business, if only the executives would be always honest and ethical. They don’t know enough to realize that business ethics is an oxymoron and does not exist in the real world.
Obama is relying on economists that believe we already have an integrated international financial market. No one who has actually worked in the real world believes it, because they know from experience that every country has a unique culture, system of law, and economic history that forces them to relate differently to similar events.
It is difficult telling someone who has never been there but never the less knows it all that they are being incredibly stupid. We are about to embark on eight years of stupid. Unfortunately.
Obama campaigned on change. Unfortunately, most people don’t realize that there are bad changes as well as good changes. Everything Obama is going to do in the area of securities market regulation and accounting standard determination is a bad change, unfortunately. If only Obama wasn’t so enamored with economists. However, he doesn’t know enough not to be.
We needed a really solid person to be named chair of the SEC. Unfortunately, we got a wimp.