Changing of the SEC Guard

Mary Schapiro replaces Christopher Cox at the SEC

Christopher Cox’s resignation took effect on Tuesday.  An interim was appointed.  But the interim will be short serving.  Mary Schapiro was approved unanimously by the U.S. Senate yesterday.  Her term officially begins very soon.

I find her choice and approval to be very interesting.  Some major newspapers came out strongly against her appointment, such as the Wall Street Journal, New York Times and Washington Post.  Nobody came out in favor. According to the critics, it is feared that she will not make a good chair because she prefers principles and not rules for regulating market participants.  She seems to believe that rules create fraud, that market participants will behave better when not forced.  She has a history of desiring arbitration in disputes between investors and corporations, which has not resulted in stiff penalties for corporate wrong-doers or much protection for investors.

The rap on her is that she is neither a strong, independent investor advocate nor a pro-business shill.  Rather, she is a regulatory lifer who prefers to avoid confrontations. She isn’t into making waves. A softer, gentler approach to regulation, if you will.

The people aware enough to comment on her selection generally think that after the most recent period of corporate excess and an artificial boom-bust, the country needs a strong investor advocate who will tip the scales away from corporate executives.

Never-the-less, she has received unanimous confirmation.

I’ve opposed her appointment for several reasons.

First, she is committed to moving to a single set of world-wide accounting standards.  Second, she does not seem to have grasped the notion that corporate executives, as a group, can be generally described as myopic and self-serving.  Third, she doesn’t seem opposed to the idea that markets are completely (or mostly) efficient with respect to all information.

A picture of the new administration’s view towards markets and regulation is starting to emerge.  Market participants will act ethically in ways consistent with the greater good if there are fewer rules against bad behaviors.  Because markets are efficient, markets can see through specific rules and fairly value securities.  Fraudulent, criminal activity is less common than thought.   The United States has a preeminent position amongst the world’s capital markets, and the world will follow United States leadership.

I see problems under the new economic regime.  The traditional thought is that in the world of business, corporate managers are motivated only by financial factors, and these factors can be manipulated to achieve rational desired behavior.   I believe corporate managers can be motivated by other factors.  Never-the-less, ethical behavior is rare because business people simply factor in penalties against bad behavior as another cost that must be recovered.  Therefore, myopic, self-serving behavior in the world of business is much more common than in other parts of society.   The absence of a natural sense of ethics means, to me, that self-serving behavior by executives can be controlled only if there are rules against it and if penalties are strong and stiff.  A new push to rely on principles and ethics is doomed, and will result in an era of flourishing corporate excess.

Mary Schapiro’s appointment is not the end of the world, but I don’t think she will help make the world a better place.  Fortunately, we won’t have Christopher Cox around any more.

Debit and credit – - David Alrecht