Slouching Towards Wall Street… Notes for the Week Ending Friday, 20 Ventose CCXIX
La lenteur des jugements equivaut a l’impunite, l’incertitude de la peine encourage tous les coupables — et cependant on se plaint de la severite de la justice
One glimpse of Delacroix’ famous depiction of proud Marianne fearlessly leading the heroes of the Revolution is enough to send chills down even the most jaded spine. The title of this piece is La liberte Guidant le people — “Lady Liberty leading the people.” It should be noted that the French word peuple has nuanced meanings: it translates as “people” in the anthropological sense (the cave people, the desert people), and in a political sense (We the People). It also has a class connotation meaning hoi polloi — the Rabble or the Common Crowd. In the French Revolution the mass of hardliners — the Parisian sans culottes — proudly applied all three meanings to themselves, as though it was not enough to demand one’s rights as a member of a socially disadvantaged group, but one had to also be proud of one’s disadvantaged status. This led to an embedding of poverty and lack of education as twin badges of honor, with the result that the emotional self interest of Paris’ revolutionary Commune exerted greater influence over the votes of the various organs of revolutionary government than did the party activists themselves. Indeed, it was the Commune’s rejection that led to Robespierre’s abrupt downfall.
Depictions of heroic women in martial poses became a staple of the French Revolution. The female embodiment of the Jacobin ideal was dubbed Marianne and is often depicted in classical semi-deshabille and the official headgear of the revolution — the Phrygian cap.
She also appeared last year in a campaign aimed at garnering public enthusiasm for the French government’s spending on education, sustainable development, the digital economy, and other societal and economic development projects. Here, Marianne was shown glowing and magnificently pregnant over a text reading “France is investing in her future.” Rather than winning people over, it got nearly everyone riled up. The Left complained that the government launched an expensive, taxpayer-funded PR campaign on the eve of regional elections. Feminists trotted out a version of the ad with an added line that says “Women: just be mothers and shut up!” while Leftists added a quote from President Sarkozy captured on a famously viral video. When a heckler in a crowd tried to grab his hand at a public appearance, Sarkozy said “don’t touch me.” When the individual persisted, Sarkozy can be plainly heard saying “Shove off, a — hole.” (It sounds better in French.)
Speaking of symbolic women being trampled by the Great Unwashed, our own poor Marianne is getting the short end of the flagpole. We refer, of course, to Mary Schapiro who is getting it from all sides lately. Ladies and gentlemen of the Peuple — enough! Ca suffit!
Our quote is from Robespierre’s speech on the revolutionary date of 17 Pluviose II (February 1794) in which he justified the Terror. “Slowness of judgments is tantamount to impunity; uncertainty of punishment encourages all the guilty ones. And yet people complain about the severity of justice.”
The notion of Justice sure and swift is embedded in America’s Constitution, yet almost never applied in practice. Certainly not to banking executives. The provisions in Dodd-Frankenstein intended to make our markets subject to sure and swift justice were shoved aside as the freshman sans culottes swarmed the Capitol lusting for royal blood, their Phrygian caps askew.
Now the Jacobins in Washington have mounted on a tumbrel those who caused the financial crisis and are carting them off to their fate. Where the will of the peuple is clear, no trial is required. Congress has acted Surely and Swiftly to ensure that the miscreants will no longer work their designs on the innocent. As an added bonus, they are simultaneously reducing the deficit. Talk about beheading two royals with one chop of the Guillotine.
The latest proposals would cut a combined $81 million from the budgets of the CFTC and the SEC. That’s “million,” with an “M.” You remember “millions”? In response, a coalition representing individual and institutional investors has come to the defense of the SEC and launched the financial markets equivalent of a Save the Dolphins campaign.
The CFTC has a tiny budget to begin with — just $168.8 million. Congress wants to slash $56 million of it, a move that the Council of Institutional Investors calls “a back door effort to block new requirements for transparency and accountability.” Even having a former Goldman partner as chairman has not helped the CFTC. Dear me, we hear you say, this really is a change.
The CII, representing some 120 of the nation’s largest pension funds, points to years of underfunding at the SEC as a perennial problem in effective regulation. The proposed budget increase would largely fund Dodd-Frankenstein measures, including creating 612 new jobs to provide oversight for derivatives, hedge funds, the whistleblower program, and credit rating agencies — areas where the SEC has been loudly criticized for poor oversight. The SEC’s argument is: you wouldn’t give us the tools. The counter-argument is: we gave you a hammer and you dropped it on our toe.
As one could have easily predicted in the run-up to Dodd-Frankenstein (indeed, as we did predict), nothing will change. But at least the deficit will not expand by another $81 million. In the present sorry state of our dis-union, this counts as tangible progress.
Speaking of poor oversight, we wish to take up the standard sanglant in defense of Mary Schapiro who is being besieged this week by people even more self-servingly political than herself.
Schapiro is under attack for two decisions: one, the matter of former SEC general counsel David Becker; the other, extending no-action protection to issuers of asset-backed paper — now including money market instruments — permitting them to dispense with ratings in their offering documents and investment decisions.
David Becker, a senior partner at the law firm of Cleary Gottlieb Steen & Hamilton, served as SEC general counsel in 2000-2002. He came back to the Commission for another two-year stint in 2009 and returned to private practice at the end of last month, just in time for Schapiro to be attacked by the Congressional Jacobins for not making Becker stand down from all matters relating to Bernard Madoff. According to the Wall Street Journal (10 March, “Schapiro Defends Against GOP Fire”) Becker and his two brothers were named in a lawsuit by Madoff trustee Picard “to recover $1.5 million of the $2 million they inherited in 2004 from their mother’s investment with Mr. Madoff.”
David Becker is one of a distinguished group of lawyers who periodically offer their services out of a sense of civic duty. In the face of the Great Unwashed, we observe that it is only the nobility that can act out of noblesse oblige. Becker, a senior partner at one of the world’s leading law firms, certainly doesn’t need one-third of $1.5 million. One might wonder why he didn’t simply hand over the money to Picard, but the entire matter is now the subject of 20/20 hindsight.
When Becker returned to the SEC in 2009, Schapiro called him “one of the leading experts on financial services regulation and securities law.” This is absolutely true, which makes it that much more important that the nation should enjoy his services.
Testifying before a committee headed by the Danton of the 49th District — Darrell Issa — Ms. Schapiro says she now wishes Becker had recused himself from all matters Madoff (WSJ, 11 March, “Schapiro To Lawmakers: I Wish Mr. Becker Had Recused Himself”). Note the history: Becker disclosed the matter fully and appropriately and was cleared of conflict by the SEC’s own ethics committee, permitting him to work on Madoff-related matters. We hardly need mention that, in 2009, the SEC was The Madoff Channel — All Madoff, All The Time! What else would the general counsel work on?
One could argue that while the Commission may not have condoned impropriety, it displayed a tin ear with regard to public opinion. Given the massive Madoff shadow looming over the agency, the wisest course may well have been for Becker to withdraw from the role altogether, permitting one of his public-minded partners to take over. We think this is evident even without the benefit of hindsight.
At the time of his appointment, Schapiro believed Becker uniquely suited to “help shape the SEC’s future as an ever-stronger regulator.” While we do not have the benefit of Mr. Becker’s confidence, by all accounts, his advice was valued by his colleagues at a critical moment in the Commission’s checkered history.
In 2009, a number of factors would have to come together for Mr. Becker’s ethics clearance to unravel. Unfortunately for him they have, including a (foreseeable) lack of progress on securities markets reform, (foreseeable) Congressional duplicity and transparent willingness to condone abuses in the marketplace, and a (perhaps unforeseeable) perception of a feckless president, leading to a (perhaps unforeseeably significant) reversal in the balance in the Capitol.
This Perfect Storm has Schapiro facing Congressional opprobrium as Mr. Issa attempts to demonstrate why Congress should allocate money to his inquiries, but not to market regulators. We concede: after the fact, any fool can see that Becker should have recused himself. Mary Schapiro — no fool — agrees because it is the only logical thing to do. We expect that she will follow this by placing the ethics committee, other high-ranking SEC officials, and Mr. Becker himself in the path of a fast-rolling multi-wheeled public conveyance.
Becker is likewise not a fool, and reports indicate he will not be talking to Mr. Issa’s panel. He may never be invited back to serve as general counsel for the SEC — but this does much more than merely deny Becker future opportunities to take a 90% pay cut. Chairman Schapiro, and Congressman Issa too, should tread carefully. People like David Becker are not the proverbial dime a dozen. Sacrificing him to the rage of the peuple will cause others to think twice before offering their services.
The Revolution Devours Its Children
While Ms. Schapiro is presenting her deadpan testimony to Congressman Issa’s committee, she is being attacked from another quarter. Massachusetts Attorney General Martha Coakley has written to chairman Schapiro asking why the Commission has not required the rating agencies to accept liability for the ratings they issue.
Massachusetts voters will remember Coakley. They were treated to a personal (well, all right — pre-recorded) phone call from President Obama last January, urging them to vote for her. Talk about a tin ear regarding public opinion: the Democrats reacted in horror that a Republican would dare run for “Ted Kennedy’s Senate seat.” And it could not have helped President Obama’s image when Coakley bowed out of the Senate race the same week he begged voters to back her. As they say in France: c’est la guerre.
Coakley is irked at SEC’s no-action letter permitting asset-backed issuers to dispense with ratings in their offerings, and at the proposed rule amendment (SEC 2011-59, 2 March) to remove credit ratings as a requirement for the issue of money market instruments. Under the proposal the basic requirement of the rule would not change. Money market funds would still have to invest at least 97% of their assets “in securities that the board has determined are issued by an issuer that has the highest capacity to meet its short-term financial obligations.” In other words, the board of a fund, who are ultimately responsible for exercising proper diligence over the fund’s operation, are still in charge, and are still liable. Only moreso. It would be instructive to know which members of which investment company boards contributed to AG Coakley’s campaign.
Coakley’s attack on Schapiro has the press clamoring for the head of Mary “Let Them Eat Credit Ratings” Schapiro. The NY Times (6 March, “Hey SEC, That Escape Hatch Is Still Open”) roundly blames the SEC for not imposing an “expert liability” standard on the rating agencies, as required under Dodd-Frankenstein. Never mind that D-F was intended to be un-implementable (the only way it could pass). Never mind that, no sooner did D-F pass than those who advocated it lost any chance of being heard on issues. Mr. Frank has been marginalized, and the seat of Dodd’s Capitol office chair was still warm when he accepted a position as head of the Motion Picture Association of America — thus the Senator who positioned himself as the “lobbyist scourge” may have set the record for fastest transition from standing guard over the trough, to pigging out at the trough. Dodd’s bullet-like trajectory from Washington to Hollywood demonstrates the non-intuitive mathematical principle that the shortest distance between two points is still a straight line, even when it travels through a revolving door.
Barney Frank says the SEC has a “long-term strategy to eliminate investor reliance on ratings.” The Commission seems to have an odd way of expressing its disapproval of the ratings game, but we wonder if this is selective journalism. The Times article goes on in its righteous profile of AG Coakley, but fails to quote Chairman Schapiro’s own crystal-clear statement.
“The focus of these efforts is to eliminate over-reliance on credit ratings by both regulators and investors, and encourage an independent assessment of creditworthiness.”
The credit rating agencies make the highly dubious claim that they made no representations to anyone about the quality of investments, and they hide behind First Amendment freedom of speech to push off any responsibility to the investing public. This is of course a sham, and they should be called on it. They enjoy privileged status, a Congressional imprimatur and, as Warren Buffet pointed out when testifying about his investment in Moody’s, a government-protected monopoly.
The raters say — hey, we were stupid. And Buffet leaps to their defense, saying they made a mistake — but everybody made the same mistake, and no one saw the market meltdown coming. This is ineffable trash not even worthy of a politician. The entire raison d’etre of the rating agencies is to clearly analyze company, industry, and market conditions to assess the stability of an issuer. By design, a credit rating entails an analysis of what would happen to an issuer if current market trends continue. The excessive proliferation of asset-backed paper should have been sufficient cause for the raters to start issuing warnings — even if we accept they had no way of assessing how much of the market rested on shaky underlying assets.
As unbelievable as it may seem, the rating agencies have managed to get away with this We Were Stupid defense, supported by none other than Warren Buffet (who admitted to being just as stupid) and abetted by the real criminals in Congress who steadfastly refuse to force the ratings agencies to change their business model.
Even in the wake of Dodd-Frankenstein, the raters continue to maintain they are nothing more than publishing companies. This conveniently overlooks their government-sanctioned power. Still, as Congress is fearful of actually doing anything, they have tossed this hot potato in to Chairman Schapiro’s lap, right on the eve of taking away the few tools she had to do her job. What’s wrong with this picture?
Coakley’s tirade also makes us wonder whether there is an effort afoot by a coalition of states’ Attorneys General to launch a mass assault on the ratings agencies a la the Wall Street analysts settlement. If the SEC thinks ratings are no big deal, the AGs’ case would be considerably weakened.
For a hundred years the rating agencies did a pretty good job of assigning risk levels to most of the paper they considered. Their databases of corporate credit were deep, went back a century, and continued to grow by the day. Their models worked reasonably well in most cases, most of the time. Well enough for the third-rate analysts who work for the raters to turn out serviceable, if unremarkable analysis.
The world’s most powerful financial institutions convinced their regulators that they could cut major corners on their capital, without disturbing their creditworthiness. This was embedded into practice, and the rating agencies dutifully followed, which was when the issuer-pays model became a major source of conflict. Doing nothing to address that conflict was clearly dereliction of duty on the part of the regulators, the managements and ultimately the lawmakers. But they were too busy making lots of money.
In the interest of only criticizing Ms. Schapiro when she deserves it, let’s get this straight: the banks got their regulators to agree to open a loophole in the law; Congress didn’t push back and so no additional requirement was imposed; those who suggested this market needed regulation were led to the Guillotine by the Committee of Public Safety (Rubin, Greenspan, Summers) — and suddenly this is all Mary Schapiro’s fault?
We agree with Chairman Schapiro. The attempt to impose new rules on the raters is a losing proposition. As pointed out by the Times, where it has been tried by local legislatures, the ratings agencies always won — local issuers were not able to sell their paper because the NRSROs refused to issue ratings. The only rational approach is to body check the rating agencies by undercutting their monopoly. This should have the collateral effect of forcing those who issue debt paper to make sure it is credit worthy. And forcing those who buy such paper for other people to actually do their homework. It pushes real responsibility back where it belongs. We can just imagine the cry that went up from the boards of the nation’s money market funds.
We urge AG Coakley to spend less time blaming Chairman Schapiro for a generational failure of both government and marketplace, and spend more time pushing those who invest other people’s life savings to act responsibly. Ms. Coakley should also recognize that, in the absence of the Guillotine, attempts to force a government agency to change its behavior are futile. For many years the SEC has been capable of doing nothing at all. For once, this is the correct approach.
Rio de Janeiro’s Carnaval ended this week with a dazzling samba competition in the Sambodrome — a stadium specially built for Carnival that seats 70,000 spectators. This year’s proceedings were especially poignant, as the run-up to Carnival was marked by tragedy. A major fire swept through Rio’s “Samba City” warehouse neighborhood in February, destroying most of the samba costumes and parade gear scant weeks before Carnival. In pre-Carnival rehearsals in another region, sixteen people were electrocuted when their sound truck was struck by a severed high-power cable. It was a triumph when Rio’s parades and samba competitions came off without a hitch.
As reported in Brazil’s “O Globo” newspaper, Rio police were out in force. On Monday before Mardi Gras, 111 cars were towed to clear the Carnival parade route. Unauthorized street vendors had their goods confiscated, including over 1000 drinks vendors, 2 umbrella sellers, and seven unauthorized barbecues.
In a front-page headlined story (we’re not making this up) O Globo reported a record number of arrests for public urination. Rio’s Secretary for Public Order reported 606 persons — nearly twice last year’s total — caught in the act of making pee-pee in public (it sounds better in Portuguese.)
Authorities attributed the record number of urinary arrests to beefed up surveillance, and to the expansion of the Carnival festivities through a larger portion of the city. Of 606 arrests for public urination, 16 were women and two foreigners. Carnival came to a triumphant close on Mardi Gras. With Ash Wednesday and the onset of Lent, we presume the street-urinators have sought absolution. Maybe a pee-nary indulgence?
Email me when ComplianceEdge publishes or recommends stories