Ezra Klein and others had a series of posts and twitter exchanges about the increases in SEC funding and the role of regulator discretion in the financial reform bill.
First off, when I was making my mental list of things that could be done if the financial reform bill failed to pass, tripling the budget of the regulatory agencies was up there. They’ve been starved of adequate resources quite consciously post 1980, which leads to brain-drain and revolving doors.
Here’s Moe Tkacik with Scenes From The Ninth Circle Of Financial Bureaucracy covering the GAO report on the SEC from 2009:
We’ve been poring over the report — hit piece? — on the SEC issued today by the Government Accountability Office, and we’re starting to understand why Hank Paulson wanted to shut the place down and put all those “enforcers” out of their Kafkaesque misery. The agency got more tips from FINRA — the financial industry’s self-regulator — than it had the resources to pursue, it lost 11.5% of its lawyers since 2004, and the staff lacked in-house expertise on pretty much all the fancy financial instruments without which we would not have this crisis (in addition to “government securities” which seems a bit sad, the SEC being a division of the government). The agency’s revenues were in a downward spiral, with corporate penalties falling 39% in fiscal year 2006, only to fall another 48% in 2007, only to fall another 49% last year.
Investigators spend half their days moving boxes and waiting in line at Kinko’s, preparing internal memos, not having access to any type of expertise or any type of actual real-time data. It looks cartoonish and sad. Compared to how well elites could describe the SEC in 1977 it’s clearly been dismantled as part of a generational change.
I would have preferred the bill to do different things in terms of regulator discretion and in terms of using clear boundaries to create competition, forcing the market to regulate itself. But we are where we are. Wall Street is back, arguably as powerful economically and politically as it ever was. All things considered, if you survived, you might even be pretty happy. As an investor, especially if you sold and re-bought at the right times.
The SEC will be front and center of any changes to securitization, one of the areas most up in the air in terms of what can happen for a better functioning market and what could not happen. I hope they use their discretion to get us closer to something like Josh Rosner’s presentation for Roosevelt Institute’ Make Markets Be Markets. The SEC has been putting on high-quality ex-industry talent, like Rick Bookstaber, to try and do regulation. Given that this is what we are doing, we may as well fund them properly.
There’s a parallel movement for reformers to try and create high-quality regulators and regulatory institutions, regulators that can be ranked and politically mobilized on like judges are. I like this in theory, but there’s a major roadblock in practice. The obvious downside is that this bill moves so much authority to the Federal Reserve and the Fed is one of the most unaccountable, non-transparent and not interested in accountability institutions working in the United States. Given that we can’t get them to accept a dual-mandate, how much can we push for them to get serious about size and concentration?