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Mary Schapiro Steps Down as SEC Chief

Simon Johnson

Simon Johnson suggests former TARP Special Inspector General Neil Barofsky to replace Schapiro

Mary Schapiro, the head of the Securities and Exchange Commission, will step downDecember 13, adding another key financial regulatory position to the menu of vacancies in President Obama’s second term.

In recent days, the S.E.C. informed the White House and Treasury Department that Ms. Schapiro planned to leave next month, becoming the first major departure from the Obama administration’s team of financial regulators. Ms. Schapiro will also relinquish her position as one of the five members of the agency’s commission, the group that oversees Wall Street and the broader financial markets.

The move, which follows a bruising, four-year tenure, was widely telegraphed. Ms. Schapiro, 57, has confided in staff members for more than a year that she was exhausted and hoped to leave after the November elections.

The President had just completed filling vacancies at the Office of the Comptroller of the Currency (where Thomas Curry was installed earlier this year) and the FDIC (where Martin Gruenberg was just confirmed).

In the aftermath of the financial crisis, which involved a high degree of securities fraud, no major executive or Wall Street figure has gone to jail for anything other than insider trading, mostly prosecuted out of the US Attorney’s office in Manhattan. The SEC pioneered a settlement strategy on various bad securities deals where they would pick one deal rather than make a platform case about a general pattern of conduct by fraudulent Wall Street firms, and then settle on that individual deal, allowing the securities issuer to neither have to admit or deny wrongdoing. After that, the SEC would never go back to the bank, as if they all only did one bad deal during the financial crisis. The SEC defends itself by saying they have brought a record number of cases since the crisis, but since the crisis was the biggest since the Depression – before the SEC existed – it’s self-evident that you would have a record number of cases. What matters is their aggressiveness and forcefulness, and that didn’t really exist at the SEC.

It’s hard to know whether to blame Schapiro for this or the weakness of the enforcement team, led by former bank employee Robert Khuzami. Indeed, enforcement is overlooked at these regulatory agencies in favor of the lead commissioner, but the staff work often drives the regulatory response, particularly in the post-crisis period.

That said, a regulatory chief can change the culture inside an agency. So Schapiro’s replacement matters. Simon Johnson kicked this off a few days ago, juxtaposing the bona fides of Treasury Department under secretary for domestic finance Mary Miller (a former mutual fund executive) against former Special Inspector General for TARP Neil Barofsky. There’s no question than an experienced prosecutor like Barofsky would change the SEC’s culture, but there’s almost no chance he will ever hold another job in Washington, as he was specifically told by Herb Allison right at the beginning of his book Bailout. So I don’t know the purpose of Johnson’s discussion, except to highlight that the financial sector will dictate who will become Wall Street’s lead securities regulator, and that designee will not have an adversarial relationship to Wall Street whatsoever. In fact, Miller’s key resume item for this job appears to be her work helping pass the JOBS Act, which weakens investor protection.

The possible figure in between the extremes of Geithner acolyte Miller and Barofsky would be someone like Sheila Bair, whose book I just finished and who would probably make an excellent choice. But she’s probably too tough for the room, too.

Meanwhile, this is a wonderful capstone, from the NYT article:

As for Ms. Schapiro, few expect her to follow her predecessors and move into private legal practice, where she would defend the banks she has spent years regulating. Instead, they say she is more likely to seek out a position at a university or research group.

Schapiro won’t follow the revolving door to Wall Street! Heavens be praised!

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David Dayen

David Dayen