One of the most glaring holes in the regulatory system has been the startling ineffectiveness of the Securities and Exchange Commission. From its failure to spot Bernard Madoff's Ponzi scheme to its role as enabler of the financial industry's leverage overdose, the SEC has taken its share of lumps in the past year. Yet it remains essentially the same woefully understaffed, some say toothless, agency that failed to curb much, if any, wrongdoing on Wall Street. Some $20 million in extra funds were earmarked for the SEC for its 2010 budget, and its new chairwoman, Mary Schapiro, has vowed to increase enforcement staff. She did bring on a new enforcement chief, former federal prosecutor Robert Khuzami.
Still, MIT's Johnson pointed out, Washington has not succeeded in stepping up its enforcement effort which was supposed to involve some new, tougher, more comprehensive regulatory body.
"Where's the new cop on the beat?" he asked. "I don't see a new cop."
Meanwhile, the SEC has been one of the agencies implicated in "turf wars" between regulators that have been blamed for slowing down the reform process. At one point in late July, Treasury Secretary Tim Geithner became so frustrated that he called the heads of other agencies to a meeting to tell them to fight less over regulatory turf and focus more on getting reform measures passed.
"It was a s**t-storm," one source familiar with the meeting said at the time, while a Treasury spokesman acknowledged that the meeting was planned so Geithner could deliver a "tough message" to fellow agency heads.
Although the Justice Department did this past November create a special task force for financial fraud and empowered it with an array of new prosecutorial powers, most Americans are still wondering when someone other than Bernie Madoff is going to be put away. The only two financial crisis era defendants that were brought to trial, a pair of Bear Stearns Asset Management portfolio managers, were recently acquitted. A current probe into insider trading seems to be escalating which could have a chilling effect on dubious behavior in general.
In several past speeches, Federal Reserve Chairman Ben Bernanke has talked about tougher capital requirements for big banks, while the Senate Committee on Banking, Housing, and Urban Affairs, as part of its proposed financial reform legislation, specifically introduced a measure aimed at preventing excessively large or complex financial companies from bringing down the economy.
But this past year, a number of Wall Street firms, most notoriously Goldman Sachs, actually upped risk. Goldman did bolster its balance sheet and took steps to drastically reduce leverage. However, the firm still borrows around 14 times its equity base to undertake its various trading strategies and during any given overnight period might be tapping short-term swap transaction markets for tens of billions to fund activities while its awaits billions coming in from other counterparties.
The counterparties are themselves are reliant on others in a potentially hazardous daisy chain daisy that didn't register much, if any attention, among average Americans, until, that is, the AIG debacle. The fact that Goldman and other big banks continue to engage in what some critics see as hedge fund style proprietary trading is cause for alarm and some form of action.