Who will Regulate the Superheroes on Wall Street?
This is a guest post by Elizabeth Friedrich, a member of Occupy the SEC.
Wall Street has grown to celebrate superheroes like Lloyd Blankfein and Jamie Dimon for their superior management skills and keen business sense. We have come to praise and applaud reckless risk-takers on the assumption that the markets always know best.
Insider Wall Street leaders like Jamie Dimon are viewed to possess special powers. In fact, many believe that Dimon, who led JP Morgan out of the financial crisis, is a banking prodigy who could do no wrong. But even Dimon is helpless in the face of reckless risk-taking behavior by his employees, as shown by the trader Bruno Iksil who lost $3 billion dollars and counting as part of JP Morgan’s CIO office. “Star traders” like Iksil structure their trades in such a complicated way that the average person could never understand them. We have no way of knowing whether the hedges that the CIO office put on actually “hedged” the original position. Such complexity, conveniently, can also serve as a powerful tool to refute public outcry.
The question here is this: Why create such risk in the first place? Or, more importantly: Why create the type of transactions that require a superman to oversee them?
Since the Volcker Rule is still being finalized, banking institutions will continue to take on these risks as long as they are allowed or exempted to do so. However, banks should face the same consequences as the rest of society. The “London Whale” trades created massive disruptions in an already fragile market and, ironically, they have caused unrest and disgust in the hedge fund community – the very community that loves unregulated market competition. Why don’t we hold banks to their own standards and stop giving them a pass when they fail?
Occupy the SEC will be marching today calling for the S.E.C. to investigate Jamie Dimon for violation of the disclosure requirements of Sarbanes-Oxley Act. We will also recommend that the S.E.C. make a criminal referral to the Department of Justice. Many people are frustrated with the slap-on-the-wrist treatment that Wall Streeters enjoy; random petty criminals are sentenced to hard jail time but the trader who loses billions of dollars is told not to do that again. The JP Morgan Chase debacle is symptomatic of a broken regulatory system.
Even if there are no criminal charges against Jamie Dimon, the American public would have been well-served to see Wall Street have its day in court. The S.E.C. has to uphold its foundational principles: 1) public companies offering securities to investors must tell the truth about their business, the securities, and the risks involved in investing; and 2) people who sell and trade securities must treat investors fairly and honestly, putting their investors’ interests first.
It is fairly simple: if S.E.C. officials find out that a company has done wrong they have the power to investigate, issue civil penalties, and refer the case to the Department of Justice for criminal prosecution. As many financial experts and white-collar crime lawyers have said, the S.E.C. has not fully utilized its authority, as demonstrated by the treatment of Dick Fuld and Jon Corzine.
The function of a financial institution is not merely to manage risk, but to act primarily as the steward of society’s assets and smart allocation of capital. We hope that the S.E.C will help re-examine the priorities of Too Big To Fail financial institutions. Finally, the current culture corrodes and disrupts sound business practices and stunts the rehabilitation of our current financial system. The S.E.C. is an imperfect vehicle (as evidenced by its lackluster approach to its duties leading up and during the financial crisis) but it’s the only vehicle we have. If they don’t do their job – who will?
Occupy the SEC is a group of concerned citizens, activists, and financial professionals with decades of collective experience working at many of the largest financial firms in the industry. Occupy the SEC filed a 325-page comment letter on the Volcker Rule NPR, which is available at http://occupythesec.org.