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.
mathbabe 
It is obscene that anyone makes more than 200,000 a year (already 4 or 5 times the median salary in the US). No one is providing so much more value than anyone else – there is just a pyramidal structure and who gets to the top takes all. It is also evidence of terrible inefficiencies in the economic system. Profits themselvs are evidence that things are not working well. Folks who don’t understand these self-evident statements can’t possibly understand why there is a need to regulate the hell out of Wall Street and the rest of business.
Wall Street bankers are the modern incarnation of pirates.
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> It is obscene that anyone makes more than 200,000 a year (already 4 or 5 times the median salary in the US). No one is providing so much more value than anyone else – there is just a pyramidal structure and who gets to the top takes all. It is also evidence of terrible inefficiencies in the economic system.
Are you saying that the founders of Google, or Steve Jobs don’t provide 5x the value of, say, a bartender (nothing against bartenders)? REALLY? Even Lebron James does that, and I don’t even like him (hundreds of thousands pay for tickets to watch him play and countless others watch him on TV).
Now the remuneration system on Wall Street is terrible and amount of inequality in the US is probably unhealthy but making statements like your first few sentences and claiming they are self-evident just discredits the rest of your post.
I grew up in Czechoslovakia and can tell you how things used to work there prior to the Velvet revolution (there were probably very few people there (probably top politians, entertainers, and some exceptions) that made 4x median salary at the time). Interested?
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When I say 200,000, I am actually giving room for a fivefold difference in value. More than that I don’t see justified by the facts. Nothing that the founders of Google or Steve Jobs did originated in a vacuum. There existed a community of researchers and developers and entrepeneurs developing similar ideas and products. That one triumphed and gets all the money is true, but does not seem to demonstrate that such an outcome was deserved.
Surely material conditions in the old Czechoslovakia were on average worse for its residents than they were on average for contermporary residents of the US, although black Americans who suffered segregation might argue that the tails matter as well as the means, and countries like Vietnam and later Iraq might argue that the wealth within the US was sustained by the abuses it committed abroad as much as by anything else. Exploitative economic structures have been a fundamental part of wealth generation in the US – those who have suffered their consequences being mainly either minorities or foreigners.
How much of the problem in the old eastern bloc was that the political conditions facilitated rampant corruption and stifled attempts at development? The Soviet Union produced tremendous mathematics despite not having the pyramidal remuneration scheme that US universities have (there are professors in a single department paid 3 or 4 times what others in the same department are paid – and these same usually teach less). What does a Steve Jobs do that generates so much more value than what the man serving him coffee does?
Controlling remuneration could be achieved through incentives as much as through direct state control. Certainly mechanisms that have failed before, like centralized state planning, should not be adopted.
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“If they don’t do their job – who will?”
Ehh…I’ve never had much faith in the SEC, which is subject to the dynamics of regulatory capture. I think we’d need to see some pretty major reforms for it ever to be able to live up to its promise.
I’d actually prefer for the U.S. Attorney’s Offices (federal criminal prosecutors) to be given more resources to conduct their own independent criminal investigations into the financial industry. But I’m reminded of Preet Bharara’s (U.S. Attorney for the Southern District of New York, with jurisdiction over Wall Street) apologetic explanation when confronted about his office’s lack of action on the financial crisis crimes. He likes to remind people that there are extremely complex legal and factual issues in these cases that require painstaking research and investigation, and that this process by its very nature needs to stay confidential until they’re ready to charge.
I know that this is the exactly the kind of suspicious “we’re looking into it” bullshit excuse that all bureaucrats give to assuage the public’s mistrust of their competence or ethics, but I think he does have a point. There are a lot of procedural details that need to be perfect for criminal charges to stick, and I think it’s time well-spent to make sure it’s all there.
If I’m going to keep caterwauling about the importance of due process protections for criminal defendants, I can’t really refuse to extend them to Wall Street because of my personal thirst for capitalist blood.
I guess my point is that I haven’t lost hope that someone is actually working on this, though I will admit that my patience is wearing thin. I’d really like to see some indictments soon. In the meantime, I think it’s important for us to keep making noise about this, so I’m in agreement with the spirit of this post, though I think it may be misdirected.
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