By Anthony Harrington
When Mary Shapiro took on the top job at the Securities and Exchange Commission (SEC) she would have known that it was a job very like the one Hercules looked at when he got his first glimpse of the Augean stables. Nothing but horse manure wall to wall. Ah well, nothing for it but to roll up the shirtsleeves and reach for the shovel…
The SEC was, after all, that same marvellous regulator that had proved spectacularly capable of taking a detailed 17-page letter from the now famous whistle blower, Harry Markopolos, and turning it into shelf furniture. This despite the fact that Markopolos’s account was more than sufficient to prove to anyone with even a modest grasp of logic that Madoff was involved in a gigantic Ponzi scheme. To make matters worse, the SEC actually investigated Madoff once or twice and found him to be a very nice chap, perfectly sound, even though the likes of Goldman Sachs were refusing to touch him with a barge pole.
The SEC was, however, at the time, simultaneously proving itself very spirited in hammering short sellers, the very people who by their actions were telling it, the Fed and everyone else that something was very wrong in the financial markets and that the bottom was about to blow out at any moment – and that they intended to profit thereby. This is a good thing for markets, not a bad thing. If short sellers are wrong they lose their shirts and when they go all in, a sensible regulator should sit up and take notice.
This, after all, is precisely the kind of market signal that regulators should be looking for. They should, most definitely, not be trying to squish such signals out of existence. Unquestionably, the SEC’s track record in the run-up to the crash proved it to be a regulator in need of some serious restructuring and redirecting.
Congress took this view in spades and ordered the SEC to engage a consultant to investigate its processes and procedures, and to help it spot where it left the tracks and what needs to be done to put it back on track. This was undoubtedly very naïve of Congress. The task of producing change management reports is what consultancies were born for and they have invented a language all of their own to couch such reports in. I defy anyone to read the Boston Consulting Group’s change management report on the SEC and not come away with a high buzzing noise in their heads and a sense of profound disorientation. These things sap the will to live…
On the front foot
To the SEC, however, the Boston Consulting Group report is Manna from Heaven. It has given Mary Shapiro and her colleagues a most marvellous method for bamboozling the politicians on the Hill for years to come. The politically correct riposte to the BCG’s thrust is the deft assimilation of its jargon and its reproduction in a reply that faithfully mirrors the opacity of the original document. When Congress invited the head of the SEC to report on the actions it intended to take with respect to the BCG’s findings, the politicians were confronted with a truly astounding collection of “workstreams” - all apparently designed to “change manage and progress” a mind-boggling array of interlocking and mutually overlapping component parts of the SEC. Make sense of that if you can, the SEC's reply to Congress seemed to say, with a certain smugness. The members of the House Committee clearly couldn’t make head or tail of it but appeared deeply impressed.
Having got the politicians on the back foot, Shapiro then told them bluntly that expecting the SEC to shoulder a vast set of additional responsibilities in the shape of all the regulatory and supervisory requirements that go with Dodd-Frank without additional funding, was not on. She came away with a promise of significant additional funding, though probably way short of what the SEC would really need to get the job done. Since prior to the meeting there was talk of cutting the SEC's budget, coming away with more rather than less was a clear victory for Shapiro. The politicians consoled themselves with the thought that in granting the SEC more funding they were (a) not rewarding sloppiness, since there was a new broom in charge, and (b) the additional money wouldn’t be adding to the horrendous US deficit anyway because, surprise surprise, companies and institutions foot the bill for the SEC, not Uncle Sam.
Undoubtedly Shapiro did her reputation as a tough manager no harm from her attendance at the hearing and gained herself and her organisation some time to put the house in order – God knows it needs it, but one has to hope that they sling that wretched BCG report in the bin and start their revamp with a few, clearly-articulated objectives. Here are two good starting points: 1) listen to whistle blowers, and 2) leave short sellers alone, they do a good job.