This morning I was a guest on FOX Business Network. FOX provided a car and driver to take me to the studio. The driver immediately started quizzing me on what I was going to talk about on television. When I told him I would discuss banking and public markets and that I am a former lawyer, he demanded to know “Why isn’t the government prosecuting corporate executives whose companies have made bad disclosure to shareholders?”
The driver was very clear that he believed corporate CEOs and CFOs violated the law by misleading shareholders, and he didn’t understand the government’s reluctance to prosecute anyone involved in bad and misleading disclosure. He particularly thought that bank executives had abused the public trust and deserved to be prosecuted. The driver said that after Enron he figured things would be better and the middle class would be treated fairly by Wall Street. He repeated several times that “brokers for a commission will do anything” and that CEOs were “screwing the little guy”.
For a while I didn’t know what to say and couldn’t answer him. My driver’s common sense questions and analysis seemed correct.
After a while I told the driver that the SEC needs to enforce the securities laws in a diligent, deliberate and disciplined manner. I stated that the integrity of the financial system depends on small investors trusting the market, government, banks and corporate executives. I told the driver that the United States has a “social contract” between and among its citizens and the government. And, some of the contract’s basic tenets are that all people are created equal, the law applies equally and fairly to all citizens and that government will make sure that there is a “level playing field” between the little guy and big corporate interests.
The driver said that small investors think the system is dishonest and that they can’t invest without worrying about being ripped off. And, he asked why the screwing of the little guy isn’t a violation of the social contract. By the time I got dropped off at the FOX studios we agreed that the current banking and credit crisis has as its root cause a violation of the social contract, and that the crisis has the potential to not only undermine the United States economy but damage society for generations. And we agreed that the government should enforce the law and make sure that bad corporate executives are punished for their behavior.
As anyone who knows me realizes, I have been a constant critic of both the Bush administration and the banking and securities regulatory agencies. I have spoken out on TV and I have written about this issue in my blog. As I wrote on August 3,
In my first year of law school I learned why enforcement of criminal and civil law is essential for the United State’s social and economic functioning. Apparently, the elite lawyers of the Bush Administration didn’t learn the same lesson since they have a non-existent enforcement policy which has made the US financial markets a Petri dish of illegal and immoral behavior. The SEC, Justice Department and banking regulators’ tolerance for unethical business behavior and blatant disregard for the law is the root cause of the current credit crisis. Without a radical change in enforcement policy by the next President, the last 7 years of mistakes will be repeated.
This week SEC Chairman Cox will announce a replacement web site for EDGAR. While a new system is needed, I think that the SEC is focusing on “form over substance”. A new web site isn’t what is needed to fix incomplete and misleading investor disclosure. After the new web site is up and running disclosure will still be defective because the information that is being disclosed will still be unreliable and incomplete. Cox’s solution to the disclosure problem confirms the adage “garbage in – garbage out”. It is a shame that the crowning achievement of Cox’s tenure at the SEC will be a new web site rather than better substantive investor reporting.
My driver told me that he hoped that the next President takes his responsibilities more seriously than Bush. When I got out of the car we both agreed that our children’s futures depend on it.