Confessions of an SEC Regulator

Former SEC regulator James Coffman in an email to Baseline Scenario admits that the agency has been captured by Wall Street. Naturally, he thinks the solution is even more regulation. Here is on the facts:

I should tell you that I retired two years ago from a management position in the enforcement division at the SEC after 27 years. So I was (and in my heart, I suppose I still am) a financial regulator. That background probably should be taken into account by anyone who reads this response.

There is no doubt that “regulatory capture” exists and is a meaningful factor in the recent failures of our regulatory system. Many of us in the enforcement division dealt with the problem regularly when we sought input from those in the agency who were responsible for regulating aspects of the securities markets. Over time, regulatory policies and practices had emerged that seemed to contradict the purpose if not the letter of the law...

...the industry “captured” the regulators and the regulatory system. But not in the passive sense that true regulators over time came to identify too closely with the interests of the regulated. This is not a case of financial regulators falling victim to the Stockholm syndrome. The vast majority of capture resulted from intentional efforts by the finance industry to advance their narrow interests at all costs and defeat meaningful regulation. Unfortunately, we live in a country that can be bought from the top down and the finance industry exploited the situation very successfully...

His insider solution is to turn more power over to career SEC regulators. Does he seriously think Hank Paulson and Bernie Madoff couldn't flip a career regulator? Who the hell does he think audited Madoff?

Madoff firm secretary Elaine Solomon told author Andrew Kirtzman for his book, Betrayal: The Life and Lies of Bernie Madoff, that young inexperienced government regulators were so wowed by Bernard Madoff's ritzy Midtown headquarters that they asked about job openings and dropped off resumes while missing clear evidence he was running a massive Ponzi scheme.

Solomon said, "They would say, 'Can we get jobs -- can we give you our resumes?' We'd say, 'Send them through to our offices. A couple of them dropped resumes off.' "

Young or old, rookies or veterans, bad guys no how to get at the wielders of power. The solution is not to create a different point of power, but to eliminate all encompassing power by diffusing it through privater sector checks as opposed to monoply government sector checks. With private sector checks, there is no one center of power to control. It is much more difficult to co-opt the entire system.