SEC Insider Indicts Agency as Soft on Wall Street: Four Blunt Points

Here’s the best story you’ll read today out of Wall Street or Washington: Robert Schmidt’s Bloomberg News scoop on a retiring Securities and Exchange Commission trial attorney who used his farewell speech to scold his former bosses for being “tentative and fearful” when it came to going after top executives in the wake of the 2008 financial crisis. Let’s break it down into four blunt points.

1. Thank goodness for former officials who speaks their minds. And the shoe-leather reporters who catch up with them. More from my friend Rob Schmidt:

James Kidney, who joined the SEC in 1986 and retired this month, offered the critique [of agency timidity] in a speech at his goodbye party. His remarks hit home with many in the crowd of SEC lawyers and alumni thanks to a part of his résumé not publicly known: He had campaigned internally to bring charges against more executives in the agency’s 2010 case against Goldman Sachs Group (GS) The SEC has become “an agency that polices the broken windows on the street level and rarely goes to the penthouse floors,” Kidney said, according to a copy of his remarks obtained by Bloomberg News. “On the rare occasions when enforcement does go to the penthouse, good manners are paramount. Tough enforcement, risky enforcement, is subject to extensive negotiation and weakening.”

2. Kidney confirmed what revolving-door critics have been saying. Namely, that SEC higher-ups are more focused on getting lucrative jobs after their government service than on bringing difficult cases. Kidney, 66, has worked at the agency since 1986, except for a four-year stint at Aetna. He earned his law degree at night from George Washington University while working as a journalist. “I have had bosses, and bosses of my bosses, whose names we all know, who made little secret that they were here to punch their ticket,” he said. Maybe if “we the people,” acting through our representatives on Capitol Hill, paid talented civil servants wages commensurate with their value to society, more people such as Kidney would devote their careers to protecting the public good. Maybe they’d even rise through the ranks to set tougher policies.

3. Don’t get fooled by the statistics. Kidney made a critical point about the numbers the enforcement agencies throw around. The SEC, he said, should focus on the quality of its actions, rather than on filing as many as possible to promote its record to lawmakers and the media. “It is a cancer,” Kidney said of the agency’s misleading use of numbers. SEC penalties, he added, have become “at most a tollbooth on the bankster turnpike.”

4. And yet, Kidney didn’t address the cry to throw more bankers in jail. Let’s remember that the main complaint from critics of government enforcement is not so much that the SEC failed to extract additional civil settlements, but that criminal prosecutors didn’t try to put Wall Street big shots behind bars. Kidney appropriately limited his comments to his area of expertise: civil suits seeking money damages in which the government does not have to prove culpability “beyond a reasonable doubt.” That exceedingly high criminal standard of proof is, to put it plainly, really, really difficult to overcome in situations in which bankers argue they were, at worst, greedy or incompetent or both. The hard truth is that it’s well nigh impossible to convince a jury that a guy in a pinstripe suit who plays shell games with credit-default swaps (and what are those again?) is akin to a bank robber caught on surveillance pointing a gun at a teller.

Still and all, Kidney deserves a serious hearing and our thanks. More ambitious SEC civil suits would accomplish some measure of added deterrence, whether or not any “banksters” go to prison.

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