The Problems With Mary Schapiro

Mary Schapiro is going to face some very tough confirmation hearings on her way to taking over the SEC, and in the wake of a big WSJ article today, her confirmation is by no means a foregone conclusion.

Th article, as Ryan Chittum says, is compellingly tough on Schapiro, who seems to have been a pretty happy no-worries-here we’re-all-making-money regulator for most of her tenure at Finra, especially when it came to her relationship with the biggest broker-dealers.

More generally, Schapiro seems to have been particularly good at taking a not-my-problem attitude to many of the biggest risks on Wall Street. She was very narrowly concerned with the specific issue of the safety of the money that individual investors invested with brokers, and left it to other regulators and even the ratings agencies to look at other issues:

Frank Congemi, a financial adviser, asked what Finra was doing to regulate "packaged products" such as complex mortgage securities. Mr. Congemi says that Ms. Schapiro replied: "We have rating agencies that rate them." The credit-rating agencies, by this time, were being heavily criticized for having given triple-A ratings to mortgage bonds that became unsalable as foreclosures rose.

When it comes to Finra’s core competency of adjudicating disputes between investors and brokers, it predictably but correctly has come under fire for being unfriendly to consumers. No individual investor welcomes the prospect of Finra arbitration, where the playing field is tilted strongly in favor of the brokers.

Schapiro is also being attacked for allegedly lying about the merger which created Finra — but that’s going to be a minor part of the confirmation hearings when compared to the story of her relationship with Bernie Madoff.

The NASD and Finra were involved in several examinations of the brokerage business of Mr. Madoff, who stands accused of running a giant Ponzi scheme; her agency concluded in 2007 only that his firm had violated technical rules and had failed to report certain trades in timely fashion.

As Kim Phillips-Fein says,

It seems quixotic to expect that a woman committed to the principle that Wall Street can regulate itself and deeply embedded in industry relationships will campaign for a stricter set of government regulations during her tenure in charge of the SEC…

Schapiro’s own analysis of Wall Street’s problems in recent months has focused in large part on a breakdown of "ethics" and the need to rebuild a moral and responsible culture within brokerages–one capable of taking into account the long-term interests of investors (and, one might add, the rest of society). This is valuable, but it seems overly focused on encouraging the industry to reform itself, rather than developing new regulatory principles. And while Schapiro has spoken about the need to create a "21st-century regulatory system reflecting 21st-century realities," it’s hard to tell exactly what this means.

It’s possible that Schapiro, weakened by her confirmation hearings, will quietly sit on the sidelines as the Obama administration abolishes the SEC entirely and hands its responsibilities over to a regulator with teeth. But I doubt it, and in any case the SEC needs someone in charge who’s committed to root-and-branch reform of the regulatory system. So far, there’s no evidence whatsoever that the toothless and narrowly-focused Schapiro is that person, and I do wonder how committed the Obama transition is to her nomination.