By Pam Martens and Russ Martens: September 14, 2021 ~
Gary Gensler, SEC Chairman
The Senate Banking Committee will hold a hearing today titled “Oversight of the U.S. Securities and Exchange Commission.” The SEC needs a lot of oversight because that’s the federal agency that didn’t catch Bernie Madoff for more than four decades, despite a financial expert, Harry Markopolos, sending the SEC detailed written reports (in 2000, 2001, 2005, 2007 and 2008), making the case that Madoff was running a Ponzi scheme.
The SEC was also asleep at the switch while Wall Street banks concocted their subprime debt bombs, then bet billions of dollars that they would fail while selling them to public pension funds as good investments. Those subprime bombs blew up in 2008, cratering the U.S. economy and leaving millions of innocent Americans jobless and homeless.
More recently, the SEC was caught flat-footed when the family office hedge fund, Archegos Capital Management, blew up and the public learned for the first time that Wall Street banks have been disguising massive, highly-leveraged stock positions held by these hedge funds as belonging to the banks.
The SEC is also currently turning a blind eye to a practice that screams illegal manipulation: it is allowing the serially-charged mega banks on Wall Street to trade their own bank’s stock in their own Dark Pools. (See The SEC Is Allowing 5-Count Felon JPMorgan Chase to Trade Its Own Bank Stock in its Own Dark Pools.)
The reason that the Senate Banking Committee has to closely police the SEC with these regular oversight hearings is because this Senate Banking Committee has repeatedly confirmed the outside counsel to the largest trading banks on Wall Street to serve as Wall Street’s top cop. The guy before Gensler, SEC Chairman Jay Clayton of Sullivan & Cromwell, was nominated by President Donald Trump. Clayton had legally represented 8 of the 10 largest Wall Street banks in the three years prior to the Senate Banking Committee confirming him to Chair the SEC.
Before Clayton, the Senate Banking Committee had confirmed Mary Jo White, a law partner at Debevoise & Plimpton, as SEC Chair. White was nominated by President Barack Obama. Between White and her husband, John White, a law partner at Cravath, Swaine & Moore LLP, they had represented almost every major trading bank on Wall Street.
As Einstein reportedly once quipped, “Insanity is doing the same thing over and over and expecting different results.” If the Senate Banking Committee genuinely wanted a real cop on the beat on Wall Street, it would stop confirming captured regulators.
The jury is still out on Gensler, who previously spent 18 years at Goldman Sachs and served as Chair of the Commodity Futures Trading Commission under President Obama. Gensler’s initial performance as SEC Chair earned him an early black eye when he picked a 20-year Wall Street bank defender as his crime chief. That crime chief, Alex Oh of the Wall Street go-to law firm, Paul Weiss, exited the role after only six days on the job and considerable unfavorable publicity. To his credit, Gensler went with a career prosecutor the second time around.
Gensler’s opening remarks at today’s Senate Banking Committee hearing include seven references to this phrase: “asked staff for recommendations…” If past is prologue, this will mean that Gensler will run out the clock on actually advancing any meaningful “recommendations” into concrete final rules.
This is Gensler’s statement from his written opening remarks for today’s hearing on market structure:
“I believe it’s appropriate to look at ways to freshen up the SEC’s rules to ensure that our equity markets reflect our mission and are as efficient and competitive as they could be. I think it’s time we take a broad view about what the market structure should look like today. The Commission started this exercise with regard to market data under former Chairman Jay Clayton.”
Let’s stop right there for a moment. Clayton took office on May 4, 2017 during the Trump administration. That’s more than four years ago and nothing positive about market structure has changed one iota.
Gensler continues:
“I’ve asked staff for recommendations, particularly around two key questions: First, how do we facilitate greater competition and efficiency on an order-by-order basis — when people send each order into the marketplace? While there is fragmentation amongst trading platforms, past reforms and new technologies may have led to more segmented markets and higher concentration amongst market makers.
“Nearly half of the volume transacted is executed in ‘dark pools’ or by wholesalers. One firm has publicly stated that it executes nearly half of all retail volume. [That firm is Citadel Securities.] Further, I wonder whether this means that the consolidated tape — the so-called National Best Bid and Offer — fully reflects the full range of activity on exchanges.”
The SEC has no criminal powers. It can only bring civil cases. And yet, the trading conduct among the Wall Street mega banks is increasingly criminal in nature and prosecuted, or not, (mostly not, via deferred prosecution agreements) by the U.S. Department of Justice. Which leads to the question, has the SEC become simply the illusion of policing Wall Street while it picks on the small crooks while giving the big crooks a pass?
That’s the view of a former 25-year trial attorney at the SEC, James Kidney, who retired in 2014. On October 12, 2019, Kidney delivered a stunning assessment of the SEC at Lake Forest College, just outside of Chicago. Kidney characterized the leadership of the SEC when he worked there as “self-serving cowards” who didn’t go after the higher ups on Wall Street because they were simply “looking to move on, to return to their Wall Street job.”
During the lecture, Kidney put up a chart to show how Wall Street’s unchecked corruption impacted the average American and the U.S. economy during and after the 2008 financial collapse. The chart shows that $19 trillion in U.S. wealth was lost; there was a 30 percent drop in housing prices; 8.8 million American jobs were lost; and 10 million homes were lost to foreclosure.
As John F. Kennedy said, “We, the people, are the boss, and we will get the kind of political leadership, be it good or bad, that we demand and deserve.”
Americans need to pick up the phone today and call their Senators to demand meaningful reform of the structure of the Securities and Exchange Commission itself.