They Ain’t Microwaivers!

The U.S. government’s Securities and Exchange Commission is our watchdog over the financial industry. They’re supposed to protect consumers but still insure that there is still a strong and viable commercial sector able to raise capital, create and market financial instruments and fuel the business of America. The SEC has substantial powers to sanction, fine, restrain and even prosecute criminally violators of this nation’s panoply of laws regulating exactly how money can be raised. On April 28, 2004, in a unanimous decision after a scant 55 minute hearing, the SEC exempted the five largest “too big to fail financial institutions” – Merrill Lynch, Bear Stearns, Lehman Bros, JP Morgan, Goldman Sachs and Morgan Stanley – from how much debt they could incur versus the amount of equity they held (their reserve ratios).

By the end of 2008, Merrill wound up in a distressed sale to the Bank of America, and, with debt representing a multiple of 30 or more times the equity – Bear Stearns and Lehman Bros. ceased to exist. This little tiny decision triggered some of the least safe, over-leveraged and irresponsible investment activity – mostly over bundles of subprime mortgages – that the country has seen since the late 1920s, the latter being a period of fraudulent and unregulated trading practices that created 1929 market crash and the ensuing Great Depression. The 2004 SEC decision followed by the 2008 collapse precipitated the biggest economic downturn the world had seen since that Great Depression.

The issue of “too big to fail” seems to have morphed into a newer mantra today, “too big to regulate.” Simply put, the sanctions available to the SEC, if applied as a result of the many, many rogue moments that occur within these financial behemoths, could shut down or seriously slow operations for the entire company because of the actions of one segment of corporate operations. So the SEC feels a huge pressure to let these mega-financial players conduct their business under a legal schema that might send you or me to prison if we attempted to mirror their behavior. Their argument is that as much as they are supposed to protect consumers, they believe it is equally important to let these big monsters ply their often-less-than-honorable-trade to keep the capital flowing in America. So they let Wall Street biggies get away with criminal or near-criminal acts in the name of expediency.

The most SEC flagrant practice is the granting of waivers and exemptions to their laws and regulations, and it profoundly commonly applied to the biggest baddies of them all. “An analysis by The New York Times of S.E.C. investigations over the last decade found nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions. Those instances also include waivers permitting firms to underwrite certain stock and bond sales and manage mutual fund portfolios.

“JPMorganChase, for example, has settled six fraud cases in the last 13 years, including one with a $228 million settlement last summer, but it has obtained at least 22 waivers, in part by arguing that it has ‘a strong record of compliance with securities laws.’ Bank of America and Merrill Lynch, which merged in 2009, have settled 15 fraud cases and received at least 39 waivers… Only about a dozen companies — Dell, General Electric and United Rentals among them — have felt the full force of the law after issuing misleading information about their businesses. Citigroup was the only major Wall Street bank among them. In 11 years, it settled six fraud cases and received 25 waivers before it lost most of its privileges in 2010.

“By granting those waivers, the S.E.C. allowed Wall Street firms to have powerful advantages, securities experts and former regulators say. The institutions remained protected under the Private Securities Litigation Reform Act of 1995, which makes it easier to avoid class-action shareholder lawsuits…. Close to half of the waivers went to repeat offenders — Wall Street firms that had settled previous fraud charges by agreeing never again to violate the very laws that the S.E.C. was now saying that they had broken.” New York Times, February 3^rd.

We are increasingly a nation of elites governed by an entirely different set of laws and tax rates than are applied to the overwhelming majority of Americans and American companies. It’s hard enough for most small businesses to find the capital they need in a credit squeeze, and the cost of complying with this nation’s securities laws – necessary in pursuit of passive equity – is prohibitive to most of us. That these Wall Street biggies and their large clients can lie and avoid the strict applicability of such laws while still continuing to operate – when a small businessman or woman might do time in a federal penitentiary – is morally repugnant to most Americans. The biggest American political issue today is the disparity between those at the top of the food chain – once called the 1-percenters or applying the tax-rate-moniker of their spokesperson, the 13.9-percenters – and the rest of us. It’s time to level this playing field big time and apply the same laws, taxes and regulations uniformly to everybody… without exception or exemption.

I’m Peter Dekom, and if you liked the nasty economic surprise of 2008, let Wall Street continue their current practices and brace yourself for the next earth-shattering debacle.