SEC Chair Schapiro and
CFTC Chair Gensler

As I recently noted in LIBOR: The Antitrust Division’s Trojan Horse? (Street Sweeper, April 2, 2011), it appears that the Uniteds States Department of Justice’s Antitrust Division is straining under the weight of its ambitious agenda. In that article I commented that

Additionally, the present political environment is demanding pay freezes, staffing reductions, and a smaller government footprint — all of which raise questions about how the Division intends to accomplish its ambitious agenda. Taking on yet another high-profile case may be the equivalent of opening the Antitrust Division’s doors to a destructive Trojan Horse.

Frankly, it was a pretty simple inference for me to make that the rumored LIBOR investigation could break the Antitrust Division’s back. There are widespread reports of similar financial and morale problems effecting virtually all state and federal regulators and prosecutors.

Money Crunch Spreads

This morning , Dealbook confirmed that Wall Street’s regulators are indeed feeling the strain of tightening budgets and ambitious agendas. In U.S. Regulators Face Budget Pinch as Mandates Widen (by Ben Protess, Dealbook/New York Times), we learn that

[T]he Securities and Exchange Commission and the Commodity Futures Trading Commission are struggling to fill crucial jobs, enforce new rules, upgrade market surveillance technology and pay for travel.

. . .

Their budgets may soon be even tighter, with Republicans looking to cut the regulators’ spending beginning Oct. 1, the start of the government’s fiscal year. . .

. . .

But critics contend that the agencies don’t deserve extra money, given that they missed warning signs and failed to catch serious wrongdoing in the years leading up to the crisis. The S.E.C., too, has been accused of mismanaging its finances. The Government Accountability Office has faulted the agency’s accounting almost every year since it began producing financial statements in 2004.

Robert S. Khuzami, the S.E.C.’s enforcement chief, has similar worries, noting that some Wall Street investigations have faced mounting delays. Recent departures of lawyers will only magnify the problem, he added.

Mr. Khuzami also said he faced a “significant backlog” of tips and referrals, including in the area of market manipulations and accounting irregularities. The tips, which come from whistle-blowers, law enforcement agencies and investors, often prompt S.E.C. investigations.

In coming months, as Congress grapples with demands to cut taxes, cut government spending, and to stimulate the economy, it seems likely that calls from the nation’s regulators and prosecutors for more funding will fall upon less sympathetic ears. Make do with what you have, if not less, may well be the new political mantra.

All of which brings me back to my point in LIBOR: The Antitrust Division’s Trojan Horse? Given the new fiscal realities, regulators and prosecutors must first address their in-house inefficiencies and implement a responsible system of triage when deciding whether to invest time and resources into a new investigation. Similarly, as I pointed out in The Damnable Politics of Regulation, the counter-productive turf wars among and between competing regulators and prosecutors must cease.

As resumes from regulators and prosecutors flood the in-boxes of defense law firms and private sector employers, it’s obvious that many government employees are fearful about the security of their jobs. Worse, as the public sector fails to use sound management practices and simply resorts to the workplace equivalent of gavage, productivity and morale will inevitably fall.

Ultimately, defense lawyers will consider their adversary’s fatigue (or possible resignation) and demand more lop-sided settlements or call the regulator/prosecutor’s bluff by forcing more cases into contested hearings or courtrooms. The failure of the Department of Justice, the SEC, the CFTC, and other government regulators/prosecutors to better triage their caseflow and to better manage their limited budgets has consequences. The failure to timely make choices simply results in choices being forced upon you — typically for the worse.