Hey Harry -- the fish stinks from the head down.

Solomon: Are you saying the S.E.C. under Schapiro is about to catch fraud on Wall Street?

Markopolos: She has the wrong staff. They're a bunch of idiots there.

Solomon: What do you mean?

Markopolos: The Five commissioners of the S.E.C. are securities lawyers. Securities lawyers never understand finance. They don't have the math background. If you can't do math and if you can't take apart the investment products of the 21st century backward and forward and put them together in your sleep, you'll never find the frauds on Wall Street.

Solomon: So why doesn't the S.E.C. hire finance people? Why don't they hire you?

Markopolos: They're overlawyered. They're poisoned by lawyers.

Math Is Hard (Questions for Harry Markopolos by Deborah Solomon, New York Times Magazine, February 28, 2010, page 14).

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DICK: The first thing we do, let's kill all the lawyers.

Shakespeare's Henry VI, Act IV, Scene 2:

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Yeah, I read Markopolos' New York Times interview. No, I didn't like the part about lawyers. Yes, I am familiar with the Bard's suggestion about lawyers.

One industry reader of my blog (someone who loves to get a rise out of me) immediately emailed me this comment: "Bill, Harry agrees with much of what you have said all along about SEC incompetence. I hope you aren't upset that he pokes at lawyers. He's somewhat right, though."

My reply to that reader was along these lines:

The numbers of lawyers on Wall Street is a function of the industry's demand for more lawyers, which was driven by Wall Street's need during the last generation for more scriveners of its exponentially increasingly exotic deals. The supply of lawyers expanded to satisfy the increasing demand for drafters and the concomitant need for litigators to handle the byproduct of those deals, many of which failed with devastating consequences.  As more and more so-called compliance matters found their way to contested hearings, civil trials, criminal trials, and civil/criminal appeals, lawyering on Wall Street became a growth industry.  Frankly, who am I to complain -- I am a lawyer. 

What Markopolos jabs at as over-lawyering at the SEC is a far worse problem. The SEC's hiring net is largely cast to capture Ivy Leaguers, to reward the politically connected, and to entrench a ponderous bureaucracy. Far too many of the best-and-the-brightest that the SEC aggressively seeks out will never, ever stay on as career professionals but will likely use their regulatory stint as a resume building block for the eventual leap to the private sector and bigger bucks.

That myopic recruiting program results in the worst of many worlds. First, you have an SEC hiring process aimed at recruiting too many lawyers who simply will not become career staff and essentially waste the valuable years of training (which might have been put to better use on someone more apt to stay on staff). Second, you fuel the turnover at the SEC when those Ivy League types bail after 3 to 6 years - at a point when they just about began to figure it all out. Third, you further the Peter Principle in that those who remain at the SEC may be disappointed job candidates unable to secure private sector employment -- and that distilled group may achieve promotions for their longevity rather than competency. As such, the system often becomes overly concentrated with cronies and sychophants.  It would be a gross over simplification to imply that the overwhelming majority of SEC Staff are wash-outs. To the contrary, my experience with all levels of regulation shows that the rank-and-file tend to be quite sincere and committed to public service.  All of which is a testament to the expression that a fish stinks from the head down.

Finally, as Markopolous correctly suggests, there has not been enough of an effort to balance SEC staff with accountants and economists, who would better understand the numbers and best further the initial purposes of examinations and investigations. Nor has there been an effort to empower those non-lawyers with more input and control over the direction of the SEC. This is not a failure that is easily resolved by killing all the lawyers.  This is a failure of intelligent management.

The SEC fails because it is a hermetically sealed system. It is staffed with the same faces that regurgitate through regulation, which causes the SEC to suffer from the lack of innovation and ingenuity. This is the destiny of any in-bred gene pool. When an organization is staffed by the same horses on the same carousel, do you really expect anything beyond going around in circles?

Markopolos is simply another victim of a failed system. He banged on one of the SEC's many doors -- but it never opened. He thinks it's personal. It's not. It is the failing of a discredited organization.  Harry and I need to join forces and kick some of those doors down!

For some of my prior commentary on Harry Markopolos, please read:

• http://www.forbes.com/2009/05/21/regulatory-commentary-bill-intelligent-investing-singer.html
• http://www.brokeandbroker.com/index.php?a=blog&id=144