With a genuine mixture of sadness and vindication, I read the just-posted report by the United States Securities and Exchange Commission's (SEC) Inspector General/Office of Audits: SEC's Oversight of Bear Stearns and Related Entities: The Consolidated Supervised Entity Program, September 25, 2008, Report No. 446-A. (the Report). I have posted the Report in full and urge all of you to read its findings and allegations.
The Report is a disturbing indictment of our regulatory system that presents a disheartening picture of regulators who sat by as Wall Street was consumed by a spreading conflagration--one that could have and should have been contained as a smaller brushfire. The Report details the ineptitude of higher-ups who persistently frustrated the prescient concerns of underlings. Time and time again, serious warnings were deferred and red flags disregarded. If this were the dismal record of an overwhelmed or well-intentioned supervisor, then I would afford those responsible regulators the same defense that I raise for industry respondents; namely, that hindsight gives us 20-20 vision. See my March 2008 Street Legal column in Registered Rep. magazine, where I discussed just this point. However, when failure to supervise is systemic to the degree of taking on the trappings of being institutionalized, then we are beyond considerations where a given human being may have made an inadvertent error. The Report compels the conclusion that the SEC's failures went far beyond the mere idiosyncrasies of an overwhelmed examiner.
My record has been clear and public. As they say, look it up. Google me and you will likely see in excess of a decade's worth of critique and criticism: broadsides aimed at the SEC, the NYSE, the NASD, FINRA, and the states. You will see years of commentary that too many regulators sought to dismiss and ridicule as the errant ramblings of an annoying gadfly. As a modern-day Laocoön, I was right about what I warned against and right about what I warned of--but my reward was not that different from that ill-fated Trojan .
Nearly two years ago in November 2006, I wrote that :
I think we expect too much out of laws written on paper. The US securities laws -- largely creatures of the 1930s -- are breaking down under the strains of an evolving market (both domestic and foreign). In a sense, they are remarkable for their longevity and flexibility. However, they are also showing signs of age and hardening of the arteries. I mean, gee, when was the last time I used that typewriter now gathering dust on the floor of my closet? The fact is that things and ideas can become obsolete. It's just tough to admit it -- perhaps because it's a sign that we're getting old and an indication that we need to get off our butts and do something new.
Sadly, the folks at the SEC, the NYSE, and the NASD just don't seem willing to wrestle with the complicated and pressing issues of the day. No, they seem more intent on firing staff lawyers who want to investigate major broker-dealers (and, omigod!! -- ask questions of CEOs of firms that advertise on television). They seem more intent on finding ways to bloat their salaries and expand their staffing, while at the same time refusing to admit that they just don't prevent fraud and the bad guys keep infesting our markets in an exponentially growing degree. Ultimately, it all stinks of too many bureaucrats trying to preserve their turf and justify their jobs and salaries. It is protectionism at its worst.
More recently, in March of this year (some six months before the SEC's Inspector General issued his report), I noted the following:
Wall Street has been humbled because it is incapable of controlling its ever ravenous appetites. Who is supposed to do that? Why, the regulators, of course. Did they? No. Why not? Because they are too much like the corrupt contractors who prefer to glue sprinklers to the ceiling. Far too often, those who regulate Wall Street prefer to give you comfort rather than substance, and since the building rarely catches fire, you only see the danger of such lackadaisical regulation when it's too late.
The most critical role of regulation is to protect an industry from its own folly. How all the state, federal, and self regulators failed to see the smoke and sound the alarm is as much a puzzle as a tragedy. One hopes that lessons are learned, but, then again, that is always the hope after such sadness. There have been other fires on Wall Street. There have been other casualties. Still, the sprinklers are glued on. Worse, there is a growing sense in this country that nothing works anymore and that no one knows how to fix what's broke. That too is an age old fear. Knowing that, however, is of little comfort.
Of more recent vintage, are my two blog entries ( Titanic 1 and Titanic 2 ) warning of the parallels between the Titanic and Wall Street, and of the even more dire consequences of simply retrofitting another vessel and sending it to sea. The Report confirms what I have long feared and known. Now that my years of warnings are vindicated, I look forward to the next chapter of my professional life. I hope to finally gain a seat at the regulatory table where my industry knowledge and instincts will be put to use to restructure our now failed and discredited regulatory system.
Pardon me if I still harbor the uneasy fear that those charged with guarding
our markets will continue to disregard my warnings, and will happily open
the gates for yet another wooden horse.