Our earlier post noted the regulatory capture of the SEC by Wall Street. Later in the WSJ piece we referenced, SEC Chairman Mary Schapiro hinted that the issue might be even worse. She blamed the agency’s ineffective oversight of Lehman Brothers was partly due to insufficient staffing.
So that set me off looking for how the SEC staff and funding levels have changed over the past few decades relative to their workload .
What I found was deeply disturbing: Over the past 30 years, the financial world has grown exponentially in size, breadth and complexity of products, trading volume, and total assets under management. In terms of personnel, assets under management, numbers of trader, managers, sales people, and mathematical PhDs., who work on the street increased dramatically.
The SEC did not.
Indeed, almost by design, the SEC has done a mediocre job keeping up with the finance sector over the past few decades. Their budgeting and salary allowances was far outpaced by Wall Street. The bodies the SEC can throw at any problem are dwarfed by what Wall Street manages. Consider that there are 1,000s of quants working on Wall Street. At the SEC, there are approximately zero.
The SEC appears to have suffered from what can be best described as a benign neglect. However, if you conclude it was malignant congressional intent, you wont get much of a fight out of me. The agency was all but abandoned
Consider this March 2002 GAO report to Congress on the SEC. To summarize their conclusion:
“U. S. securities markets have grown tremendously and become more complex and international. As a result, SEC's workload has increased in volume and complexity over the past decade. As illustrated below, around 1996, SEC's workload (e.g., filings, applications, and examinations) started to increase at a much higher rate than SEC staff years devoted to this workload. Although industry officials said that they respect SEC as a regulator, they said that SEC's limited staff resources have resulted in substantial delays in SEC regulatory and oversight processes, which hampers competition and reduces market efficiencies. In addition, they said information technology issues need additional funding, and SEC needs more expertise to keep pace with rapidly changing financial markets. Finally, the officials said that SEC's reliance on a small number of seasoned staff to do the majority of the routine work does not allow those staff to adequately deal with emerging issues.
The GAO also identified other budgetary related issues: Low salaries, inexperienced staff, high turnover, outdated equipment, etc.
The charts tell all:
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All charts sourced via GAO analysis of SEC data
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This leads us to asking Congress to accept responsibilty for the ineptness of the SEC. Congress failed to provide adequate funding for the agency. It didn’t require tax dollars, it could have been funded through SEC action, fines and settlements.
Congress did not need to deregulate Wall Street — they only had to defund the SEC –which is what effectively happened. Hence, the chief cop on the Wall Street beat was outgunned, overmatched, undermanned and out-lawyered by the industry they were supposed to be regulating.
How can that possibly have been any good for investors . . . ?
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More charts after the jump . . .
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Source: SEC OPERATIONS Accountability Integrity Reliability Increased Workload Creates (GAO-02-302) A report to Paul S. Sarbanes, Chairman, Committee on Banking, Housing, and Urban Affairs, U.S. Senate; Christopher J. Dodd, Chairman, Subcommittee of Securities and Investment; and Jon S. Corzine, Member, Committee on Banking, Housing and Urban Affairs, U.S. Senate. GAO, March 2002 http://www.gao.gov/new.items/d02302.pdf
Source: SEC.
But Barry – it was “TOO much regulation” (and CRA, Fannie, Freddie) that caused this mess. Stop trying to destroy the libertarians’ convenient straw man.
Ya think the IRS has such a short leash? Me neither
Starve the Beast. Remember that. This all fits into a mass psychosis this country has been suffering for a long time.
After all “Free” markets don’t need a regulator/cop or someone telling them what to do. They are self regulating. The Federal government should only provide an army (and that is per the Constitution so my friend insists) . It just doesn’t happen to be the Constitution I read, but many people believe it.
Barry, I hear this stuff all the time. I live in a very conservative rural area. The people firmly believe the less regulatory/government foot print the better. I’d say at least 80% in this poor rural area feel this way. After all it is hammered into them on the radio, (just listen to late night talk shows) Fox, etc.
The 80% would be all for defunding the SEC, doing away with the EPA, out lawing unions etc.
The funny thing is most of these people are rather poor and many live off Social Security. THe irony is almost too much.
during 2001 recession it was well know bush gutted all regulatory agencies, cutting some budgets by 50%
now what do folks do, regular employee’s do, be thankful u have a job, keep your mouth shut, don’t make any wayves
which is what we got, enronesque
[...] Defective By Design (The Big Picture) Barry Ritholtz takes a look at how the SEC has not kept up with the growth and complexity of Wall [...]
I maintain it’s not the quantity of staff; it’s the quality.
Far too many lawyers and not enough people with serious trading experience. they can understand a problem when they see it. The lawyers cannot.
This is a CULTURAL problem and it starts at the top. When incompetence, cronyism, and corruption are not penalized (e.g. by FIRING people and replacing them), then we get the same behavior (X 10) over and over again. It’s not that complicated. We need smart regulations that are ENFORCED by smart, tough people who will be supported AT THE TOP when the sociopaths try to take them down, not necessarily more regulations.
The Sheeple merely follow what the elite are doing and we are leaderless and rudderless in this country. Everyone looking out for numero uno first, last, always.
Barry, there is an underlying partisan issue masquerading as a “systemic” problem here. See, for example, the Bill Moyers interview a few weeks back with Thomas Frank: http://www.pbs.org/moyers/journal/01152010/transcript4.html
The Executive branch controls staffing levels and the pace at which federal agencies can promulgate new regulations. There is a well-documented pattern of deliberate under-staffing and/or inappropriate staffing at oversight agencies during republican administrations. These conditions satisfy the self-fulfilling prophecy that government is bad and government workers are inherently incompetent.
Government has never paid as well as the private sector but offers additional job security and often very decent benefits as something of a trade-off. This is why the lone honorable lawman fighting the rich railroad/cattle baron and his minions and corrupt judges/local politicians has been a plot staple of westerns since forever.
Hmmm 2002…..who controlled all branches of government at that time? That’s right! That a boy, Brownie!
So Wall St. got the opportunity to self-regulate. They didn’t. What are they liable for to Main St. in order to “make it whole”?
@Chief: If you’d ask them – nothing at all. This “wasn’t their fault”. Now let’s all move along. Nothing to see here.
What a fuster cluck.
SHOCKED! Shocked I tell you.. Starve the beast was a crucial part of the tactics espoused by the Booze Allen and Andersen ilk of the 90’s. The line went something like “change is not easy– it takes time to weed out all of the poor practices that need to be eliminated…”. The approach was simple- feed/support those efforts that further the ‘new’ direction while starving those that are ‘resistant’ to change. This is how compliance audits are ‘defanged’. Prioritize puff audits and reports while telling the ‘zealots’ that if those other low priority ‘concerns’ are so important, work on them on your dollar! Take’m home…
Legal staffs actually conducted plausible deniability sessions specifically stating that all of those ‘negative’ reports need to be eliminated at the source. My favorite quote was ” why would you ever want to know that you are not in compliance?” The best way has always been to force the naysayer to bleed his own blood if he was so serious about the effort or better yet don’t let the door hit you in the ass on the way out!
Think GMAC, ResCap and Ditech etc…
Sorry, it’s not Washington’s fault. I did it. In the last thread I placed a curse on the world and removed all reasonable financial regulation for what I thought was the past year. I retained my memory of the correct events. My bad. I went back a little further than intended. Sorry.
Things were pretty good before my little joke. Congress was faithfully representing the needs of the majority of the People. The SEC kicked ass and was highly respected and feared on Wall Street. Gas was 98 cents a gallon. The S&P was 2500 and dividends averaged 9%. You couldn’t sell a stock that didn’t pay dividends. People were in awe of the Fed and it’s incredible perfection. Ben Bernanke won 2 Nobel prizes and NY City changed it’s name to Greenspan, NY in honor of the world’s smartest man. You have no idea how much I regret the error.
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