>>The entire system needs an overhaul in my opinion.<<
I agree. Just a week ago I was telling Victor the constraints the SEC has.
I'm not a big government kinda guy, but I do believe some government agencies should be in place to protect the public from fraud.
>>February 19, 2002
We're fighting a nuclear war with a popgun.
We're asking a 3-year-old to solve the Sunday New York Times crossword puzzle.
The cases of Enron, Global Crossing, ad nauseam prove once again that verbal and mathematical abstruseness is the essence of financial fraud. It's always been that way, but in the last decade, as ever-more-complex derivatives and dense legal and financial verbiage have proliferated, the situation has become the worst in our history.
We have gone back to the days of the robber barons, but the crooks are much better armed now. And it looks like nothing will be done.
The Bush administration proposes to boost the Securities and Exchange Commission 2003 budget by merely 6.6 percent. This paltry $29 million boost will only cover inflation, computer improvements and security.
The SEC had asked for an additional $76 million to bring the pay of SEC lawyers and accountants up to the level of U.S. banking agencies. Actually, SEC staffers deserve even higher pay. Indeed, with financial deceit as rampant as it is, these fraud fighters deserve private-sector pay.
But the Office of Management and Budget is not budging. On Thursday, SEC Chairman Harvey Pitt told the budget office that its parsimony could trigger "a massive exodus of our best and brightest" SEC professionals.
All along, of course, the SEC – and other agencies – have merely been a training ground for ambitious attorneys and accountants. They spend a few years at the agency learning how malefactors can and do evade the law, then go into private practice and work for the crooks that they pursued while at the government. And they quintuple their salaries doing it.
Unfortunately, that process will continue. But the immediate need is to boost salaries now, while the Enron debacle has the public's ear.
Experts such as the University of San Diego's Frank Partnoy correctly say that over-the-counter derivatives should be regulated. But these bewilderingly complex derivatives are concocted by M.I.T. mathematics Ph.Ds.
Why would someone smart enough to figure out these derivatives go to work for a regulatory agency for low pay, when they can make millions a year on Wall Street? There are reform-minded individuals, such as Partnoy, who would sacrifice riches for the public good, but, alas, their ranks are thin.
On Thursday, Paul Volcker, former Federal Reserve chairman, testified before a Senate committee. In his usual understatement, Volcker said, "In the midst of the great prosperity and boom of the 1990s, there has been a certain erosion of professional, managerial and ethical standards and safeguards."
Said Volcker, "The pressure on management to meet market expectations, to keep earnings rising quarter by quarter or year by year, to measure success by one's 'bottom line,' has led, consciously or not, to compromises at the expense of the public interest in full, accurate and timely financial reporting."
At the heart of the issue, said Volcker, is complexity. "The accounting profession has been hard-pressed to keep up with the growing complexity of business and finance, with its mind-bending complications of abstruse derivatives, seemingly endless varieties of securitizations and multiplying, off-balance-sheet entities," he said.
"The new profession of financial engineering is exercising enormous ingenuity in finding ways around established accounting conventions or tax regulations," Volcker said.
But in the last decade, accounting industry lobbyists have convinced government to get out of their way. The Internal Revenue Service's staff has been denuded, its power sharply curtailed. The SEC has been reined in.
And investors have been pillaged. Deregulation has worked well in some industries, such as trucking, but it was never going to work in finance industries, in which greed is the only variable.
Either we have to beef up regulation greatly, or we have to pass stricter laws with much stiffer criminal penalties for those who abuse the system.
The people who love free markets should be the ones who scream the loudest when those markets are rigged. Up to now, it hasn't happened.
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