On the surface, Mary L. Schapiro has all the credentials to be an outstanding chairwoman of the Securities and Exchange Commission, as she has unparalleled experience as a securities regulator.
She has been an SEC commissioner and even its acting chairwoman. Ms. Schapiro was chairwoman of the
Commodity Futures Trading Commission of Washington and most recently chief executive of the
Financial Industry Regulatory Authority Inc. of New York and Washington.
She should therefore be thoroughly familiar with virtually all aspects of the financial system, with the exception of commercial banking, including:
• Weaknesses of the SEC's regulatory and investigative efforts.
• Workings of the futures exchanges and, therefore, with the role and power of derivatives.
• The brokerage industry.
But questions remain.
For example, while Ms. Schapiro may be familiar with the SEC's weaknesses, does she have any good ideas about how to fix them? If she has such ideas, why hasn't she shared them with the SEC?
Critics credibly complain that the SEC has spent its energy pursuing small technical violations at small firms while missing major scandals such as the alleged Ponzi scheme run by Bernard Madoff, and failing to spot and head off impending failures at such major firms as The Bear Stearns Cos. Inc. and Lehman Brothers Holdings Inc., both of New York.
Does Ms. Schapiro agree? And does she plan to change the focus of the SEC's investigators?
Does Ms. Schapiro understand how the regulators missed the Madoff scheme despite being tipped off several times over the past decade? Does she have any good ideas about how to make sure similar failures don't occur in the future?
Although Ms. Schapiro may be familiar with derivatives by virtue of her time with the CFTC, does she truly understand how they work? Does she truly think that a merger of the SEC and the CFTC would improve oversight of those institutions using derivatives to hedge or leverage their positions?
A key problem for the SEC seems to be that it is often seen by employees as a great training ground and launchpad for lucrative positions in the financial sector. That has led to significant turnover in experienced staff members and may even have subconsciously affected investigative zeal. In addition, the SEC may be intellectually "outgunned."
'ROCKET SCIENTISTS'
Wall Street has attracted the top graduates of top business schools with the prospects of sky-high salaries, with which the SEC couldn't compete. In particular, Wall Street firms have for the past decade been hiring "rocket scientists," people with strong mathematical skills, to design and implement powerful "black box" investment models.
Mr. Madoff, the founder of Bernard L. Madoff Investment Securities LLC of New York, claimed to be using such a black-box model to generate his unusually steady investment returns during volatile times.
It appears that the SEC didn't have investigators with sufficient brain power to figure out that such returns were impossible with the approach that he claimed to be using. They may not have even understood what the whistle-blowers were trying to tell them about the impossibility of Mr. Madoff's claims.
Wall Street's demand for such "rocket scientists" will no doubt be lessened as a result of the
bear market, but there is still a question as to whether the SEC could attract and pay these "quants" what they demand. Ms. Schapiro should at least try to beef up the SEC's financial and investment brainpower.
If confirmed, she will have her hands full revamping a struggling agency. Ms. Schapiro should spend at least a few months making sure that she understands the failures before she devises a plan to address the flaws that created them.
"First diagnose, then treat" is always a good maxim.
