7 ms·

Dissolve the SEC

42 points by cs702 14y ago

jpdoctor 14y ago
> I get it, I’ve talked to people inside the SEC who want to do a better job but feel like they aren’t being given the power to. She has a nice rant, but completely missed the point: The SEC is made of people, all of whom are in finance, and most of whom would like a high-paying job on wall-street. The term "regulatory capture" needs to appear in there somewhere.
- chii 14y ago
  I think the root of the problem isn't that SEC can be captured - all industry regulators can be captured, if given enough funds. The root of the problem is that the financial industry has so much money - money that may not represent real value, and thus, force ripple thru out the rest of the world when some group decides to take huge, but externalized risks. The problem is that this single industry is responsible for too much money generation. If a player in a game has too much power, the power to change the rules will eventually appear. and no amount of regulation can fix that. I m unsure what can actually fix it, other than setting laws such that money cannot be used to make money. Then, this problem will disappear (but so will the livelyhood of many people who currently depend on this).
btilly 14y ago
This article comes from the assumption that the goal of the SEC is to stop the industry from doing Bad Things. That is wrong. The goal of the SEC is to provide a veneer of regulation while ensuring current members that they will have a profitable future in the financial industry. If you get rid of the SEC and replace it with something, this does not improve. Either you wind up with nobody watching these companies - and hence not even a pretense of regulation - or else you will recreate the incentives that lead to the SEC being broken in the way that it currently is. Regulatory capture is an intrinsically hard problem. Anything you do about it is bound to fail in time. However what is most likely to work in my opinion is for someone else - for instance the FBI, to investigate current and past members of the SEC for evidence of corruption. Then have a high profile lawsuit. Once jail time is added to the list of incentives for people in the SEC, we might see more meaningful enforcement from them.
- ihsw 14y ago
  The Nefarious People(TM) involved pay very large amounts to avoid the perp walk, perhaps we should take advantage of that? Let it be known that the public flogging has never gone out of style.
- smokeyj 14y ago
  Instead of replacing the SEC, why have it at all? What service do they provide that I so badly need?
- specialist 14y ago
  > Regulatory capture is an intrinsically hard problem. What's beginning to bug me about regulatory capture is that it's a two party system: subject and observer. Seems to frail. The brilliance of the US constitution is the balance of power between executive, legislative, and judicial. Over the long term, it seems to be largely self-correcting. Or at least correctable. That the players are fighting each other is the only thing that's keeps everyone honest. There's some cliche about mutual distrust guaranteeing trust in a system For all the belly aching about over bearing government and onerous regulation, it seems to me the regulators are way too cozy with the entities they regulate. In general. Oh well. I haven't been able to imagine a system other than subject and observer. So I can't imagine a persistent system resistant to regulatory capture. Maybe there's some novel market-based solutions which build in the right incentives. Kind of like the capitation model for healthcare, which rewards wellness (vs the USA's current fee-for-service model which rewards treating disease.). Or maybe one of those self-managed collectives, like the managed fisheries of the north east, who's mission is to prevent the tragedy of the commons (destroying a common resource).
  - chii 14y ago
    i dont believe the three prongs of the gov't really ensures that none is doing "sus" things. I think its just that judges are help up as people with integrity and societal pressure forces them to behave, where as the SEC regulators are less well known, and the average joe won't really have a clue as to how he/she is being fucked over (indirectly of course). What you need is a incentivization system in which the players are rewarded properly for the tasks that benefit the whole. May be one way is to have the pay bonus of SEC directly related to the amount of fines/corruption/bad behaviour that exists in the corporations they regulate. I m not sure if this will work, as the real cause of the problem is that those with financial power can translate it into political power.
biesnecker 14y ago
I read the headline and immediately thought "but that's the only conference where they play real football!" <sigh>
AJ007 14y ago
Sometimes when a government agency settles with a low fine, its a case they know is on shaky grounds. Defendant thinks they can win but also knows how much it will cost. Usually more than the fine. If something is so serious that the company should be put out of business for doing it, then it needs to involve more than a rule a government regulatory agency wrote themselves. Especially when the government agency is composed of individuals eager for private sector work after they "retire."
steve8918 14y ago
I agree with the author, but I don't think that dissolving the SEC will solve the problem of the SEC. The SEC is corrupt, but no one cares enough to fix it. I think the way to do it is to create an new exchange whose primary focus is to create a level playing field for all participants. This means that things are done fairly, and people won't game the system. Anyone who games the system will be forbidden from trading on it. This also means that they will enforce their own rules at a stricter level than what the SEC would regulate at. If investors are truly concerned about fairness in the system, then eventually, an exchange like this could get enough liquidity to compete against NYSE and NASDAQ. If you read "Dark Pools" by Scott Patterson, he describes how Island was created by a lone hacker, Josh Levine, and he completely disrupted the industry. Maybe there's room for another disruption, along the lines of fairness.
javert 14y ago
Hey, please get that gun out of my face! If you don't like the way an exchange plays, make your own exchange that has better rules and that operates transparently, or patronize one that does. Besides being morally wrong (this is supposed to be a free country), regulation harms innovation, results in winner-picking, and results in regulatory capture. Nothing good can come of it.
- rayiner 14y ago
  Societies need to be regulated. When Moses came down with the commandment: "thou shalt not steal" that was regulation. That was a restriction on what otherwise free people could do in organized society. That was a regulation that involved a "gun in your face." I'll start taking libertarians seriously when they can come up with anything more than strained and ad-hoc distinctions between regulations pertaining to property and other sorts of regulations.
  - javert 14y ago
    I'll start taking libertarians seriously FWIW, I'm not a libertarian. more than strained and ad-hoc distinctions between regulations pertaining to property and other sorts of regulations If you believe each person should work to achieve their own happiness and has no duty to sacrifice for others, then it follows that the role of government should only be to protect citizens from the initiation of physical force. That's the fundamental principle that is relevant to our discussion--not something to do with property. (Granted, some libertarians would argue, incorrectly, that property is fundamental.) For a full explanation, see "Objectivism: The Philosophy of Ayn Rand" by Leonard Peikoff.
    - rayiner 14y ago
      > If you believe each person should work to achieve their own happiness and has no duty to sacrifice for others, then it follows that the role of government should only be to protect citizens from the initiation of physical force. I don't see how you get from "no duty to others" to "government should protect citizens from initiation of physical force." It doesn't logically follow in any way. It's an arbitrary bit of line drawing. If people have no duty to others, why may they not use physical force to achieve their own happiness? This is after all the state of nature. The wolf owes no duty to the deer, and no government restrains him in his use of force to achieve his happiness. Taking physical force off the table is inconsistent with the idea that people have no duty to others. For a great many people, physical force is their competitive advantage. They were born big and strong. They would rule the world instead of the bankers and the politicians if it were not for the government restraining them. Yet the government does restrain them, and that often relegates them to the lowest rungs of society. Imposing that restraint on them is certainly imposing on them a duty. It forces them to sacrifice for the rest of society.
shawnee_ 14y ago
On the one hand, I’m outraged that these fraudulent practices are being so lightly punished. I wonder if the author of the article actually understands what the SEC fined this "dark pool exchange" firm for doing. Dark pools are a growing part of the trading world and are legal but they do not disclose the identity of buyers and sellers. Quotes on securities are not displayed to the public, as they are with major mainstream stock exchanges like the New York Stock Exchange. Participants in dark pools have access to trades that other investors in public exchanges do not The SEC fine was for "allowing" a dark pool to be not-so-dark. She seems to be arguing that the fine should be higher, which would mean firms would have an incentive to go "darker". Dark pools are bad for markets. Allowing a select few (the wealthiest select few? why are they pooling in the dark?) to "collude" and thus have significant impact on the price of a security can hurt the ability of other investors to extract their fair value. Why is the general public being excluded from these trades that affect the FMV (Fair Market Value), and more importantly, does this pooling actually hurt FMV? Maybe dark pools should be illegal. In which case a small fine here makes sense. But what probably happened is that when this dark pool firm leaked the identities / trades of some of its insiders, those insiders freaked out. And now these dark pool exchange firms have been poked in the direction to "stay dark". So where are the incentives to make dark trading more light? Can we invent some? The SEC could reward firms that make colluding dark-pool firms more transparent. I'm sure there's something in the mission statement of the SEC (http://www.sec.gov/about/whatwedo.shtml http://www.sec.gov/about/whatwedo.shtml) that would justify the need for fairness to aid in potential linkage of insider trading of securities that for whatever reason aren't public. [edited for typos and content]
- niggler 14y ago
  Dark pools are bad for the exchange operators of public exchanges (like NYSE and NASDAQ) but it's far from obvious that they are bad for the financial industry. There are certain advantages: for example, even now, all it takes is $50-100K to whip the price of certain public companies like Alcoa (AA), a Dow 30 component. I have rocked the boat many times, and the fact that most small traders can do the same doesn't bode well for the markets. The dark pools do allow for large transactions without affecting the price too much, keeping some sense of order (as vacuous as that sounds). It's important in these discussions to understand that the various companies take sides based on their desired outcome. Other effects like insider trading are far more disconcerting than the issues claimed in this case.
guelo 14y ago
Congress has continually cut the SEC's budget at the request of Wall Street. Wall Street has bought off their cops just as much as the Mexican drug cartels have bought off their cops. The only difference is that in Mexico the population understands what's going on, here people don't understand it and probably wouldn't care if they did.
TinyBig 14y ago
Don't dissolve the SEC because it gives people false hope - dissolve it because it is the poster child for regulatory capture. The top regulators do not hand down big fines because the SEC is a revolving door and the regulators don't want to muck up their post-government careers. It is so utterly corrupt the only solution is to demolish it and replace it with a new enforcement body with some teeth.
- msrpotus 14y ago
  What's the solution? Another body that will then be corrupted by Wall Street?
intended 14y ago
The SEC has been demoralized, and defunded for a long time. While people argue regulatory capture, its only a small part. There are other things most people don't know about the street habits and saves - sort of like the hidden rules of your favorite language. Firstly - The SEC is also working to improve. In 2009 they got their new head of enforcement Robert Khuzami - http://en.wikipedia.org/wiki/Robert_Khuzami http://en.wikipedia.org/wiki/Robert_Khuzami Read his wikipedia page, and his case history, this is the kind of person who you Want fighting for you. -------------- Secondly Rituals: Most industries over time identify patterns and streamline them, but for outsiders they would be arcane. Mathbabe, the ex finance girl who decided to leave finance for something, should already know this. For the rest of us: The SEC has x resources - so they pick and choose cases that they know they have a bullet proof case for. AS a result, when its announced that the SEC is investigating you, most Wall Street firms know that they are in trouble. (OTOH most normal people would think its just an investigation, not the announcement of a verdict ) At this point, all firms know they have a call to make - Fight it out, or cave. * Almost Everyone goes to the negotiating table. The thing most firms want is to plea bargain, and then get a statement where they accept whatever fine they have to accept, while never having to publicly admit to wrong doing. Thats the ritual ------ In 2010, there was 1 firm which decided it had the stones to go against the grain - Goldman Sachs. It was hilarious - the disparaging comments here are praise compared to what Fox news and GS churned out. The SEC is clueless and dumb, filled with people who couldn't make it in finance. The SEC is a lap dog of the Govt. etc etc. IIRC the CEO even went on record expressing his confidence on having the case thrown out. The SEC won and GS paid the largest fine (in the SEC's history AFAIK) of $550 million. The next day the news papers were crowing about how the fine is only a blip on the radar a days fluctuation on the stock market. The guy who prosecuted the case, the head of the SEC ---- Also please note the author of the article is reading a book and has recently reached the section which discusses regulatory capture, and is particualrly incensed by it.

42 points by cs702 14y ago

> I get it, I’ve talked to people inside the SEC who want to do a better job but feel like they aren’t being given the power to. She has a nice rant, but completely missed the point: The SEC is made of people, all of whom are in finance, and most of whom would like a high-paying job on wall-street. The term "regulatory capture" needs to appear in there somewhere.

chii 14y ago
I think the root of the problem isn't that SEC can be captured - all industry regulators can be captured, if given enough funds. The root of the problem is that the financial industry has so much money - money that may not represent real value, and thus, force ripple thru out the rest of the world when some group decides to take huge, but externalized risks. The problem is that this single industry is responsible for too much money generation. If a player in a game has too much power, the power to change the rules will eventually appear. and no amount of regulation can fix that. I m unsure what can actually fix it, other than setting laws such that money cannot be used to make money. Then, this problem will disappear (but so will the livelyhood of many people who currently depend on this).

btilly 14y ago

This article comes from the assumption that the goal of the SEC is to stop the industry from doing Bad Things. That is wrong. The goal of the SEC is to provide a veneer of regulation while ensuring current members that they will have a profitable future in the financial industry. If you get rid of the SEC and replace it with something, this does not improve. Either you wind up with nobody watching these companies - and hence not even a pretense of regulation - or else you will recreate the incentives that lead to the SEC being broken in the way that it currently is. Regulatory capture is an intrinsically hard problem. Anything you do about it is bound to fail in time. However what is most likely to work in my opinion is for someone else - for instance the FBI, to investigate current and past members of the SEC for evidence of corruption. Then have a high profile lawsuit. Once jail time is added to the list of incentives for people in the SEC, we might see more meaningful enforcement from them.

ihsw 14y ago
The Nefarious People(TM) involved pay very large amounts to avoid the perp walk, perhaps we should take advantage of that? Let it be known that the public flogging has never gone out of style.
smokeyj 14y ago
Instead of replacing the SEC, why have it at all? What service do they provide that I so badly need?
specialist 14y ago
> Regulatory capture is an intrinsically hard problem. What's beginning to bug me about regulatory capture is that it's a two party system: subject and observer. Seems to frail. The brilliance of the US constitution is the balance of power between executive, legislative, and judicial. Over the long term, it seems to be largely self-correcting. Or at least correctable. That the players are fighting each other is the only thing that's keeps everyone honest. There's some cliche about mutual distrust guaranteeing trust in a system For all the belly aching about over bearing government and onerous regulation, it seems to me the regulators are way too cozy with the entities they regulate. In general. Oh well. I haven't been able to imagine a system other than subject and observer. So I can't imagine a persistent system resistant to regulatory capture. Maybe there's some novel market-based solutions which build in the right incentives. Kind of like the capitation model for healthcare, which rewards wellness (vs the USA's current fee-for-service model which rewards treating disease.). Or maybe one of those self-managed collectives, like the managed fisheries of the north east, who's mission is to prevent the tragedy of the commons (destroying a common resource).
- chii 14y ago
  i dont believe the three prongs of the gov't really ensures that none is doing "sus" things. I think its just that judges are help up as people with integrity and societal pressure forces them to behave, where as the SEC regulators are less well known, and the average joe won't really have a clue as to how he/she is being fucked over (indirectly of course). What you need is a incentivization system in which the players are rewarded properly for the tasks that benefit the whole. May be one way is to have the pay bonus of SEC directly related to the amount of fines/corruption/bad behaviour that exists in the corporations they regulate. I m not sure if this will work, as the real cause of the problem is that those with financial power can translate it into political power.

biesnecker 14y ago

I read the headline and immediately thought "but that's the only conference where they play real football!" <sigh>

AJ007 14y ago

Sometimes when a government agency settles with a low fine, its a case they know is on shaky grounds. Defendant thinks they can win but also knows how much it will cost. Usually more than the fine. If something is so serious that the company should be put out of business for doing it, then it needs to involve more than a rule a government regulatory agency wrote themselves. Especially when the government agency is composed of individuals eager for private sector work after they "retire."

steve8918 14y ago

I agree with the author, but I don't think that dissolving the SEC will solve the problem of the SEC. The SEC is corrupt, but no one cares enough to fix it. I think the way to do it is to create an new exchange whose primary focus is to create a level playing field for all participants. This means that things are done fairly, and people won't game the system. Anyone who games the system will be forbidden from trading on it. This also means that they will enforce their own rules at a stricter level than what the SEC would regulate at. If investors are truly concerned about fairness in the system, then eventually, an exchange like this could get enough liquidity to compete against NYSE and NASDAQ. If you read "Dark Pools" by Scott Patterson, he describes how Island was created by a lone hacker, Josh Levine, and he completely disrupted the industry. Maybe there's room for another disruption, along the lines of fairness.

javert 14y ago

Hey, please get that gun out of my face! If you don't like the way an exchange plays, make your own exchange that has better rules and that operates transparently, or patronize one that does. Besides being morally wrong (this is supposed to be a free country), regulation harms innovation, results in winner-picking, and results in regulatory capture. Nothing good can come of it.

rayiner 14y ago
Societies need to be regulated. When Moses came down with the commandment: "thou shalt not steal" that was regulation. That was a restriction on what otherwise free people could do in organized society. That was a regulation that involved a "gun in your face." I'll start taking libertarians seriously when they can come up with anything more than strained and ad-hoc distinctions between regulations pertaining to property and other sorts of regulations.
- javert 14y ago
  I'll start taking libertarians seriously FWIW, I'm not a libertarian. more than strained and ad-hoc distinctions between regulations pertaining to property and other sorts of regulations If you believe each person should work to achieve their own happiness and has no duty to sacrifice for others, then it follows that the role of government should only be to protect citizens from the initiation of physical force. That's the fundamental principle that is relevant to our discussion--not something to do with property. (Granted, some libertarians would argue, incorrectly, that property is fundamental.) For a full explanation, see "Objectivism: The Philosophy of Ayn Rand" by Leonard Peikoff.
  - rayiner 14y ago
    > If you believe each person should work to achieve their own happiness and has no duty to sacrifice for others, then it follows that the role of government should only be to protect citizens from the initiation of physical force. I don't see how you get from "no duty to others" to "government should protect citizens from initiation of physical force." It doesn't logically follow in any way. It's an arbitrary bit of line drawing. If people have no duty to others, why may they not use physical force to achieve their own happiness? This is after all the state of nature. The wolf owes no duty to the deer, and no government restrains him in his use of force to achieve his happiness. Taking physical force off the table is inconsistent with the idea that people have no duty to others. For a great many people, physical force is their competitive advantage. They were born big and strong. They would rule the world instead of the bankers and the politicians if it were not for the government restraining them. Yet the government does restrain them, and that often relegates them to the lowest rungs of society. Imposing that restraint on them is certainly imposing on them a duty. It forces them to sacrifice for the rest of society.

shawnee_ 14y ago

On the one hand, I’m outraged that these fraudulent practices are being so lightly punished. I wonder if the author of the article actually understands what the SEC fined this "dark pool exchange" firm for doing. Dark pools are a growing part of the trading world and are legal but they do not disclose the identity of buyers and sellers. Quotes on securities are not displayed to the public, as they are with major mainstream stock exchanges like the New York Stock Exchange. Participants in dark pools have access to trades that other investors in public exchanges do not The SEC fine was for "allowing" a dark pool to be not-so-dark. She seems to be arguing that the fine should be higher, which would mean firms would have an incentive to go "darker". Dark pools are bad for markets. Allowing a select few (the wealthiest select few? why are they pooling in the dark?) to "collude" and thus have significant impact on the price of a security can hurt the ability of other investors to extract their fair value. Why is the general public being excluded from these trades that affect the FMV (Fair Market Value), and more importantly, does this pooling actually hurt FMV? Maybe dark pools should be illegal. In which case a small fine here makes sense. But what probably happened is that when this dark pool firm leaked the identities / trades of some of its insiders, those insiders freaked out. And now these dark pool exchange firms have been poked in the direction to "stay dark". So where are the incentives to make dark trading more light? Can we invent some? The SEC could reward firms that make colluding dark-pool firms more transparent. I'm sure there's something in the mission statement of the SEC (http://www.sec.gov/about/whatwedo.shtml http://www.sec.gov/about/whatwedo.shtml) that would justify the need for fairness to aid in potential linkage of insider trading of securities that for whatever reason aren't public. [edited for typos and content]

niggler 14y ago
Dark pools are bad for the exchange operators of public exchanges (like NYSE and NASDAQ) but it's far from obvious that they are bad for the financial industry. There are certain advantages: for example, even now, all it takes is $50-100K to whip the price of certain public companies like Alcoa (AA), a Dow 30 component. I have rocked the boat many times, and the fact that most small traders can do the same doesn't bode well for the markets. The dark pools do allow for large transactions without affecting the price too much, keeping some sense of order (as vacuous as that sounds). It's important in these discussions to understand that the various companies take sides based on their desired outcome. Other effects like insider trading are far more disconcerting than the issues claimed in this case.

guelo 14y ago

Congress has continually cut the SEC's budget at the request of Wall Street. Wall Street has bought off their cops just as much as the Mexican drug cartels have bought off their cops. The only difference is that in Mexico the population understands what's going on, here people don't understand it and probably wouldn't care if they did.

TinyBig 14y ago

Don't dissolve the SEC because it gives people false hope - dissolve it because it is the poster child for regulatory capture. The top regulators do not hand down big fines because the SEC is a revolving door and the regulators don't want to muck up their post-government careers. It is so utterly corrupt the only solution is to demolish it and replace it with a new enforcement body with some teeth.

msrpotus 14y ago
What's the solution? Another body that will then be corrupted by Wall Street?

intended 14y ago

The SEC has been demoralized, and defunded for a long time. While people argue regulatory capture, its only a small part. There are other things most people don't know about the street habits and saves - sort of like the hidden rules of your favorite language. Firstly - The SEC is also working to improve. In 2009 they got their new head of enforcement Robert Khuzami - http://en.wikipedia.org/wiki/Robert_Khuzami http://en.wikipedia.org/wiki/Robert_Khuzami Read his wikipedia page, and his case history, this is the kind of person who you Want fighting for you. -------------- Secondly Rituals: Most industries over time identify patterns and streamline them, but for outsiders they would be arcane. Mathbabe, the ex finance girl who decided to leave finance for something, should already know this. For the rest of us: The SEC has x resources - so they pick and choose cases that they know they have a bullet proof case for. AS a result, when its announced that the SEC is investigating you, most Wall Street firms know that they are in trouble. (OTOH most normal people would think its just an investigation, not the announcement of a verdict ) At this point, all firms know they have a call to make - Fight it out, or cave. * Almost Everyone goes to the negotiating table. The thing most firms want is to plea bargain, and then get a statement where they accept whatever fine they have to accept, while never having to publicly admit to wrong doing. Thats the ritual ------ In 2010, there was 1 firm which decided it had the stones to go against the grain - Goldman Sachs. It was hilarious - the disparaging comments here are praise compared to what Fox news and GS churned out. The SEC is clueless and dumb, filled with people who couldn't make it in finance. The SEC is a lap dog of the Govt. etc etc. IIRC the CEO even went on record expressing his confidence on having the case thrown out. The SEC won and GS paid the largest fine (in the SEC's history AFAIK) of $550 million. The next day the news papers were crowing about how the fine is only a blip on the radar a days fluctuation on the stock market. The guy who prosecuted the case, the head of the SEC ---- Also please note the author of the article is reading a book and has recently reached the section which discusses regulatory capture, and is particualrly incensed by it.