Here’s an excerpt from Bailout Nation, about a subject under much discussion today: The incompetence of the S.E.C.

Part IV: Market Failure
Chapter 14. Casting Blame

Over the course of two terms, Bush appointed three SEC Chairmen, each ill-suited for the position. It was a veritable parade of poor choices for the role of regulating stock markets. His first appointment, Harvey Pitt, was a securities industry defense attorney and was wholly unsuited to the position. Instead of representing the interests of investors, Pitt was an industry lapdog. Pitt pledged a “kinder and gentler” SEC just when the opposite was needed in the midst of a huge run of corporate misfeasance.

In an era of corporate accounting scandals, Pitt had close ties to the accounting industry. And for inexplicable reasons, Pitt met with the heads of companies under active SEC investigation. As a Wall Street lawyer, Pitt had “recommended that clients destroy sensitive documents before they could be used against them – advice that seemed to find echoes in the SEC’s investigations into Enron and its shredder-happy auditor, Arthur Andersen.” Pitt had to recuse himself from many of the SEC’s votes — they were frequently about the clients he had represented as a defense attorney. By July of 2002, Senator (and future GOP presidential candidate) John McCain was calling for Pitt’s resignation.

Pitt, not surprisingly, demoralized the agency. To investor advocacy groups, having Pitt as SEC chief was like putting Osama bin Laden in charge of Homeland Security.

The next SEC Chairman Bush appointed was William Donaldson. He is the one who allowed the net-cap rule to be exempted for the five biggest banks in 2004. Instead of 12 to 1 leverage, banks levered up 30 and even 40 to 1 after the waiver. It isn’t glib to say the financial meltdown was three times as bad as it might have been for Donaldson’s SEC agreeing to this waiver. It would be charitable to call his chairmanship undistinguished.

Then there is Christopher Cox, a stumblebum of an SEC Chair. Cox was more hapless than anything, unable to successfully navigate the fierce lobbying thrown up by Wall Street.

In July 2007, Cox eliminated the so-called uptick rule, removing a key restraint on shorting just as the credit crunch was getting started. (Not very smart). The market peaked shortly afterwards, and began heading south — with no uptick rule to prevent indiscriminate short selling. Then in September 2008, with the crisis in full flower, the clueless dolt made shorting financial stocks illegal. Apparently, he was unaware that fierce market selloffs are often slowed by short sellers covering their positions (to lock in profits on their bearish bets). Without any short-sellers in the market, the downturn became even worse. From the market highs of October 2007, the S&P 500 and the Dow Jones Industrial Average were cut in half in 12 months. Much of the damage came after the no-shorting rule went into effect. (As GOP Presidential candidate in 2008, Sen. Johh McCain called for Cox’s resignation.)

As this book went to press, an extraordinary scandal was erupting that should give the SEC another black eye: Madoff Investments had made off with as much as $50 billion in investor assets. Madoff himself called his 40-year operation a “giant ponzi scheme.” Madoff was infamous for consistently reporting 1% to 2% monthly returns – rarely having a down month, much less a down quarter.

Numerous people, including hedge fund manager Doug Kass, had warned years before that the ability to provide such unusually smooth returns with so little volatility was more likely the result of fraud than investing acumen.  Other red flags as to the firm’s stated returns had been previously identified, including in a letter to the SEC in 1999. There was no investigation. The fraud was only discovered only after Madoff spontaneously confessed (an act which makes me wonder what the full story really is).

Indeed, there is little evidence that even as late as 2008, the SEC is using any of the quantitative methods for searching out and indentifying fraud now so common on Wall Street.

Harvey Pitt: Accounts angel who supped with the devil
Jason Niss
UK Independent, Sunday, 11 August 2002

The Free Market Needs New Rules
NYT, July 8, 2002

The SEC goes AWOL
Arianna Huffington
Salon, May. 14, 2002

Madoff Was Made Up
Doug Kass:
The, 12/12/08 – 09:27 AM EST

Category: Legal, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

32 Responses to “S.E.C. Chairmen, 2001-08”

  1. Brett Tibbitts says:

    I agree that all three of the SEC Chairmen selected by Bush were VERY poor choices. The SEC simply did not do its job.

    But I also worry that this country will put too much of the blame for this economic mess on the SEC. It is gravely wrong to put too much of the blame on SEC, because then we are inclined to think that a decent SEC could have prevented all of this from happening. We begin to put far too much emphasis on the role of government to protect us and to do our job. And if we do that, the United States, IMHO, will have seen its best days. We will clearly be on the downward spiral.

    This country became rotten to its core with debt and greed – that is the cause of this mess. Everyone must carefully examine his or her own role in how he or she contributed to the mess. Were they more concerned about missing out on gains than preservation of capital? Did they invest with people they didn’t know or didn’t investigate? Were they afraid to look stupid and ask simple questions? Did they buy a house in California or Florida in 2006 or 2007 when we were very obviously in a real estate bubble?

    By all means we need an SEC that does it job – enforces the rules that are already on the books. This clearly did not happen during the Bush years. But if we place too much of the blame on the SEC for the current economic mess, we will not ask ourselves questions like those in the paragraph above. We won’t look at our own roles in the mess – and we will be more than likely to repeat our own mistakes at a later date — because government simply CANNOT and SHOULD NOT keep us away from all risks.

  2. AGG says:

    Is it true that Maria Shapiro was just picked by Obama to be the new SEC chairperson? If so, could you tell us what you think of her?

  3. Mannwich says:

    Of course most of this comes back to Bush and his ideology of not only unfettered free markets, but of using government solely for the purpose of advancing industry interests no matter the cost to the country. He got what he wanted in the end. Heck of a job!

  4. AGG says:

    You are preaching to the choir. All these contributors to the current mess have always asked themeselves just one question: “Did I get away with it?”. If they did they heave a sigh of relief and continue to “play the game” to see who else they can take for a ride. Only tragedy and depression changes the greedy mindset and even then it can morph into a Banzai type of revenge to go out with a blaze of glory. Prudence is not, at present, an American trait. We are big on forgiveness as long as we are on the receiving end. Caveat Emptor is fine for those of us that are educated but Government must always function like a locked door; it keeps honest people honest. The crooks will always find a way and, by the way, the crooks have been using the argument you are making to cover their malfeasance. It’s time for the pendulum to swing in the social justice direction and away from the free for all jungle. We need jungles in the world but most of us don’t want to live in one.

  5. Mannwich says:

    @AGG & Brett: I would submit to you that our government not only condones the unethical, morally bankrupt behavior you describe, they PROMOTE it. That’s the issue and everyone knows it. In their world, if you don’t get caught it’s technically not cheating, so you might as well only try, since everyone else is doing it, the rewards are so great and penalties so laughably light or nil, you’d be a fool NOT to try (elite competitive athletics is similar in that regard).

  6. Marcus Aurelius says:

    It’s not advancement of industry interests – it’s blatant refusal to enforce the law. The SEC knew about Madoff for a long time. They didn’t think the company’s activities might’a, sort’a, kind’a looked unsavory – they knew, or had good reason to know – that crimes were being committed. They did nothing. That’s what happens in a kleptocracy.

  7. Mannwich:
    A lot of Democrats promote it too(I say that as a Democrat). What did Chris Dodd or Barney Frank do? They’ve been bought off by Wall Street(thanks to Chuck Schumer).


    BR: I didn’t see Barney Frank having done much wrong, but Schumer (D-NY) supported all of the Wall Street bills that Gramm had sponsored, like the repeal of Glass Steagall, and the Commodities Futures Modernization Act.

    That legislation wa signed into law by Bill Clinton, and had the support of both Robert Rubin and Larry Summers

  8. AGG:
    Yes, Shapiro is Obama’s pick to head the SEC. I know nothing about her.

  9. AGG says:

    I looked at Schapiro’s bio and the main danger flags are 1) board member Duke Energy and 2) board member Kraft foods. These outfits are both very predatory. Duke was and is involved in a problem down in Texas with people’s houses blowing up because of gas line couplings that were supposed to be replaced but weren’t because the “authorities” in FREE MARKET GOD TEXAS didn’t see any need. Of course this good corporation “contributes” large sums to the Texas elected official’s PAcs. It’s the American way.
    Kraft Foods. The antithesis of organic.

  10. going broke says:

    Wish I could leverage my unemployment check 40-1

    Thanks! Bush & Company

  11. Mannwich says:

    @Calvin: I hear you. Most of the Dems are no better either but the Bush admin took ideological incompetence to a while new level. We’ve had a failure of leadership in all segments of our culture.

  12. AGG says:

    Hey Marcus Aurelius,
    Glad to read your words. I missed your regular commentary. Yeah, I know these anus rectums at the SEC wear coded blinders so the see only what they are supposed to see. Most people are afraid to accept the total corruption of the elite. The only fun (with the elite) is in watching them chase their tail around trying to cover their ass. 2008 has been very entertaining.

  13. jmborchers says:

    Part of the reason the banks had to lever up to make profit was because US people weren’t saving anymore.

  14. AGG says:

    13th Apostle,
    Thanks. I got the bio from borchers on another thread. The net is strarting to drum up stuff on her now. She’s been “in on” a lot of the show but has she been a player or a person of integrity waiting her chance to use that great veterinarian tool, the emasculator, on a few predators? That is the question.

  15. Pat G. says:

    The reasons the banks levered up was because they were greedy and knew that they could get away with it. The SEC was asleep at the switch and as this article indicates, still is. Like most of our government.

  16. gamingthemarket says:

    This is from Gary Aguirre (SEC whistleblower) who was fired for investigating John Mack prior to his CEO appointment at Morgan Stanley.

    “Significantly, three years ago, the SEC was conducting an investigation that could have averted the subprime crisis. The investigation focused on Bear Stearns’ evaluation of subprime debt, the core issue in the current crisis. The investigation reached a point where Bear Stearns was told it would be charged. Then, for no known reason, the investigation was switched off. A recent Wall Street Journal article suggests that the effective prosecution of the Bear Steams case might have averted the subprime crises.”

    Read more at:

  17. DL says:

    “In July 2007, Cox eliminated the so-called uptick rule, removing a key restraint on shorting … (Not very smart)”.

    “Apparently, [Cox] was unaware that fierce market selloffs are often slowed by short sellers covering their positions (to lock in profits on their bearish bets)”.

    The foregoing two statements appear to be inconsistent. Perhaps there is no inconsistency, however, if it is true that restoration of the uptick rule would have no effect on average daily short interest. But I would be surprised if there were any definitive data showing that the presence of the uptick rule has any effect one way or another on the level of the 10 day moving average of the SPX (relative to what it would be in the absence of the rule).


    BR: Not inconsistent at all — an uptick rule exists to prevent additional shorting in a freefall.

    But you don’t get any Short covering after a selloff if you make shorting illegal. And short covering is often how bottoms get started.

  18. wunsacon says:

    Neo-Republican motto: “regulatory capture happens”.

  19. KJ Foehr says:

    “Here’s an excerpt from Bailout Nation, about a subject under much discussion today: The incompetence of the S.E.C.”

    It’s not just incompetence; it’s planned incompetence.

    I think this is one area where we definitely will see real change in the Obama administration. The SEC will become proactive, even aggressive and intrusive. Having said that, any auditor can tell you fraud is hard to uncover. It may have been fairly obvious in the Madoff case, but it wasn’t “discovered” because they didn’t want to see it: sort of like salutary neglect, except in this case maybe we should call it free-market neglect.

  20. Jurgen says:

    BR: “Then in September 2008, with the crisis in full flower, the clueless dolt made shorting financial stocks illegal. Apparently, he was unaware that fierce market selloffs are often slowed by short sellers covering their positions (to lock in profits on their bearish bets). Without any short-sellers in the market, the downturn became even worse.”


    The idea that short sellers slow down the selloffs is a completely nonfactual B.S. fabricated by Chanos. I personally saw Chanos laughing his ass off after he saw CNBC picking up and propagating this fabricated by him myth. I also have a data to prove it.

    The actual problem with shorting the financials ban was that the ban was not a complete ban — market makers were allowed to short the financials (supposedly to provide liquidity and to hedge, but in reality the market makers [btw, Madoff’s firm was one of them shorting the financials during that time under market maker ID MADF, according to the records] were front-running and manipulating). The “fair market making” requirement was only implemented after the shorting financials ban expired, in late October. (Since late October market makers are now required to be on the bid as much as they are on the offer and for like amounts of stock. This “fair market making” requirement is designed to prevent market makers from manipulating stock prices.)

    For example, the average daily short sales in Morgan Stanley for the month of July was 1.9 Million shares, for August 1.3 Million shares, for the period between September 1 – 12 2.6 Million shares, September 15 – 18 18.7 Million shares, and when the ban was in place during September 22- 30 1.9 Million shares.

    So Barry, if the short sales during the ban were equal to that (on an average daily basis) of short sales without a ban, how do you really know what caused the continued decline in the market?


    BR: I believe experienced traders can tell the difference between institutional accumulation and short covering. The short sharp rallies you see during sell offs are usually short covering; The sideways rangebound trading is more institutional buying.

    I’d be interested in whatever data you have on this.

    I’ve never bothered with data on this, but having watch the process closely now thru several selloffs (97, 98, 2000-03, 2008) as both a trader and a strategist, I believe there is a difference.

    As to Chanos, I wouldn’t be so quick to write him off . . .

  21. eren says:

    i keep saying since 2000 ” it is all about stock options.”.

  22. KJ Foehr:
    I wish I could dig up the quote of Kos(of The Great Orange Satan fame) said about Republicans. Something to the effect of: What do you expect when you elect a party that doesn’t believe in good governance? One of their highest profile surrogates has been quoted as saying he wants to shrink the government so he can drown it in a bathtub. If I find the quote, I’ll post it.

  23. Scott F says:

    I run a long short fund.

    Short covering after big selloffs is just profit taking. Its the equivalent of a little pullback after a big rally.

  24. VennData says:

    “…It would be charitable to call [Donaldson's] chairmanship undistinguished…” thought he was doing a good thing for Wall Street, but actually, literally destroyed it.

    You can’t spell ‘unintended consequences’ without S… E… C…

  25. JustinTheSkeptic says:

    I hope you mentioned something about what role competition from abroad, namely London, Singapore, Hong Kong, etc., played in making our government officials behave the way that they did. All, we were hearing back then was how much market share we would lose if we did not lighten up on regulation.

  26. OkieLawyer says:


    This is the best that I could do (not from Kos):

    Why do people vote to send Republicans to government, when they see their entire purpose in life as being to show that government doesn’t work? And why doesn’t it work? Because Republicans keep trying to thwart any good that it might be able to do. Then they pat themselves on the back and say, “See? We were right. Government doesn’t work.”


    “I’m a Republican and I believe that government is corrupt, incompetent, inefficient and ineffective. Elect me, and I will prove it to you.”

  27. CPJ13 says:

    From Dealbreaker, re Shapiro’s appointment:

    “There has to be a question about vetting, as in: did or didn’t the administration actually look into Mary’s past. Mary’s the one that appointed Mark Madoff to the National Adjudicatory Council in 2001, which we have to assume is an oversight on the part of Obama’s camp if for no other reason than it’s so bloody insane it defies all bounds of logic.”

    Didn’t know that…

  28. ottovbvs says:

    BR: your strictures are entirely justified but surely it’s all part of a pattern in the Bush administration. He repeatedly appointed extreme idealogues, sycophants and cronies to these jobs who with a few exceptions were uniformly incompetent. I’m not sure that I can remember all the names but a few that spring to mind.

    George Tenet
    Porter Goss
    Miers (who didn’t make it to the supreme court).
    General Pace
    General Myers (who was worse than Pace)
    General Sanchez
    Tommy Franks
    Rice (Bin Laden determined to attack) and the most useless SOS in memory.
    The black guy at HUD
    The woman at Admin Services
    All of them at Interior
    All of them at EPA with possible exception of Whitman
    Ashford(he of the velvet curtains over the tits)
    Wolfie and all the other neocons like Perle and Feith Jew at Defense and State
    Yoo and Addington (tortures ok as long as you’re American otherwise it’s illegal)
    All of them at Energy
    Perino bimbette to end blackeyed bimbettes, Fleischer the slimester and the little Walmart manager?
    All of them at the FDA
    Bremer (He of the db suits and combat boots)
    Rove who seems to have wrecked the GOP with his strategy of polarization
    Scooter the felon
    Cheney (at an undisclosed location improving his aim)

    It’s never ending. Elections, alas, have consequences.

  29. ottovbvs says:

    ps. Before anyone jumps all over me about Mr Feith, no offence meant, I couldn’t remember his name and originally referred to the ‘ Perle and the other Jewish guy who set up the little gestapo according to Powell’ but didn’t delete whole line when his name came back to me. Mea Culpa.

  30. mkkby says:

    Who cares! It’s all in the rear view mirror. Anyone paying even a little attention knows about the bailout nation. Let’s get on with money-making investment ideas for this week and next.

  31. Lugnut says:

    More to CPJ’s point…

    Mary Schapiro, Barack Obama’s choice to lead the Securities and Exchange Commission (SEC), previously appointed one of Bernard Madoff’s sons to a regulatory body that oversees American securities firms.

    It has emerged that in 2001, Ms Schapiro, currently chief executive of the Financial Industry Regulatory Authority (Finra), employed Mark Madoff to serve on the board of the National Adjudicatory Council — the division that reviews disciplinary decisions made by Finra.

    Last week, Mark Madoff, with his brother, Andrew, were understood to have approached the authorities after their father apparently confessed to orchestrating a $50 billion securities fraud.

    Mr Madoff is under house arrest in his $7 million Manhattan apartment and will be electronically tagged after he failed to secure further signatories to guarantee his $10 million bail.

    Both sons have emphatically denied any involvement in what could be the biggest fraud perpetrated by an individual.

    However, the link with Mark Madoff may prove controversial for Ms Schapiro and the President-elect, who has moved fast to replace Christopher Cox, the current head of the SEC. The watchdog has came under fire for failing to detect Mr Madoff’s activities.

    Earlier this week, Mr Cox admitted the regulator had repeatedly failed to follow up on tip-offs about Mr Madoff’s business dealings

    I’m sure there will be a perfectly good explanation for this vetting oversight.


    Knowing the Dems, they’ll say they t wasn’t an oversight, they were fully aware of her connections to Madoff’s son, investigated it thoroughly, and deemed that this was not sufficient cause for her to recuse herself from consideration This is not the scandal you are looking for

  32. thenewguy11 says:

    So the body of your posts points to a indications of Madoff’s fraud from 1999, but the headline of the post starts at 2001. I can’t imagine why.