I awoke this morning to read that a former U.S. Securities and Exchange Commission official has credibly claimed that the S.E.C. destroyed thousands upon thousands of records of enforcement cases in which it had decided not to file charges or to launch full-blown probes. The case records dumped included prominent Wall Street firms such as Goldman Sachs, Citigroup, Bank of America, Morgan Stanley and SAC Capital.
Here’s is how Rolling Stone concluded its excellent report on the scandal:
“Forget about what might have been if the SEC had followed up in earnest on all of those lost MUIs(“Matters Under Inquiry”). What if even a handful of them had turned into real cases? How many investors might have been saved from crushing losses if Lehman Brothers had been forced to reveal its shady accounting way back in 2002? Might the need for taxpayer bailouts have been lessened had fraud cases against Citigroup and Bank of America been pursued in 2005 and 2007? And would the U.S. government have doubled down on its bailout of AIG if it had known that some of the firm’s executives were suspected of insider trading in September 2008?”
“It goes without saying that no ordinary law-enforcement agency would willingly destroy its own evidence. In fact, when it comes to garden-variety crooks, more and more police agencies are catching criminals with the aid of large and well-maintained databases. “Street-level law enforcement is increasingly data-driven,” says Bill Laufer, a criminology professor at the University of Pennsylvania. “For a host of reasons, though, we are starved for good data on both white-collar and corporate crime. So the idea that we would take the little data we do have and shred it, without a legal requirement to do so, calls for a very creative explanation.”
“We’ll never know what the impact of those destroyed cases might have been; we’ll never know if those cases were closed for good reasons or bad. We’ll never know exactly who got away with what, because federal regulators have weighted down a huge sack of Wall Street’s dirty laundry and dumped it in a lake, never to be seen again.”
This isn’t conduct that the current administration, in typical fashion, can blame on the last one, as it has every other fiasco that has come to light under its watch. The SEC’s habit of illegally destroying evidence (which the law requires it to retain for 25 years) began under President Clinton in 1997, continued through the Bush years, and only ended in 2010, after a whistle-blower (who was fired as a result) brought it to light.
We have already learned that many SEC attorneys, rather than doing their jobs, spent their days watching porn on the government dime. We wondered how the agency failed to detect Enron, failed to stop Madoff, failed to save the nation from a financial meltdown. Do we really need to wonder any more?
The lesson of the SEC’s betrayal is an old one. Rules and regulations are necessary, but they won’t make an unethical culture ethical. All they can do is give smart and unethical people something to work around, and these will always figure out ways to do it. In the wake of the Enron scandal nine years ago, new rules were put in place. Sarbanes-Oxley was going to cure everything. The SEC “got tough” on lawyers and accountants and the Wall Street manipulators they abetted. And the financial sector got more corrupt than ever while the government enforcers vaporized the proof of their own incompetence.
Does it amaze you that in the wake of Enron, the Bush administration didn’t pay special attention to how the SEC was performing its duties, rather than assuming that words on pieces of paper were suddenly going to clean up a stinking cesspool? It amazes me, because it is so, so utterly stupid and self-destructive. Does it amaze you that the Obama Administration, swept into office by a wave of indignation over the financial sector’s greed and recklessness, proclaiming hope and change, , didn’t make over-hauling the SEC a top priority even after the Madoff fiasco? It amazes me, and I know it shouldn’t.
Americans have been betrayed and lied to by three administrations, all of which assured them that the ever-watchful government was making sure that the wheeler-dealers on Wall Street were playing by the rules, and that the public’s investments were safe. Are we really going to be so foolish as to believe that a fourth regime will do any better?
The SEC’s failure proves an ethics truth: the only way to reform an unethical culture is to change it from within. Ethical cultures don’t require heavy oversight, and unethical cultures will always breed people get around it. That is true of Wall Street, and goes for the obviously imbedded unethical culture at the SEC as well. Watch: there will be calls for a new watchdog to watch the watchdog, which is madness. The Security Exchange Commission, like the industry it regulates, needs to be trustworthy because of what it is, not because of how it is policed. Right now, it isn’t trustworthy; it isn’t even legal. We can’t wipe out Wall Street and start all over again: reforming that culture is going to be a daunting, if not impossible task.
We can, however, overhaul the agency that betrayed the nation with its laziness and corruption. It’s time to get started.