The Securities and Exchange Commission is set to get a new sheriff. Mary Jo White, former United States Attorney for the Southern District of New York (Manhattan, essentially), was tapped in late January to replace Mary Shapiro as SEC chair. Debate immediately began on whether this was a sign of a turn to stricter oversight or coziness with Wall Street. But the efforts to peer into her background for forecasts about her future may be fruitless. Biography is a poor predictor of regulatory scrutiny. The real issue—both at the SEC and at other key regulatory posts that have yet to be filled—is what the president wants to see happen. If he’s smart, he’ll recognize that his second term is a great time for a No More Mr. Nice Guy approach to bank regulation. With the economy on the mend, now’s the time to worry less about cleaning up the last banking crisis and more about stopping the next one.
White’s appointment was initially seen as a sign of a new, tougher attitude on the part of the administration. She’s a prosecutor, known for having drawn difficult criminal assignments prosecuting terrorist cases and mafia bosses as well as white collar malfeasance. The SEC has never been run by a prosecutor before, and White’s background is strikingly different from Shapiro’s, whose previous gig was at a cozy Wall Street self-regulatory association.
The counterpoint is that after George W. Bush’s inauguration, White lost her public sector gig and went to work as a criminal defense lawyer. Socially respectable and financially remunerative criminal defense in Manhattan in the aughts meant a lot of Wall Street defense work and statements casting aspersions on excessively aggressive government regulation.
But rather than ask which is the “real” Mary Jo White, it’s worth considering that for all the talk of revolving doors, the impact of past work experience on public sector stances is highly ambiguous. Former Treasury Secretary Timothy Geithner had essentially the exact work background that Wall Street’s critics think they want in a bank regulator. His career was spent overwhelmingly in the public sector, and his private sector career didn’t involve any direct work for major financial institutions. Obama’s pick to run the Commodities Futures Trading Commission, Gary Gensler, by contrast, was a Robert Rubin protégé during the Clinton years and a veteran of Goldman Sachs. Yet Gensler emerged during the Dodd-Frank debates as probably the administration’s strongest proponent of tough rules, while Geithner has been the leading advocate for the view that Wall Street must be handled gently to heal the economy.
White’s career shows that, like many lawyers, she can do a good job on either side of the courtroom. The issue isn’t what lies in her heart, it’s what job she has been hired to do.
So far, the administration’s approach has very much been a mixed bag. Obama passed a sweeping overhaul of America’s financial regulatory apparatus and created a new Consumer Financial Protection Bureau. But while writing the rules for tomorrow, the main focus for the present has been on financial system rescue and repair. That’s meant bailouts and regulatory forbearance, not stiff penalties for misdeeds. The Geithner legacy is ending a financial panic, and you don’t accomplish that by maximizing the number of bank executives you slap handcuffs on. In a recent Frontline episode on the remarkable absence of any federal criminal prosecutions related to the financial crisis, Lanny Breuer, the outgoing chief of the DOJ criminal division, relies on the pathetic excuse that these cases are hard to bring. That’s true, but his team put strikingly little effort into bringing them.
With a new SEC chief, a new treasury secretary, a vacancy at the criminal division, and Senate Republicans’ ongoing effort to nullify the CFPB, it’s time for Obama to take the gloves off. The choice to go soft in 2009 was, in my view, perfectly defensible—a renewed banking panic could have required new bailouts and wreaked new economic harm.
But with the system more stable, the economy growing, and any hope of a legislative agenda held hostage to the House Republican leadership, the time is right to get dogged. Successful criminal prosecutions on Wall Street are hard, but White’s mafia cases and terrorism cases were hard too. That’s why the U.S. attorney gig is an important job. In addition to sending a much-needed message of accountability, rigorous enforcement would be an important show of confidence in the new system. A key aim of the Dodd-Frank regulatory framework is to ensure that the financial system can survive a panic at even the biggest of financial institutions without the need for chaotic bailouts. If that’s true, then there’s no more need to worry that an aggressive approach could tank the banking system and the economy.
To those who think Obama has been a corrupt pawn of Wall Street all along, of course, this will sound naive. But the administration’s already been willing to alienate the lords of finance by passing Dodd-Frank in the first place, prompting a massive shift of Wall Street campaign funds to the GOP. The low-key approach to enforcement and investigations served a real purpose for much of the first term. But it’s obsolete now, and as the president builds his new team, he ought to assemble one that’s ready to fight.