Wall Street Isn't Afraid of the SEC

You might say I have a little inside information about the SEC.

I spent several years there before I was a "recovering attorney" -- first as lawyer in the Enforcement Division who investigated a variety of securities fraud cases and then as Deputy Director of Public Affairs, where I dealt with reporters all day about cases being brought and how the agency worked. Granted, it's been a few years since I walked around the halls of the agency known as the Investor's Advocate, but my guess is that for the most part things aren't so different, except that this relatively small government agency is everyone's favorite whipping boy right now.

But as cable news shows and newspaper headlines focus on Wall Street reform, Goldman Sachs, the mortgage crisis and the economy (that still isn't so fine, thank you very much), I just wanted to weigh in on why the mess we're in is less the fault of the Securities and Exchange Commission than it is of the lawmakers who are all pounding their fists, wanting you to believe that either they're trying to change the status quo or that changing that status quo will only make things worse. The real problem is this --

Wall Street isn't afraid of the SEC.

They never have been and they never will be as long as the agency is structured as it is -- one that brings only civil, not criminal, cases. The handful of men who run our nation's investment banking institutions aren't afraid of consequences that they consider to be mere slaps on the hand from an inconsequential agency. The SEC can only take money from these Masters of the Universe. These guys make gobs of money all day, every day and know that they'll make more money tomorrow (can you say credit default swaps?). Losing a little of it is just a cost of doing business to them, so you don't even come close to getting their attention unless you can take away their ability to make more money -- like when you say the word 'prison.' And the only ones who can bring criminal charges against them are the Justice Department and state Attorneys General.

The SEC might find a case and investigate it. The SEC might be the agency that does all the grunt work when it comes to digging for the dirt. But it can only stand by at the photo op when the criminal authorities start talking about the big house.

Think about it in this smaller, non-investment banking securities case -- do you really think Martha Stewart batted an eyelash over her $30,000 fine after alleged insider trading? Or do you think she was more concerned about what five months in the slammer would do to her reputation, her business and the stock price of Martha Stewart Living Omnimedia?

So, when it comes to the fraud currently alleged against Goldman Sachs -- and cases that the SEC investigates every day -- is it any wonder that the Richard Fulds or the Lloyd Blankfeins of the investment world treat SEC investigations with about the same amount of disdain as they would a pesky mosquito?

The Securities and Exchange Commission has the authority to subpoena documents and testimony, but corporations can and do drag their feet for years to delay any actions. This tactic is a good one for those being investigated, because Wall Street also knows that: (1) it takes forever to enforce those subpoenas, and (2) that there's a lot of staff turnover at the SEC. Corporations and Wall Street big wigs know that a staff attorney there is like the weather -- if you don't like it, you don't have to wait too long for it to change. And when that happens -- when underpaid staff attorneys leave to seek their fortune at a big law firm or one of those Wall Street banks -- a new attorney inherits an old case they usually couldn't care less about.

So, unless and until the SEC can find a way to instill some fear when it comes to enforcing the nation's securities laws, few will believe there's much to lose by failing to cooperate when civil cases are filed. It's a Wall Street mindset that's existed as we've moved from Den of Thieves to Liar's Poker to the internet trading bubble to today's mortgage investment crisis. Not to mention that when major investment banks are big contributors to lawmakers' campaigns and former Goldman executives get plum jobs in the government, it doesn't seem likely that there will be any fear on Wall Street in the near future.

Joanne Bamberger, a former SEC attorney and SEC Deputy Director of Public Affairs, is a writer and political/media analyst in Washington, D.C. She is the founder and author of the political site, PunditMom, and is at work on a book about the increasing political involvement of mothers in the age of social media (Fall 2010, Bright Sky Press).