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SEC Commissioner Kara Stein Fighting for Tougher Bank Sanctions, Stymies Bank of America Settlement

Tuesday, November 04, 2014 By Yves Smith, Naked Capitalism | News Analysis
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2014.11.4.SEC.MainSEC Commissioner Kara Stein. (Photo: Securities and Exchange Commission / Flickr)One of the things that continue to be a source of anger in the American public is the way that banks were rescued en masse without the perps, the managers and producers in the businesses that produced toxic product facing much if anything in the way of consequences. Another is that the banks pay fines that are inadequate relative to the amount of damage that they did.

SEC commissioner Kara Stein has been using her post as a surprisingly effective bully pulpit to pressure the agency and other regulators into upping their game. It's unusual for an SEC commissioner to play that role; the post is typically a runway for becoming either a lobbyist or a director on financial services company boards. Even more rare is that Stein is regularly crossing swords with SEC chairman Mary Jo White, who is taking a much more industry-friendly line than she promised at the time of her confirmation. It's virtually never done to have a commissioner from the same party buck the chairman.

Admittedly, Stein can't attack the "no one goes to jail" problem, since the SEC lacks prosecutorial powers. But she's pushing the agency to use tools that it has refused to pick up that can increase the pain level at banks that have misbehaved.

Her current fight is over a practice she called out in April, of the SEC giving waivers to sanctions that are supposed to kick in automatically when a financial firm enters into a settlement in court. Bloomberg explains:

At the SEC, there are three main penalties that banks seek waivers for when they settle cases, with the harshest a ban on managing mutual funds. Another prevents banks from raising money for private companies. The third, and most minor, takes away a privilege that allows a firm to issue its own shares or bonds without SEC approval.

Stein has opposed the practice of rubber-stamping requests to grant waivers. As we wrote in June:

Stein has called out numerous SEC failures of nerve in her brief tenure as commissioner. For instance, in April she issued a withering dissent on the SEC's waiver of having Royal Bank of Scotland lose its status as a "well-known seasoned issuer" as provided in both legislation and SEC rules, when it convicted for interest rate manipulation. This standing is valuable because, among other things, it allows securities issues to float offerings at will, rather than wait for the SEC to review and approve their offering documents. Stein also said that the SEC had recently given kid-gloves treatment to another financial institution that had also engaged in criminal abuses. In a statement to the Huffington Post, Elizabeth Warren backed Stein's position:

"When the SEC waives automatic penalties for criminal misconduct by the largest banks, it sends a dangerous signal about how weak it is in its enforcement of the law,...We are still paying the price for a financial crisis that was caused in part by regulators looking the other way while big financial institutions broke the law. Big corporations should not get special treatment when they break the law, and the SEC needs to learn from its past failures in oversight, to demonstrate no one is above the rules, and to show some backbone."

Stein this time has managed to do more than just make speeches about not giving these waivers freely. She's created some consternation by a bureaucratic maneuver to stymie giving Bank of America one for its $16.7 billion settlement for selling toxic mortgages. First, she and her pro-reform fellow Democratic commissioner Luis Aguilar forced a change in internal policies so that staff could no longer grant these waivers unilaterally; the commissioners had to sign off on them. Normally, that would be a no-brainer, since pro-industry Chairman Mary Jo White plus the two Republicans could be relied upon to approve them. But Mary Jo White has had to recuse herself for having represented the Charlotte bank. Stein and Aguilar teamed up to demand tougher punishments for this recidivist lawbreaker.

The sanction that Stein and Aguilar want to impose is that of barring Bank of America from fundraising for private concerns. That stings because Merrill, now Bank of America, has long been a leader in the low-risk, lucrative business of raising money for hedge funds and private equity funds. Of course, if you didn't know better, you'd think this was a grave injustice being visited upon American engines of growth. From the Bloomberg piece:

"It seems to me it would be important for them to have that waiver," said Richard A. Kline, a law partner at Goodwin Procter LLP in Menlo Park, California. When fast-growing companies are seeking to raise money from institutions, "there are often banks that will lead some of those private placements," he said.

Yves here. While I don't have a breakdown of Bank of America's revenues in this segment, it's a safe bet that raising money directly for what by implication are pre-IPO tech companies is less important than either of its hedge fund or private equity fundraising business. Moreover, it's also likely that companies that re large and successful enough to be candidates for Bank of America's private placement team would have plenty of other firms competing to get their mandate. In other words, putting Bank of America in this penalty box is extremely unlikely to prevent any promising business from getting capital on good terms.

As Dave Dayen pointed out at Salon:

This is actually pretty simple: Financial firms should have to bear the consequences that the SEC has had on the books for decades. This strengthens the impact of fraud sanctions, and creates greater deterrents to future misconduct. If Bank of America doesn't want to lose access to profit-making opportunities for its business, it shouldn't break the law in the first place. The SEC shouldn't be obligated to do the bank a favor when it makes mistakes.

This is especially true when the lawbreakers return again and again for waivers to clean up their unending series of messes. Bank of America has agreed to 51 legal settlements and regulatory fines since 2008. You can see why officials would get the impression that the bank cannot manage its business properly. Adding regulatory scrutiny and effectively cutting the bank down to size serves as a good corrective to that, not to mention a bulwark against future misbehavior. If the law means nothing to Bank of America, perhaps the risk of losing future profits will.

Cynics may say this is only a small step in the right direction. But change typically comes about via a series of small steps rather than seismic shifts. The more that people like Kara Stein and Luis Aguilar show that the SEC's leaders are willing to back tougher sanctions, the more that staffers in the agency will be emboldened to pursue misconduct more aggressively.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Yves Smith

Yves Smith has been in and around finance for more than 30 years as an investment banker, management consultant to financial institutions across a large range of wholesale banking and trading markets businesses, and a corporate finance adviser. She has also written for The New York Times, Al Jazeera, the New Republic, Salon, the Conference Board Review, the Australian Financial Review and other financial publications. Her TV appearances include NBC News, CNBC, Fox Business, PBS, Bill Moyers, The Real News Network, Democracy Now!, Russia TV, ABC (Australia), Al Jazeera and BNN (Canada). Follow her on Twitter: @yvessmith.

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SEC Commissioner Kara Stein Fighting for Tougher Bank Sanctions, Stymies Bank of America Settlement

Tuesday, November 04, 2014 By Yves Smith, Naked Capitalism | News Analysis
  • font size decrease font size decrease font size increase font size increase font size
  • Print

2014.11.4.SEC.MainSEC Commissioner Kara Stein. (Photo: Securities and Exchange Commission / Flickr)One of the things that continue to be a source of anger in the American public is the way that banks were rescued en masse without the perps, the managers and producers in the businesses that produced toxic product facing much if anything in the way of consequences. Another is that the banks pay fines that are inadequate relative to the amount of damage that they did.

SEC commissioner Kara Stein has been using her post as a surprisingly effective bully pulpit to pressure the agency and other regulators into upping their game. It's unusual for an SEC commissioner to play that role; the post is typically a runway for becoming either a lobbyist or a director on financial services company boards. Even more rare is that Stein is regularly crossing swords with SEC chairman Mary Jo White, who is taking a much more industry-friendly line than she promised at the time of her confirmation. It's virtually never done to have a commissioner from the same party buck the chairman.

Admittedly, Stein can't attack the "no one goes to jail" problem, since the SEC lacks prosecutorial powers. But she's pushing the agency to use tools that it has refused to pick up that can increase the pain level at banks that have misbehaved.

Her current fight is over a practice she called out in April, of the SEC giving waivers to sanctions that are supposed to kick in automatically when a financial firm enters into a settlement in court. Bloomberg explains:

At the SEC, there are three main penalties that banks seek waivers for when they settle cases, with the harshest a ban on managing mutual funds. Another prevents banks from raising money for private companies. The third, and most minor, takes away a privilege that allows a firm to issue its own shares or bonds without SEC approval.

Stein has opposed the practice of rubber-stamping requests to grant waivers. As we wrote in June:

Stein has called out numerous SEC failures of nerve in her brief tenure as commissioner. For instance, in April she issued a withering dissent on the SEC's waiver of having Royal Bank of Scotland lose its status as a "well-known seasoned issuer" as provided in both legislation and SEC rules, when it convicted for interest rate manipulation. This standing is valuable because, among other things, it allows securities issues to float offerings at will, rather than wait for the SEC to review and approve their offering documents. Stein also said that the SEC had recently given kid-gloves treatment to another financial institution that had also engaged in criminal abuses. In a statement to the Huffington Post, Elizabeth Warren backed Stein's position:

"When the SEC waives automatic penalties for criminal misconduct by the largest banks, it sends a dangerous signal about how weak it is in its enforcement of the law,...We are still paying the price for a financial crisis that was caused in part by regulators looking the other way while big financial institutions broke the law. Big corporations should not get special treatment when they break the law, and the SEC needs to learn from its past failures in oversight, to demonstrate no one is above the rules, and to show some backbone."

Stein this time has managed to do more than just make speeches about not giving these waivers freely. She's created some consternation by a bureaucratic maneuver to stymie giving Bank of America one for its $16.7 billion settlement for selling toxic mortgages. First, she and her pro-reform fellow Democratic commissioner Luis Aguilar forced a change in internal policies so that staff could no longer grant these waivers unilaterally; the commissioners had to sign off on them. Normally, that would be a no-brainer, since pro-industry Chairman Mary Jo White plus the two Republicans could be relied upon to approve them. But Mary Jo White has had to recuse herself for having represented the Charlotte bank. Stein and Aguilar teamed up to demand tougher punishments for this recidivist lawbreaker.

The sanction that Stein and Aguilar want to impose is that of barring Bank of America from fundraising for private concerns. That stings because Merrill, now Bank of America, has long been a leader in the low-risk, lucrative business of raising money for hedge funds and private equity funds. Of course, if you didn't know better, you'd think this was a grave injustice being visited upon American engines of growth. From the Bloomberg piece:

"It seems to me it would be important for them to have that waiver," said Richard A. Kline, a law partner at Goodwin Procter LLP in Menlo Park, California. When fast-growing companies are seeking to raise money from institutions, "there are often banks that will lead some of those private placements," he said.

Yves here. While I don't have a breakdown of Bank of America's revenues in this segment, it's a safe bet that raising money directly for what by implication are pre-IPO tech companies is less important than either of its hedge fund or private equity fundraising business. Moreover, it's also likely that companies that re large and successful enough to be candidates for Bank of America's private placement team would have plenty of other firms competing to get their mandate. In other words, putting Bank of America in this penalty box is extremely unlikely to prevent any promising business from getting capital on good terms.

As Dave Dayen pointed out at Salon:

This is actually pretty simple: Financial firms should have to bear the consequences that the SEC has had on the books for decades. This strengthens the impact of fraud sanctions, and creates greater deterrents to future misconduct. If Bank of America doesn't want to lose access to profit-making opportunities for its business, it shouldn't break the law in the first place. The SEC shouldn't be obligated to do the bank a favor when it makes mistakes.

This is especially true when the lawbreakers return again and again for waivers to clean up their unending series of messes. Bank of America has agreed to 51 legal settlements and regulatory fines since 2008. You can see why officials would get the impression that the bank cannot manage its business properly. Adding regulatory scrutiny and effectively cutting the bank down to size serves as a good corrective to that, not to mention a bulwark against future misbehavior. If the law means nothing to Bank of America, perhaps the risk of losing future profits will.

Cynics may say this is only a small step in the right direction. But change typically comes about via a series of small steps rather than seismic shifts. The more that people like Kara Stein and Luis Aguilar show that the SEC's leaders are willing to back tougher sanctions, the more that staffers in the agency will be emboldened to pursue misconduct more aggressively.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Yves Smith

Yves Smith has been in and around finance for more than 30 years as an investment banker, management consultant to financial institutions across a large range of wholesale banking and trading markets businesses, and a corporate finance adviser. She has also written for The New York Times, Al Jazeera, the New Republic, Salon, the Conference Board Review, the Australian Financial Review and other financial publications. Her TV appearances include NBC News, CNBC, Fox Business, PBS, Bill Moyers, The Real News Network, Democracy Now!, Russia TV, ABC (Australia), Al Jazeera and BNN (Canada). Follow her on Twitter: @yvessmith.