The SEC's Disastrous Distractions: Former commissioner Paul Atkins on how the regulatory agency's inattention contributed to the financial crisis

Appointed to the Securities and Exchange Commission in 2002, Paul Atkins was a persistent-and unfortunately prescient-critic of the agency's failure to execute its regulatory functions in an efficient and effective manner.

Instead of working to make financial markets more transparent, argues Atkins, who stepped down from his post earlier this year, the SEC spent its time and resources focusing on irrelevant or secondary issues, allowing all sorts of problematic behavior to flourish and grow.

In December, Atkins sat down with Reason's Nick Gillespie and Matt Welch for a wide-ranging 45-minute conversation about the proper role of government oversight in a free enterprise system, the dangers of regulation, and what's likely to unfold as the Democrats take over the White House.

For an audio podcast version of this conversation, go here.

For downloadable versions of the video and related materials, go here.

Comments

[Paul]

Three books on his shelf: Farm Fiasco, Abuse of Power and Judgement Day... coincidence? I think not.

[squarooticus]

Good to know the SEC was going after Martha Stewart for trading on superior information (something, incidentally, that we all believe we do all the time lest stock trading be nothing more than a game of chance) while literally hundreds of trillions of dollars of fraud were being ignored.

Hoppe is proven more and more right about democracy every day.

[oldtimer]

What? Me Worry?

[joe]

When people who don't think it's important for the government to do its job well - who really, really believe that it's important for it NOT to do its job - take over the government, the government ends up not doing its job well.

Shocking.

Oh, well. At least the real estate derivatives market was all novel and dynamic.

[squarooticus]

When people who don't think it's important for the government to do its job well....take over the government

Ignoring for a moment that you haven't defined the metric by which one judges how well government does "its job"... what evidence do you have that the Bush administration and the Congressional GOP didn't think it was important for government to do its job well? AFAICT, some of the people who voted for them think that, but the two are simply not equivalent.

Furthermore, it seems like you're asking for a rhetorical beatdown when you target an administration that expanded government at every opportunity. Are you attempting to argue that the Bush administration's goal was to create a larger and less effective government? Just which constituency is in favor of this?

[joe]

squarooticus,

I offer as evidence all of the proposals for greater regulation of the financial markets, particularly of MBSs and CDOs, coming out of the bureaucracy that were shot down the political appointees, out of a wrong-headed belief that the markets could police themselves.

I offer as evidence the appointments made to FEMA. These are not people chosen because of a commitment to the efficacy of its operations.

Furthermore, it seems like you're asking for a rhetorical beatdown when you target an administration that expanded government at every opportunity. Government is not a commodity to be measured by the pound, gallon, page, or meter. Adding a prescription drug benefit to Medicare means absolutely nothing on the question of regulating financial markets.

Are you attempting to argue that the Bush administration's goal was to create a larger and less effective government? Yes, their goal was to use the mechanisms of government to award favors to their friends and wage warfare against their political opponents, both of which are better accomplished through expanding the government. It's unwise to assume to convincing somebody that there's no difference between a well- and poorly-run government and assume that they will respond by shrinking it; it's just as likely, if not moreso, that they'll respond by feeling liberated from the need to strive for good government at all, and just loot.

[squarooticus]

Yes, their goal was to use the mechanisms of government to award favors to their friends and wage warfare against their political opponents, both of which are better accomplished through expanding the government.

Bingo. You fell into my trap. True enlightenment will come when you realize that all politicians---not simply Republicans---do this.

Every sin of which you accused the Republicans---political appointments, using the mechanisms of government to reward friends and punish enemies, manipulating regulations for the same political purposes, looting whole swaths of the supposedly commonly-owned capital value of the country---is true of the Democrats, though perhaps in ways not nearly as objectionable to you.

I take it you're happy to have a few years of "good government" every so often? I ask this because you seem very happy to have Obama Nation, yet the problems you identify are not a product of bad men: they are a product of a bad system that encourages the participation of opportunistic and self-interested lowlifes and discourages long-term planning.

[Robbie]

So what we are saying here is that we need an administration which wants smaller government, and for government to properly execute the roles that it is supposed to fill. Sounds like a libertarian to me!

[Mari Dupont]

Even though Mr. Atkins claimed to be a free market-type guy, he was so undynamic in expressing his alledged principles that it was painful to watch. You'd think the former head of the SEC would have some strong opinions about risk and reward, but apparently not...

[Ken T.]

Seems like a sharp guy, but not a great communicator.

[Amakudari]

I offer as evidence all of the proposals for greater regulation of the financial markets, particularly of MBSs and CDOs, coming out of the bureaucracy that were shot down the political appointees, out of a wrong-headed belief that the markets could police themselves.

What evidence do we have that regulators can police financial markets? The SEC had been receiving actionable intelligence on Madoff for a decade. The OTS just got caught red-handed for letting IndyMac backdate a capital infusion, and I figure they'll be dismantled now that most major thrifts with an OTS charter have imploded. The FDIC totally bungled the Wachovia-Citi-Wells catfight, and moreover, Wachovia was solvent when they were threatened with receivership. The Treasury's picked winners in Bear, AIG and Citi and losers in Lehman, which has destroyed market stability. The Fed's responsible for the interest rate component that got us into this mess. And this is all ignoring the role of non-regulatory government actors like the FHLBs, FNMA and FHLMC, and their supporters in Congress. Given the same Fed rate policy, do we really think that financial results would have been radically different under a Democratic administration? They would have been the ones to pull away the punch bowl?

Say even that federal regulators had the ability to look into MBS and CDOs. Keep in mind, of course, that Fannie Mae was the first to sell MBS (agency securities = packaged FHA and VA loans), and I doubt the government's official analysis would differ substantially. What would they have learned that would cause them to pull the plug? They couldn't access documentation on underlying collateral, and they would have no incentive to probe. Go ask someone who worked in banking back then, and you couldn't even find an auditor who would let you take large overprovisions against future losses (they feared you were managing earnings). Mortgage defaults were at a record low, and would naturally continue to be that way. It's like falling 90 stories off a 100-story building and extrapolating that the next 10 stories will end just as uneventfully. Now imagine everyone on Wall Street thinking that way, and figure how regulators with one or two less zeroes on their paycheck would have made a stand against financial innovation.

I'd say that we do need changes, but the changes that the Republicans and Democrats would make versus the other seem more like window dressing. We still would have encouraged very risky lending through a cheap funds rate, a deposit put (i.e. FDIC insurance increases a bank's desired size and risk appetite), and a huge government-backed mortgage finance regime. I don't know we can assume things would have been better if only we'd done this, that, or the other. The problem is the system.

[R C Dean]

Well played, squarooticus. Well played indeed. Rarely has the "Right People" fallacy been so nicely illustrated.

[perilisk]

"Yes, their goal was to use the mechanisms of government to award favors to their friends and wage warfare against their political opponents, both of which are better accomplished through expanding the government."

Isn't that pretty much synonymous with machine politics? Surely the only thing new here is that the machine is serving the GOP and WASPy types instead of Democratic immigrants.