It’s clear that I am a terrible person because I continue to be unable to get all that excited about banks that commit fraud. And the big thing today is that the SEC doesn’t put banks out of business just for committing fraud, which I think is rather sporting of them but lots of people disagree.

Here’s the issue:

By granting exemptions to laws and regulations that act as a deterrent to securities fraud, the S.E.C. has let financial giants like JPMorganChase, Goldman Sachs and Bank of America continue to have advantages reserved for the most dependable companies, making it easier for them to raise money from investors, for example, and to avoid liability from lawsuits if their financial forecasts turn out to be wrong.

An analysis by The New York Times of S.E.C. investigations over the last decade found nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions. Those instances also include waivers permitting firms to underwrite certain stock and bond sales and manage mutual fund portfolios.

JPMorganChase, for example, has settled six fraud cases in the last 13 years, including one with a $228 million settlement last summer, but it has obtained at least 22 waivers, in part by arguing that it has “a strong record of compliance with securities laws.”

Ha ha ha strong record of compliance with a fraud case every two years or so! What a sham! Except that JPMorgan actually does have a strong record of compliance, and is generally viewed as being pretty conservative and law-abiding.

This stuff stirs emotions because it’s hard to think about who is being punished here. Corporations are people, my friend (still), but in the way Mitt Romney meant it, not in the way everyone pretended to take it. Like: JPMorgan employs a lot of people, and some of them are maniacs and crooks and liars and most of them aren’t and that’s true of … the SEC, for instance, and The New York Times,* and anyone else who wants to give them shit for their fraudulosity. But JPMorgan isn’t an individual human, not any more anyway. So saying “JPMorgan is crooks” is sort of nonsensical.

So if you want to impose punishments on JPMorgan for particular fraud-y things done by particular individual humans who may or may not still be at JPMorgan you need a reason. There are two candidates. The first is that the securities laws are the securities laws and if you’ve violated them then you’re a menace to the investing public and the SEC needs to keep an eye on you. This is what the SEC actually cares about – the Times quotes the director of Corp Fin as saying “The purpose of taking away this simplified path to capital is to protect investors, not to punish a company,” so if it doesn’t protect investors why do it. This is where Felix Salmon gets worked up:

If a company tells lies to investors, those investors should be able to sue it. And if a company wants to issue securities to the public, it’s the SEC’s job to examine the proposed offering first.

But somehow, along the way, a handful of very big companies — especially banks — managed to persuade the SEC that they were trustworthy corporate citizens, and that they didn’t need to be bound by those rules.

That’s a little bit suspicious just for starters. But it gets much worse. The SEC, quite naturally, put in place a policy which said that if any of those companies ended up being fined by the SEC for violation of securities laws, then it would lose its special privileges.

And then the SEC proceeded to ignore that policy.

That’s, like – none of that is exactly false but it’s not quite right either. Let’s spend a minute on what these “waivers” actually are. We’ll start really really slow. There is a thing called the SEC. It has rules about how you can offer securities. Those rules are quaint and amusing, designed in the 1930s to prevent people from just making shit up, writing it down and selling it to people. Part of why they look quaint now is that they basically worked. These days you can have Ponzi schemes that fall outside of the public-company securities laws, and you can have Enron-y companies where the companies are very craftily hiding their inventions from their auditors, but you can’t just write numbers on a piece of paper and raise large quantities of public capital without someone noticing. Except if you’re in China.

One of those rules is that the SEC needs to review your filing before you issue securities. Very sensible when you’re a newly public company and you report net income excluding the effect of expenses, but less so when you’re a longstanding public company whose periodic filings are subject to SEC review. So the SEC allows “well-known seasoned issuers” to issue when they feel like it, rather than waiting weeks or months for SEC review. This works well because (1) no one is reading the historical financials in the new-issue prospectus; they’re reading the historical financials that have already been disclosed, and (2) the SEC is not, like, reviewing your deals to make sure that they’re good deals or that you’re not lying, they’re just reviewing to see that you’ve followed the normal forms of accounting and been signed off on by your auditors etc. So if you’re regularly having reliable auditors sign off on your financials, having the SEC sit on any offering for two weeks double-checking that is unlikely to help investors.

Another rule is that you can’t lie in your securities offerings. That is PRETTY PRETTY OBVIOUSLY a good idea but it depends on what you mean by “lie.” If you say “we sold 100 widgets last year” and you actually sold zero, bad. If you say “we think we’ll sell 200 widgets next year if all goes according to plan,” and there’s an earthquake and you sell no widgets – should you be sued for that? No, says the SEC, so long as you appropriately caveat things.**

Now those protections – the “well-known seasoned issuer” fast track and the “forward looking statements” safe harbor – come from relatively recent legislation designed to modernize the securities markets. And you lose them – and are back in the old rules of “the SEC reviews everything and you get sued for everything that goes wrong” – if you, like, already committed fraud in the last three years. But the SEC can waive those penalties, and they have, and maybe that’s bad. But I don’t think you can rationally look at the army of internal accounting policy people at JPMorgan, and the army of bankers and lawyers who write JPMorgan’s disclosure for its own fundraising, and say that just because an entirely separate army of people who wrote the entirely separate disclosure for its, say, CDO deals, “committed fraud,” then the first army are just a bunch of scammers.

Or, hell, maybe you can – maybe there’s a “culture of fraud” at JPMorgan, and every other bank, and so they should all be on double secret probation – but you still can’t come to the conclusion that an SEC review of the format of their filings would protect investors, or that their forward-looking statements should be extra sue-able, because the SEC isn’t looking for fraud in its review of filings, and the forward-looking statements were never the problem. The SEC knows this – again from the Times:

The agency usually revokes the privileges when a case involves false or misleading statements about a company’s own business.*** It does not do so when the commission has charged a Wall Street firm with lying about, say, a specific mortgage security that it created and is selling to investors, a charge Goldman Sachs settled in 2010. Different parts of the company — corporate officers versus a sales force, for example — are responsible for different types of statements, officials say.

Of course, even if the sanctions don’t actually protect investors after the fact, you might want to impose them anyway because they are a “deterrent” and if you don’t impose them then banks will just go around committing fraud all the time and get away scot-free except for the multi-hundred-million-dollar fines. Again, making J. Pierrepont Morgan wait three weeks to do a debt deal**** and expose him to liability on forward-looking statements might be enough to scare him straight. If he were a human who was both concocting CDO fraud and responsible for corporate filings. But here is a conversation that has never happened:

Compliance officer: It’s very important that you don’t commit fraud.
Banker: Please elaborate.
CO: If you commit fraud, we could be fined hundreds of millions of dollars and you may be personally fired, fined, or imprisoned.
B: Hmm. I can live with that. Fraud it is.
CO: Also we will lose WKSI status and have to undergo SEC review of shelf registration statements, as well as losing access to the PSLRA safe harbor for forward-looking statements.
B: Oh, wow, that’s serious. Okay I’ll be good.

The non-waiver of these sanctions is not even a possible deterrent for CDO fraud because there is no overlap between the people who care about them and the people who need deterring.

The subtext of all of this is that the SEC is weighing the balance between protecting the integrity of the capital markets, on the one hand, by being tough on pseudo-crime like CDO fraud, and preserving the existence of the capital markets, on the other hand, by allowing giant and systemically important banks efficient access to funding. There is probably a structural worry there. Maybe Jamie Dimon is so important to the functioning of our interconnected financial system that if he killed a man the government would have to let him go so he could keep clearing trades. And that seems like a problem. If some banks are too important to punish then they’re probably too big to succeed™.

But that’s hardly a reason for the SEC to make particular enforcement decisions. And it’s not a reason to get worked up about the fact that they let the biggest users of the modern financing markets continue to have access to the modernized rules governing those markets even if, in some of their businesses, they push up awkwardly against some entirely different rules.

S.E.C. Is Avoiding Tough Sanctions for Large Banks [NYT]


* See? Mistakes happen even in the finest organizations.

** The appropriate caveats usually go in a “forward looking statements” disclaimer at the front or back of every press release, filing and investor presentation. Those are usually boilerplate that no one reads but today a reader sent us a – surprisingly fun! – E&P investor deck today that starts like so:

That is how it’s done.

*** TBF Yves Smith points out that BofA’s maybe lying about the Merrill bonuses didn’t get it penalized.

**** It’s also worth saying that Citi did actually get slapped with the no-WKSI-for-three-years sanction and survived, in part because under modern shelf takedown rules not being a WKSI doesn’t really prevent you from doing securities offerings at your leisure, as long as you first file a reviewed shelf, which Citi did and it was fine.

Comments (49)

  1. Posted by Late Guest | February 3, 2012 at 7:28 PM

    Matthew, despite your posting this at 6:45pm on a Friday, my love for you keeps on growing and growing.

  2. Posted by geoffgeoffgeoff | February 4, 2012 at 3:02 AM

    Agreed. Good stuff.

  3. Posted by Bitchtern | February 4, 2012 at 11:37 AM

    This is gold:

    Compliance officer: It’s very important that you don’t commit fraud.
    Banker: Please elaborate.

  4. Posted by guest | February 5, 2012 at 11:43 AM

    "Maybe Jamie Dimon is so important to the functioning of our interconnected financial system that if he killed a man the government would have to let him go so he could keep clearing trades. And that seems like a problem."

    I see no problem here.

  5. Posted by Avid Reader | February 6, 2012 at 9:44 AM

    Great stuff, Matt!

  6. Posted by Avid Reader | February 6, 2012 at 10:47 AM

    FYI – the slide from the E&P investor deck is from Contango Oil & Gas (MCF).

  7. Posted by Walter Sobczack | February 6, 2012 at 11:13 AM

    ahem… the fines are a ringer -> the SEC doesn't want them to stop doing it, else their results (read "revenue") would tarnish… like state troopers and speeding tickets… nobody actually wants people to stop speeding, the cops want to be able to write 4 tickets an hour whenever they choose… it shows productivity and it adds to the coffers…

  8. Posted by Guestest | February 6, 2012 at 11:49 AM

    What next? A post about how hydrofracking co's are not culpable under Clean Water /Air Acts?

  9. Posted by Internet Frauds | April 18, 2012 at 2:45 PM

    The goal of the bait-and-switch is to persuade buyers to purchase the substitute goods as a means of avoiding disappointment over not getting the bait, or as a way to recover sunk costs expended to try to obtain the bait.

  10. Posted by Bristol Airport Hotels | April 19, 2012 at 1:21 AM

    IjM68Z Fantastic blog post.Thanks Again. Really Great.

  11. Posted by cheap seo services | September 9, 2012 at 3:23 PM

    xuD0bq Fantastic article post.Really thank you! Much obliged.

  12. Posted by top cosmetic dentists | September 12, 2012 at 8:00 AM

    Thanks a lot for the article post.Much thanks again. Want more.

  13. Posted by one buck resume | September 12, 2012 at 11:15 AM

    I loved your blog post.Really thank you! Cool.

  14. Posted by South Shore | September 12, 2012 at 1:09 PM

    Really informative article post. Keep writing.

  15. Posted by imprenta online | September 13, 2012 at 2:46 AM

    Hey, thanks for the blog post.Really looking forward to read more. Fantastic.

  16. Posted by DUI | September 14, 2012 at 8:34 AM

    I cannot thank you enough for the blog.Thanks Again. Cool.

  17. Posted by Yoga in Punjabi, Surrey, BC | September 15, 2012 at 6:06 AM

    Enjoyed every bit of your blog.Thanks Again. Really Great.

  18. Posted by self defense law | September 15, 2012 at 7:23 AM

    Thank you ever so for you article post. Much obliged.

  19. Posted by food for pregnant women | September 15, 2012 at 8:38 AM

    Major thankies for the post.Thanks Again. Much obliged.

  20. Posted by Better Health Lifestyles | September 17, 2012 at 6:01 PM

    Im grateful for the blog.Really thank you! Much obliged.

  21. Posted by pikalaina | September 18, 2012 at 8:30 AM

    Major thanks for the blog article.

  22. Posted by TDAP Vaccine Side Effects | September 18, 2012 at 9:03 AM

    I truly appreciate this article post. Cool.

  23. Posted by TDAP Vaccine Side Effects | September 18, 2012 at 12:37 PM

    Really appreciate you sharing this blog article. Fantastic.

  24. Posted by orange county wedding DJ | September 19, 2012 at 4:20 PM

    Thanks so much for the post.Really thank you! Fantastic.

  25. Posted by best canadian vacation spots | September 20, 2012 at 4:39 AM

    Enjoyed every bit of your blog article.Really looking forward to read more. Want more.

  26. Posted by Film Cinema | September 20, 2012 at 11:20 AM

    Wow, great blog post.Really looking forward to read more. Really Cool.

  27. Posted by black dating | September 21, 2012 at 3:16 AM

    Really enjoyed this article post.Really looking forward to read more. Great.

  28. Posted by barbeques galore | September 21, 2012 at 7:01 AM

    Appreciate you sharing, great article.Much thanks again. Cool.

  29. Posted by Somanabolic Muscle Maximizer Login | September 21, 2012 at 8:04 AM

    Say, you got a nice post.Thanks Again.

  30. Posted by food | September 21, 2012 at 8:14 PM

    I think this is a real great article post.Really looking forward to read more. Cool.

  31. Posted by best multivitamin for men over 50 | September 22, 2012 at 5:43 AM

    Fantastic blog post.Much thanks again. Great.

  32. Posted by How To Stop Panic Attacks and Keep Anxiety Away | September 22, 2012 at 9:17 AM

    Appreciate you sharing, great blog article.Much thanks again. Will read on…

  33. Posted by lose belly fat | September 23, 2012 at 1:59 AM

    I really enjoy the blog post. Great.

  34. Posted by best die cutting machine | September 24, 2012 at 2:10 AM

    Hey, thanks for the article post.Thanks Again.

  35. Posted by Alexander Mans | September 24, 2012 at 7:48 AM

    Thanks a lot for the blog post. Want more.

  36. Posted by one buck resume | September 24, 2012 at 11:33 AM

    Major thanks for the article post. Awesome.

  37. Posted by Whole House Humidifiers | September 25, 2012 at 3:00 AM

    Enjoyed every bit of your blog article.

  38. Posted by Top EDM Music | September 25, 2012 at 4:54 AM

    Great article post.Thanks Again. Cool.

  39. Posted by LA rappers | September 25, 2012 at 2:28 PM

    Looking forward to reading more. Great blog.Much thanks again. Fantastic.

  40. Posted by hypnosis for anxiety | September 26, 2012 at 12:26 AM

    I really liked your article.Much thanks again. Much obliged.

  41. Posted by Website | September 26, 2012 at 7:52 AM

    I really like and appreciate your article.Thanks Again. Great.

  42. Posted by weight loss through hypnosis | September 26, 2012 at 11:33 AM

    Great, thanks for sharing this article post. Great.

  43. Posted by Online Goldmine | September 26, 2012 at 4:07 PM

    A big thank you for your article post.Thanks Again. Fantastic.

  44. Posted by Peter Francis-Macrae | September 26, 2012 at 9:47 PM

    Thanks a lot for the blog article.Much thanks again. Awesome.

  45. Posted by HP Officejet 6500 | September 30, 2012 at 9:38 PM

    Looking forward to reading more. Great blog article.Really thank you! Really Cool.

  46. Posted by hp 300xl | October 1, 2012 at 1:48 AM

    I truly appreciate this blog article.Really thank you! Great.

  47. Posted by cheap archive boxes | October 1, 2012 at 5:55 AM

    Im obliged for the blog article.Really looking forward to read more. Much obliged.

  48. Posted by bar mitzvah linen rental | October 2, 2012 at 9:06 AM

    Interesting. We are waiting for new messages on the same topic!!…

  49. Posted by hitch mount bike rack comparison | October 6, 2012 at 6:48 AM

    Interesting, but still I would like to know more about it. Liked the article:D