Party lines

The Obama-appointed SEC chair voted with the two Democrats and against the two Republicans in deciding to bring fraud charges against Goldman Sachs.

Hmmmm …

April 19 (Bloomberg) – The U.S. Securities and Exchange Commission split 3-2 along party lines to approve an enforcement case against Goldman Sachs Group Inc., according to two people with knowledge of the vote.

SEC Chairman Mary Schapiro sided with Democrats Luis Aguilar and Elisse Walter to approve the case, said the people, who declined to be identified because the vote wasn’t public. Republican commissioners Kathleen Casey and Troy Paredes voted against suing, the person said.

Schapiro, an independent appointed by Democratic President Barack Obama, cast the deciding vote in a high-profile case for the second time this year. In February, she sided with Democrats in a $150 million settlement with Bank of America Corp. tied to its takeover of Merrill Lynch & Co.

I guess it’s barely possible that Goldman didn’t do anything legally wrong in helping one of its customers set up a sucker bet for a bunch of other Goldman customers, or in concealing from the suckers that the securities they were buying had been designed by someone who was then going to bet that the securities would fail. That – and the criminal charges that may well come next – is for the courts to resolve.

But in the court of public opinion, investment bankers as a class are guilty of crashing the economy and then fleecing the federal government through the bailout process. Nor is the public entirely wrong in thinking so.

Yes, a bunch of Goldman partners have been Democratic contributors, and some have been or are elected officials and appointees. So what? The Democrats are standing with the public against the banksters – even when that means going after their own donors – while the Republicans are backing the banksters.

That shouldn’t be hard to run on.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

10 thoughts on “Party lines”

  1. What a perverse understanding of what it is that government should be doing, to say nothing of what an independent agency like the SEC should be doing.

  2. Yes, Thomas, you *do* have a perverse understanding of the proper function of a government.

  3. Barry, we're talking about using the civil enforcement powers of the SEC to, what?, send a message to "the public" about a disfavored group, regardless of whether the law supports the case? Wow, if modern liberalism supposes that's a proper function of government, yeah, count me as having a perverse view.

  4. Thomas, in the spirit of charity that our host requests of all of us, I am going to presume you are merely ignorant rather than stupid. Nothing can be done for the stupid, but innocent ignorance is grateful for a cure. Securities law is what I do for a living, so let me help cure you.

    You think this is "a perverse understanding of what … the SEC should be doing". If you want a correct understanding of what the SEC should be doing, you need to look at what Congress set it up to do. And here, in pertinent part (as we love to say) is what Congress set the SEC up to do, in Sec. 21 of the Securities and Exchange Act of 1934, as amended:

    The Commission may, in its discretion, make such investigations as it deems necessary to detemine whether any person has violated … any provision of [this Act or] the rules and regulations thereunder… Whenever it shall appear to the Commission that any person has violated any provision of [this Act or] the rules or regulations thereunder … the Commission may bring an action in a United States district court to seek, and the court shall have jurisdiction to impose, upon a proper showing, a civil penalty.

    Sec. 21 also states that "[t]he Commission may transmit such evidence as may be available concerning such acts or practices as may constitute a violation of any provision of this title or the rules or regulations thereunder to the Attorney General, who may, in his discretion, institute the necessary criminal proceedings under this title." (The SEC has no authority to bringf criminal charges, buit they can ask their friends at Justice to do it for them.)

    The SEC's complaint against Goldman alleges that it violated two statutory provisions and one extremely important rule, Rule 10b-5 under the Exchange Act. In rather inelegant language, Rule 10b-5 makes it unlawful for any person using any means of interstate commerce:

    — To employ any device, scheme, or artifice to defraud,

    — To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

    — To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

    To be liable under Rule 10b-5, a defendant must be shown to have engaged in wilful or reckless misconduct. You're not liable under this rule for making a mistake — not even gross negligence suffices for liability.

    It is a question of fact whether Goldman knowingly sold certain customers pools of mortgages chosen by another customer (who wished to bet against them) precisely because they were likely to explode. It is a question of law whether, if it in fact did so, Goldman and its people are exposed to civil or criminal liability. To answer those questions, we have things called courts. Answering that sort of question is their job.

    The SEC's job, the thing Congress set it up to (among many other things; it has a lot of other functions, many of which have nothing to do with suing malefactors) is to decide whether there are such questions for a court to answer. In other words, in filing its complaint against Goldman, the SEC was doing exactly what it should be doing. Its understanding of its mission was not "perverse" (which in your case seems to mean, "something I heard Limbaugh make disapproving grunts about"); it is perfectly, entirely, admirably correct.

    And do you know something else? Those two Republican Commissioners who voted against filing the complaint would tell you exactly the same thing. Their sole disagreement here is whether the SEC should bring the complaint; they would never suggest that bringing this kind of complaint is not what the SEC should be doing. Although the SEC is not a prosectuing authority, the Exchange Act grants it, in many areas (including this one), broad discretion over whether to exercise its powers. There are all sorts of reasons why the SEC, like a proswectuor, might elect not to file a complaint in a specific case. But only an idiot, or somebody who knows nothing about the SEC and the laws it enforces, would conclude from that fact that, when the SEC does do precisely what the Exchange Act authorizes it to do, it is acting with a "perverse understanding" of its intended function. And as I said above, I will assume out of charity that you are not in the former category, and are now, hopefully, a former member of the latter category.

  5. Mrs Tilton, I'm familiar with the securities laws and with the purposes of the SEC. Yes, it is the SEC's job to decide whether there is sufficient evidence that GS violated the antifraud provisions so that bringing a civil action would be appropriate. In this case, unusually, two of the SEC's commissioners dissented, presumably because they believe the evidence and theory of liability are insufficent to provide a basis for liability. I'll assume that the majority of the commission concluded in good faith to the contrary. But that's not what Mark's theory is. Mark's view is that it's important for the Democrats on the commission to be seen "standing with the public against the bankers." That's not what their job is. I trust you don't disagree.

  6. Given that the SEC is primarily a law enforcement agency, if it (acting through a majority of its commissioners) believes that bankers have violated the US securities laws, then by voting to take enforcement action against those bankers the three non-Republican* Commissioners are, indeed, "standing with the public against the bankers" — which is just a rather dramatic way of saying "doing what Congress created the Commission to do": enforce the securities laws, safeguard the integrity of the markets, and protect the investing public.

    Like you, absent evidence to the contrary I'll assume the two Republicans had good faith reasons to vote otherwise. So although it is strictly speaking true that they are "backing the bankers", I would think it unfair of Mark if he were using "backing" in a pejorative sense, e.g., "in the tank for the bankers", rather than merely "making a decision that the bankers will agree with". I don't think that reading necessary, though. The Republican Commissioners can vote against filing a complaint in the best faith in the world, but if people who believe bankers guilty of serious and widespread abuses see them vote that way — and there a lot of such people these days, by no means all of them Democrats — such people are likely to conclude that those Commissioners' priorities and values lie elsewhere than with their own.

    * Though she'd by viewed as occupying one of the "Democratic" seats on the Commission, Chairman Schapiro is SFAIK not a Democrat. She was first appointed to the Commission by noted left-wing Democrat Ronald Reagan, and appointed again by G.H.W. Bush, who I understand was pretty much a Trotskyite.

  7. Mrs. T, yes, if a majority believes that the bankers violated the law, then "standing with the public" means bringing an enforcement action, but the problem I guess is that if a majority were to believe that the bankers didn't violate the law, there'd be no way to both stand with the public (that is, to stand on the side of the law) and to stand against the bankers. What work is the "against the bankers" doing in the formulation you and Mark endorse? Lady justice used to wear a blindfold, but maybe that's old fashioned.

    Schapiro is a Democrat. The commission can't have more than 3 members of a particular party. The limit requires that presidents appoint members of the opposing party from time to time.

  8. If a majority of the Commission believes there is no reason to bring enforcement action against the bankers (again, assuming the Commissioners are acting in good faith), then by "backing the bankers" (to use terminology I might not have chosen myself), they are indeed "standing with the public" in the sense that Congress intended them to do. Unlike in the factual case, they would not at the same time be standing with public opinion, which currently runs strongly anti-banker, and by no means solely along party lines.

    If there is anything I disagree with in Mark's post (under one of its possible readings), it is not what you have pointed to. It would, rather, be the apparent conflation (as opposed to mere coincidence) of "public interest" and "public opinion". I assume that the majority of the Commission chose to file the complaint not because they wish to please the large numbers of Americans who dislike and distrust bankers, but because they believe that in arranging the trade to certain customers of CDOs securitizing mortgages hand-picked to fail by another customer wishing to bet against those mortgages, Goldman Sachs and a GS banker violated Sec. 17(a) of the 1933 Act, Sec. 10 of the 1934 Act and Rule 10b-5, nothing more and nothing less. But as I said above, I don't think the only possible reading of Mark's post is inconsistent with that notion. There would be an assumption behind it, of course, that the general popular distrust of bankers is, in broad terms, justified. I don't think that assumption unreasonable.

    And thanks, but I'm familiar with Sec 4(a) of the 1934 Act. Schapiro is not registered as a Democrat. She is, as I noted, in one of the "Democratic" seats. Possibly she was registered as a Democrat earlier in her career but went independent at some point. Of course presidents may find themselves appointing Commissioners who support a party other than their own. My point is that Schapiro was not first put on the Commission by the Kenyan Socialist Usurper but by St. Ronald, whose advisors presumably (and understandably) would have been looking to fill a Democratic seat with a Commissioner as amenable to the Reagan administration's views and policies as possible, not an ANSWER member with a nose-ring and "Eat the Rich" tshirt.

  9. Thomas says:

    "In this case, unusually, two of the SEC’s commissioners dissented, presumably because they believe the evidence and theory of liability are insufficent to provide a basis for liability. I’ll assume that the majority of the commission concluded in good faith to the contrary. "

    You have no evidence for your presumption and assumption, and much evidence to the contrary. The GOP is 100% against any reform of the financial sector.

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