JEFFREY BROWN: As the financial crisis fallout spreads and the Bernard Madoff scandal deepens, President-elect Obama used today’s announcement of new appointees to talk about the need for stronger regulatory oversight.
U.S. PRESIDENT-ELECT BARACK OBAMA: And if the financial crisis has taught us anything, it’s that this failure of oversight and accountability doesn’t just harm individuals involved. It has the potential to devastate our entire economy, and that’s a failure we can’t afford.
I think the American people right now are feeling frustrated that there’s not a lot of adult supervision out there.
JEFFREY BROWN: The crisis, which began in the housing market and quickly spread throughout Wall Street and beyond, has prompted numerous questions about both the players who helped caused it and the regulatory regime that allowed it to happen.
The president-elect weighed in on some of those questions today.
BARACK OBAMA: We have been asleep at the switch, not just some of the regulatory agencies, but some of the congressional committees that might have been taking a look at this stuff. We have not been as aggressive, and we’ve had a White House that started with the premise that deregulation was always good.
JEFFREY BROWN: Mr. Obama referred directly to the scandal involving Madoff, who’s been arrested for allegedly creating a Ponzi scheme that may have cost investors tens of billions of dollars.
BARACK OBAMA: Charities that invested in Madoff could end up losing savings on which millions depend, a massive fraud that was made possible in part because the regulators who were assigned to oversee Wall Street dropped the ball.
Financial regulatory reform will be one of the top legislative priorities of my administration.
JEFFREY BROWN: One of the agencies under heavy fire, the Securities and Exchange Commission, which now appears to have ignored warning signs about Madoff and has been accused of missing simmering fires on Wall Street before the financial crisis.
BARACK OBAMA: I’d like Mary to step up and say a few words.
JEFFREY BROWN: Today Mr. Obama selected Mary Schapiro to chair that agency.
MARY SCHAPIRO, financial regulator: This is a perilous time for investors. Americans are looking to policymakers and regulators to restore stability and trust to our financial markets.
JEFFREY BROWN: Schapiro served as an SEC commissioner from 1988 to 1994. She also chaired the Commodity Futures Trading Commission and currently heads the Financial Industry Regulatory Authority, the industry’s self-regulating organization.
Today she promised tougher oversight.
MARY SCHAPIRO: Investor trust is the lifeblood of our financial markets. The only way to restore the trust that has been lost is through effective, thoughtful reform of our regulatory structure and the consistent and robust enforcement of our financial regulations. And this will be my top priority.
JEFFREY BROWN: The president-elect also tapped Gary Gensler to head the Commodity Futures Trading Commission. He worked for the Treasury Department under President Clinton.
And Daniel Tarullo, who served as an economic adviser to Clinton, as well as to President-elect Obama, was nominated to an open seat on the Federal Reserve Board in Washington.
Mr. Obama said that tougher regulation, while needed, would not be enough.
BARACK OBAMA: But government is not going to be able to do it alone. And so, in the context of the financial markets, for example, there needs to be a shift in ethics on Wall Street.
JEFFREY BROWN: Today’s nominees are subject to Senate confirmation.
A 'lack of adult supervision'
JEFFREY BROWN: And for more on all this and the debate ahead, we get the perspectives of Donald Langevoort, a professor of law at Georgetown University Law Center. A former SEC staffer in the '70s, he's also served on advisory boards to the SEC and the New York Stock Exchange.
Robert Kuttner, a co-editor of the American Prospect magazine and author of a new book focusing on the economic crisis titled, "Obama's Challenge."
And Steve Bartlett, president and chief executive officer of the Financial Services Roundtable, which represents financial services companies.
Well, Donald Langevoort, some strong words from the president-elect, "a lack of adult supervision." How would you define the problem and help scope out the fixes needed?
DONALD LANGEVOORT, Georgetown University: Well, first of all, the symbolism on the stage when the president-elect made these nominations was very powerful. For a long time, we've had different regulators in Washington with different tasks to do and they've bickered a lot.
And I think the president-elect is saying: It's time for you to cooperate, build a system that gets out in front of the risks that financial innovation provides, rather than reacts to it.
JEFFREY BROWN: You mean but -- but you're suggesting a structural problem between the different -- among the different agencies?
DONALD LANGEVOORT: A structural problem, an attitude problem, and an expertise problem. We have a fast-paced change in the financial services industry, and we're not sure we have a regulatory regime anywhere in Washington that's up to the task.
I think the president-elect is saying to these three people: Sit down and work out some way of responding to that.
JEFFREY BROWN: Robert Kuttner, do you see a regulatory structural problem, a lack of power, a lack of will? How do you define it?
ROBERT KUTTNER, author, "Obama's Challenge": Well, I think the ideology of deregulation, ideology that markets could police themselves, really took over both parties beginning in the 1980s. The ideology was more purely Republican, but the Democrats were complicit.
A lot of the deregulation occurred in the 1990s. There was an expose in the New York Times this past Sunday of the role that Democratic Sen. Chuck Schumer played.
And the ideology was that, if the financial industry invented an innovation, by definition it had to be good, that the markets would police themselves, and that there was no role for regulation. And now, of course, we've had a dramatic demonstration with catastrophic consequences of how wrong that worldview is.
So I think regulation has to be reassembled. It's partly a structural problem of which agency does it. It's partly a philosophical problem of what kind of regulation you need.
But the system was completely broken by so-called innovators on Wall Street, many of whom turned out to be taking opportunistic risks, Madoff only being the most extreme, but lots of other scams that were systemic. This was not the case of an occasional bad apple; this was the barrel that's going to have to be reinvented almost from scratch.
System may need structural overhaul
JEFFREY BROWN: All right, let me bring in Steve Bartlett, because a lot of those so-called innovators he would be talking about might be your members.
STEVE BARTLETT, The Financial Services Roundtable: Well, innovation is not the problem. Innovation is good. There is a problem, and it's a structural problem, and I think what President Obama has done today by both the symbolism and the reality is to say that we have to create a systemic solution.
Our organization and the large financial services companies, we've been advocating for several years much stronger, more effective regulation, prudential regulation in a way that coordinates the agencies.
And so to see the CFTC, the SEC, and the Federal Reserve lined up on a stage, I hope next week they bring in the Treasury and the OCC and the other characters.
So there is a problem. It's a systemic problem. And I was really heartened to see that President Obama is going to put front and center on the list to get on with the regulations.
JEFFREY BROWN: But to the extent that it's your members that are trying to innovate and asking for a certain amount of freedom to allow the markets to work to come up with new things...
STEVE BARTLETT: Actually, we're asking for more effective regulation.
JEFFREY BROWN: More effective.
STEVE BARTLETT: More provincial regulation. What we've been treated with is, as they say, you know, the gaps between the pillars. We now have the pillars about five miles apart and more gap than there is pillar. So we think there ought to be systemic regulation that coordinates these agencies and gets out in front of the problem.
The other real problem to this is it's been enforcement after the fact. After the $50 billion herd of cows are out of the barn, we didn't go in to enforce. So we think the government should do a much more effective job in advance.
JEFFREY BROWN: Well, Donald Langevoort, you heard that, you heard Robert Kuttner talk about a history of deregulation. There's always a tension between rules and allowing the markets to work, right? Do we always overreact one way or the other?
DONALD LANGEVOORT: We seem to. And it's tough to get it right, especially in a highly charged political environment. One of the nice things about the choice of Mary Schapiro as chair of the SEC is she has a pretty good track record of knowing both when to be really tough and to realize trust is the lifeblood for Wall Street. You can't let it slide.
And at the same time, I think she appreciates that the United States needs and wants a vibrant financial services industry. And if you just layer on regulation in order to respond to a crisis, you're not going to get that.
Is Schapiro a good choice?
JEFFREY BROWN: Robert Kuttner, what do you make of the new appointment?
ROBERT KUTTNER: Well, let me just say, it's not plausible to believe that the financial services industry has been a force for tougher regulation. They have lobbied against tough regulation. They have weakened, they've worked to weaken the regulators, and this is what you would expect them to say now that the crisis has happened.
Mary Schapiro has been the head of something called the Financial Industry Regulatory Authority. It is a self-regulation entity. There's no transparency in how it works. It's not a government agency. It's a classic case of industry's effort to fend off real regulation by having self-regulation, and having self-regulation has been a failure.
There were many tougher people who might have been appointed. I think it's a rather disappointing nomination, given the crisis we're in and given the need for much tougher regulation.
JEFFREY BROWN: All right. Mr. Bartlett, you have a couple things to respond to.
STEVE BARTLETT: Actually, Mary Schapiro has been one of the toughest, strongest, and most effective regulators in the business. And FINRA has been a part of the solution.
But the difficulty has been is that, if each agency just sort of goes it alone, well, then there are just too many gaps, so I think it's exactly the reverse. Our industry...
JEFFREY BROWN: Excuse me, before you go to your industry, about her, what's an example that you could -- of her being tough?
STEVE BARTLETT: The examples are the dog that didn't bite. The stories are not about the lack of enforcement at FINRA. It's been the rest of the agencies.
She's also -- she's principles-based. I don't -- that's a little subtlety that perhaps is lost in this. She came from CFTC. That starts with principles of fair treatment for customers, of holding management accountable, and then builds the regulations from that.
And that's really where -- one of the places we need to go. And that's one of the strengths of that appointment.
JEFFREY BROWN: OK, I interrupted you on your industry's role in...
STEVE BARTLETT: Well, I was going to say -- in fact, and I understand what Mr. Kuttner is saying. He's just simply wrong. Our industry has been actively advocating for three years now. We've published reports; we've had conferences. It's just -- and we've actually had proposals for more effective, more systemic regulation.
But until recently, those proposals have fallen on deaf ears. It's clear that President Obama, at least from today, that he's on the same wavelength and perhaps in 2009 we'll get something done.
JEFFREY BROWN: Where do you come down here?
DONALD LANGEVOORT: I'm in the middle on this. I do think we need a vibrant financial services industry and smart regulation, tough regulation. Smart regulation is what's important.
I do agree, however, that we have a miserable mess on the floor right now in terms of the meltdown of financial services industry, taxpayers on the hook for a lot of money. And one thing these regulators are going to have to do is convince the American people that there is accountability, that you don't walk away a rich person when you have put in place levels, you know, sale of securities that generate this much risk and cause this much harm.
So she's got to be a cop. And I think she's going to be a good cop and so do the other agencies, while at the same time looking forward to make sure that, you know, we retain the United States as a place where smart innovation can occur. We don't want to lose this industry.
JEFFREY BROWN: Well, go ahead, Mr. Kuttner. You don't think that these appointees can, I don't know, bring back that kind of confidence in investors and be the cops that we're talking about?
ROBERT KUTTNER: Well, I think it's interesting. It's a spectrum of appointees. Dan Tarullo believes in tough regulation. I think Gary Gensler is somewhere in the middle. I think Mary Schapiro is one of the weaker of the appointees.
But, look, if you take something like the subprime crisis, there was no regulation of any consequence at every stage of the game. It was pass the hot potato and leave some sucker at the end of the line stuck with the risk of securities that turn out to be worthless.
And I just have to repeat: The financial services industry day in and day out has lobbied against the kind of regulation that would have prevented subprime and would have prevented this whole meltdown.
So let's hope that Mary Schapiro and the rest of the team are tough enough in this crisis to be really effective regulators.
JEFFREY BROWN: Do you...
STEVE BARTLETT: Look, we're in a world of hurt. There is a mess. And the mess is -- but the mess, as you go back, as you look at it, it's because of the gaps in the regulation.
Mortgage brokers unregulated, mortgage originators, then half of the mortgages were made by regulated banks, the other half by totally unregulated entities with no regulation at all, and then the products sold to Wall Street with no regulation, no supervision, but more of the disclosure and enforcement after the fact.
Well, we got enforcement after the fact, but we should have had regulation up front. And that's what we're advocating; that's what needs to happen. I think that's what this entire team and, frankly, the rest of the Obama financial team is on that wavelength.
It's not going to be easy pointing fingers, or making it a partisan thing, or Democrats versus Republicans is not going to help, although that's a favorite Washington game. The fact is, is that we're in a deep hole and, in the immortal words of the lyrics of the song, "Change is going come."
JEFFREY BROWN: Don Langevoort, one thing that did come through from President-elect Obama, he said this is going to be a top priority. He made that clear. Now, is the political will, do you think, given all that's happened, because you live here, so you watch this.
DONALD LANGEVOORT: Sure. For a while, the political will is here. And we don't know what the economy is going to do, but as long as there's a lot of anger out there, I think there's going to be support.
What we need -- we haven't said this yet, but I hope it was implicit in what President-elect Obama said -- is the resources that have to go to regulation have to be a whole lot more than they've been in the past.
I agree about the ideology. There was a time when we said, "Free markets do solve problems. You don't need to spend a whole lot of money on an SEC." That was wrong.
JEFFREY BROWN: Those days are gone, huh...
DONALD LANGEVOORT: They're gone.
JEFFREY BROWN: ... at this moment. Donald Langevoort, Robert Kuttner, and Steve Bartlett, thank you all very much.