The American Dilemma and How We Can Fix It

Posts tagged ‘SEC’


It was mid-June, 1994 when I walked in the door of my office to be greeted by my always-cheery receptionist who said, “Good morning.  What do you think about O.J.?”   I believe I responded, “Well, it’s a work day so we can’t add vodka to it and, besides, it tends to make my stomach a little sour.  Tomato juice would be better.”

She looked at me as though I were from Mars and said, “No, about O. J. Simpson’s wife and friend being murdered.”  As I hadn’t caught the evening news or seen a newspaper headline that morning, this was all truly news to me.  Little did I realize that she was asking me about what would be the largest media circus and most talked about piece of television broadcasting that would grip the country for many months to come.

I have never understood why people are so intrigued by other peoples’ misfortunes.  If it were up to me, there would be no audience for soap operas whether fictional or factual.  We all have enough dirty laundry of our own to fill several hampers to the full.  But I guess that’s how many of us elevate ourselves – taking comfort in the downfall of others thus diverting ourselves away from how we might improve our own lives.

Well, within just a day or so of the news release about the murders, I can honestly say that virtually every friend and acquaintance had formulated an opinion about whether Mr. Simpson were guilty or innocent.  They had not heard a single word of testimony nor been presented with a piece of evidence – but they had formulated their opinion.  This is what is known as “prejudice” – something most of us say is abhorrent yet something in which we actually often engage.

With J. P. Morgan Chase’s CEO Jamie Dimon’s announcement that the financial firm had suffered a $2 Billion trading loss in the most recent quarter to be reported, it didn’t surprise me that this story took on some of the same qualities as the one involving the murders of Nicole Simpson and Ronald Goldman.

People who think the banks are predatory (and that is many) began wagging their fingers and saying, “See, these SOB’s need more regulation.  Here we go again with ‘too big to fail’.”  But the fact is that – well, we don’t know the facts – and any judgment that any of us makes at this point is simply prejudice speaking.  Since I have actively supported a capitalistic viewpoint of economics, it is not a surprise that I heard from a number of people who hold an alternate view.

By way of full disclosure, I do not have any financial relationship with J. P. Morgan Chase.  I neither own nor am short their stock or bonds; I do not have a checking, savings, money market or credit card account with the firm; I do not have any personal loans a mortgage or IRA’s with them.  In other words I have absolutely no personal interest (other than as it may affect the overall financial system) with the company.  Having said that, I believe I am in a position to view this loss in an unbiased manner.

It is the nature of trading financial instruments whether those are stocks, bonds, commodities, currencies, options or any other sort of derivatives to take losses on a regular basis.  Obviously, if you don’t also take profits which are greater than the losses, you ultimately go out of business.  As it turns out, the $2 Billion which Chase took represented a reduction of their quarterly profit by about twenty-five percent.  In other words, the company earned $8 Billion after the loss.

Why this came to everyone’s attention was not that it was a loss but because it was an extremely large loss.  If this had been a $2 Billion profitable trade, none of us would ever have heard about it – it would simply have been included in the company’s earnings statement and we would have to find some other scandal to which we could turn our attention.

But step back from the world of finance for a minute since many of you may not be acquainted with its inner workings – and look at a different form of trading to which we can all relate.  In this case I offer the example of women’s apparel.

A buyer for a major department store chain decides that “hot pink ladies tank-tops” are going to be all the rage this summer season.  So she purchases an overly-large quantity of these, trading the store’s dollars for merchandise.  Sadly, lime green not hot pink is the sensational color this year and the merchandise she has purchased sits unsold within the store’s outlets.  In order to recoup the firm’s investment she authorizes markdowns in the hot pink tops – first twenty percent then forty percent then half off – but she still has an extensive inventory and finally sells the remaining inventory to a discounter – suffering a loss on this unfortunate purchase.

Now in the case of the buyer, there is no Federal regulator overseeing the transaction – only the upper echelon hierarchy of her store – who will, no doubt have a conversation with her about this purchase.   If I were in her boss’ position, before I engaged in that conversation I would look at her overall track record with the store and gauge her performance not solely based on this one event but on her overall skills.  I would examine the facts before reaching a conclusion.

Mr. Dimon has a reputation for a certain feistiness – and I’m sure has a fairly good-sized ego.  I have no doubt that having to make the statement about this loss was a significant embarrassment for him and the firm is internally looking at the circumstances surrounding it.  Clearly, if they had better internal controls and risk management systems, it might not have happened at all.  But it did – and as I can think of nobody who enjoys taking a $2 Billion loss, I am sure that even as I write this the firm is addressing the problem.  But is that enough?  Or is this just an example of why the banks need to be further regulated?

There is no question that certain regulations are good.  I frequently refer in these posts to laws governing our use of motor vehicles because this is something to which we can all relate.  Does it make sense to reduce the speed limit in areas where our children are on their way to school?  It makes sense to me.  Does it make sense to require that we come to a complete halt at a Stop sign.  Sure.  But as good as these provisions are, they are meaningless unless they are enforced.

It is just the same in the world of regulating financial institutions.  We might write the most efficient regulations that can be conceived – but if they are not enforced they have absolutely no value.  And to whom does this responsibility fall?  The answer is that the SEC is responsible for this oversight.  So let’s look at the job they are doing.

Let’s go back to 2009 and Bernie Madoff – do you remember him?  He created the largest Ponzi scheme in the history of the world – ultimately costing his investors an estimated $18 Billion dollars – nine times the trading loss at Chase.  Mr. Madoff’s activities were subject to the scrutiny of the SEC.

Despite the fact that they had received complaints from Mr. Harry Markopolos among others as much as ten years earlier, the SEC found nothing wrong in the way Mr. Madoff conducted business.  In fact, Mr. Madoff came to justice not because of the SEC’s efforts – but because he openly admitted to his deception and turned himself in.  He is currently serving a one hundred fifty year sentence.

Did the SEC have sufficient regulatory authority to bring Mr. Madoff to justice a decade before he admitted to his crime?  They certainly did.  Did they do their jobs in enforcing those regulations?  They certainly did not.  If they had, countless billions might have been saved those investors who were subsequently defrauded – an amount that would make the Chase trading loss look like small potatoes.

So before we go on a witch hunt and start screaming for yet more regulations to protect us from predatory financial institutions, why don’t we look at those who already have the power to oversee these firms and evaluate the quality of the job they are doing with their present authority.  If they are not enforcing the regulations which are already on the books, what could possibly make us believe they would do any better with new ones?

Perhaps that’s the real answer to financial reform and regulation.


 A salesman was returning from a long car trip and was driving on a mountainous two-lane road when he had a flat tire. He got out of his car, opened his trunk and pulled out the jack and the spare. As he looked up he saw a man standing at a tall fence. At the top of the fence was barbed wire and the sign, “Sunnyvale Sanitarium for the Insane.”

 The man began to change his tire, feeling a little eerie that this individual at the fence was watching him. He appeared to be one of the patients in the facility. He jacked up the car, removed the hubcap and loosened the four lug nuts holding his defective tire to the vehicle. He then put the lug nuts in the hubcap and began pulling the bad tire from the axle.

 In the process he accidentally knocked the hubcap and the lug nuts over the side of the mountain. He could see them falling perhaps two hundred feet or so – and because the descent was so steep – he realized that there was no way he would be able to retrieve them.

 He began cursing, wondering what he was going to do in order to get his car operational and get home.

 As he was going on about his situation, the man inside the fence spoke up.

You know there’s an auto repair company about six miles down the road,” he said. “If you take one nut off each of the other three tires you can use them to secure the fourth tire. Then if you drive slowly, you can go there and get four lug nuts and be on your way.”

 The salesman was struck by the fact that this solution had come from a man who was committed to a mental institution. He warmed up to this fellow and said,  “You know – maybe I’m the one who should be in there and you should be out here. How did you ever think of that?”

 To this the patient replied, “Just because you’re crazy doesn’t mean you have to be stupid.”

 In the late ’90’s I began a new career as a stock day-trader. The first year or so was torture. I had succeeded in finding a way to lose money on a consistent daily basis – and it was my money that I was losing. Had it not been for the fact that other traders in the office were making a healthy living, I would have quit. These successful people were an inspiration to me and the reason that I kept at it. I knew there was a way to becoming one of those success stories. I merely had to find it.

 Well about this time, a day-trader in the Atlanta office of another firm obviously had a worse day than I had ever experienced. He finished his day, went home and returned to the office with a gun and shot several of his fellow traders  dead. This horrible tragedy was immediately seized on by the media.

Any number of television stations began running special reports on the evils of day-trading. These reports featured people who had tried it and had failed. Story after story emerged about this person who had put up their life’s savings and had lost it or that person who just didn’t get it and complained that the firm through which they were trading didn’t provide enough training.

 I never saw any of the successful traders in my office in any of these interviews – but as we all know, bad new sells.

 Well the SEC took action. They decided to make sure that there was never a repeat of the Atlanta tragedy. They determined that all day-traders take the Series 7 exam. (It’s the one your stockbroker has to pass to allow him to deal with you as a client). So the firm I was with told us that we would have three months to pass the exam or we could no longer continue trading.

 By the way – the exam had absolutely no relevance whatever to day-trading (or psychiatric competency).

 I began investigating educational programs that were designed to help people pass this test – which I was told was extremely tough. Supposedly, only about 40% of the people achieved the passing grade of 70 on their first try.

 All of these programs cost between $500 – $1000 – money which I didn’t have. So I went to Barnes & Noble and found a volume in their reference section which was cleverly entitled, “The Series 7 Exam.” I purchased it for $20 and went home to start learning the material.

 I went through the book in a week, took all of the tests at the end of each chapter as well as the three “Sample Exams” which the book contained to prepare its readers for the six hour SEC exam. I was scoring in the mid-80’s but wasn’t sure that this exam accurately reflected the actual test with which I would be faced. So I went through the book again and scheduled myself for the test a week later.

 I arrived at the test site about 20 minutes before my appointment and signed in. There were four or five other people in the waiting room who were scheduled to take their tests. One of these was a young lady – probably in her mid-20’s – who was taking it for the third time. This did not instill a lot of confidence in me as I sat there.

 The young man with whom she was talking asked her, “What will you do if you don’t pass the test this time?”

She answered, “I’ll probably enroll in a cosmetology school. You can make really good money giving manicures.”

 I couldn’t help thinking that, for the sake of the investing public on whom she might be unleashed, cosmetology school might be the way to go.

 The receptionist called my name and took me to the cubicle where I was to start the first part of the test. She explained how to mark my answers on the computer screen, how to review my answers and how to record my answers. And so I began.

 I found myself at the last question of the first part of the test and realized I must have messed up – perhaps skipped some questions or something. Only an hour and ten minutes had gone by out of the three hours that had been allotted. So I looked at the bottom of the screen and found out that I had answered all 90 questions. And I hit the record button.

 I left, picked up my study book (which had been confiscated on my arrival) and went to lunch. Since I had over two hours to dine, I went to a nearby restaurant and pulled out my manual.

 Returning to the test center after my grilled cheese sandwich (one of my favorite comfort foods), I hunkered down for part two. I completed this in just about an hour.

At that point I was done. I now had a momentous decision to make. Should I review the answers I had entered or just push the finish button? I pushed the button.

 I scored a 94 on the exam.

 So I had now earned the right to continue what I was doing before – and to pay the Federal Government (the SEC) about $1000 a year in fees for the privilege of doing that.

 That’s okay. I believe that in a free economy there will always be people who try to take advantage of others.  I support the concept of  having informed and effective regulations and regulators to keep the public from harm. 

 But let’s look for a moment at the SEC as an example of the way government often operates. (I would have chosen the word “works” – but I believe that is inappropriate).

 Founded by the Securities & Exchange Acts of 1933 and 1934 – the SEC was designed to protect investors from unscrupulous manipulation of the movement in the prices of stocks.

 It’s first chairman was Joseph Kennedy (father of President John, and Senators Robert and Teddy). He was selected because he was one of the most egregious stock manipulators in the history of America. I presume that FDR’s theory in choosing him was that since Kennedy had figured out how to manipulate the system to his own advantage – he would easily be able to ferret out other crooks. 

Kennedy had a distinguished pedigree in skulduggery – having made his fortune as a “rum runner” during prohibition. How could you ask for a better candidate to oversee the regulation of America’s securities markets?

 Most of the SEC’s funding comes from the people whom they supervise – those “fat cats” on Wall Street. Fat cats like me who risked their own money on an every day basis to make a living.  And I didn’t have a problem donating my thousand bucks a year toward helping them achieve their goals of keeping the public safe from the unscrupulous.

 But I wonder, when you hear about a Bernie Maduff – who was reported to the SEC by an informant three years before the truth of his ponzi scheme was finally brought to light – and then only by self-admission not because of the SEC – I can’t help but wonder…

 Are the people at the SEC crazy – or just stupid?

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