Downsizing the SEC: Another Bad Idea

There were no great surprises yesterday when SEC chair Mary Shapiro urged a House committee not to cut the SEC's budget. But there were plenty of shocking statistics.

Shapiro noted that GOP plans to roll back the SEC's funding to 2008 levels would mean cutting its $1.1 billion budget by $241 million and force the agency to lay off nearly a fourth of its staff. If that's not gutting a federal agency, I don't know what it is.

And we're not talking about just any agency here. The SEC is not just the chief watchdog over Wall Street -- which turned into a lawless casino before driving the economy over a cliff in 2008 -- it is also charged with scrutinizing the earnings reports of over 15,000 publicly held companies to make sure they aren't fudging the numbers that inform investor decisions. And the SEC polices some 12,000 financial advisors scattered across the country that collectively manage assets of $38 trillion. 

Doing all that on a billion dollars a year doesn't realistic, does it? Well, it's not, and one of the shocking statistics that Shapiro cited in her testimony was that the SEC only reviewed about 9 percent of those 12,000 advisors it's supposed to be keeping an eye on. That's right: the people we're trusting with our nest eggs and endowments are, in effect, barely monitored at all, despite an endless stream of stories of malfeasance of every kind by these advisors, from Bernard Madoff's giant Ponzi scheme all the way down to the more mundane sin of churning investor accounts to generate fees.

Shapiro didn't say what percentage of earnings reports by public companies the SEC reviews, but last I checked, that figure was also alarmingly low. No wonder so many companies cook their books, even after Sarbanes-Oxley made earnings fraud a more serious crime post-Enron.

These weaknesses have been well-known for years. Beyond that, we learned the hard way during the financial crisis that there is a whole shadow banking system that is barely policed by the SEC at all -- or anyone else.

All these problems explain why the Dodd-Frank financial reform bill aimed to double the SEC's budget to $2.25 billion by 2015. The Obama Administration asked for an additional $300 million in the 2012 budget to move toward that goal. This sounds like money well spent if it will avoid another financial meltdown that costs investors trillions of dollars.

But such increases seem highly unlikely at this point. And don't fool yourself into thinking that this is about budget deficits. It's not. Republicans in Congress are targeting the SEC for downsizing as part of a broader bid to block implementation of the most sweeping financial reform since the Great Depression.

Watching all this, you would almost think that the financial crisis never even happened -- not to mention the wave of corporate frauds that preceded that crisis by less than a decade.