By Zachary A. Goldfarb
Washington Post Staff Writer
Friday, January 16, 2009
Mary Schapiro, who has been picked by President-elect Barack Obama to lead the Securities and Exchange Commission, said yesterday that she is exploring ways to revamp how securities are rated, calling the current system of companies paying directly for credit ratings a conflict of interest that must be addressed.
Speaking at her confirmation hearing, she said a better system might be for financial firms to contribute to a pot of money that would be used to pay for ratings. In the years leading up to the financial crisis, credit-rating firms failed to judge the risk of many complex securities that turned out to be ticking bombs on the balance sheets of banks.
Schapiro, 53, told the Senate Banking Committee that she would move aggressively against bad guys on Wall Street and revitalize an agency whose reputation has been battered by the Bernard L. Madoff case and the failure of investment banks. She pledged to fix many of the problems that have surfaced at the SEC over the past year.
Schapiro said she would push to more closely oversee the activities of investment advisers and brokerages, many of which are lightly regulated. She suggested that she may pursue legislation to increase oversight of auditors. She said she also would study whether steps need to be taken to curb short selling, in which investors bet that share prices will fall, and continue with a plan to register hedge funds.
In addition, she said she would seek to give big shareholders more say in naming directors of public companies and shaping corporate governance. And she said she had qualms about an SEC timetable for potentially adopting international accounting standards, which critics say are more flexible and allow companies to shield losses from investors.
In addressing the Madoff case, Schapiro pledged to unleash the agency's enforcement division to go after fraud, saying it will proceed "with full force and fervor against anyone who violates investors' trust." Last month, the SEC disclosed that it failed to detect a $50 billion Ponzi scheme allegedly orchestrated by Madoff, despite warnings and agency examinations of his firm. Answering questions about whether the agency didn't pay enough attention to Madoff because he was a Wall Street legend who advised the agency, she pledged that there would be "no sacred cows."
Schapiro, a longtime financial regulator who most recently served as chief executive of the Financial Industry Regulatory Authority, Wall Street's self-regulator, was received well by senators, several of whom said they would support her.
But Schapiro also faced questions about why, as head of FINRA, her organization failed to detect the alleged fraud at Madoff's firm. She said FINRA didn't have authority over Madoff's investment advisory division, where the alleged fraud occurred. FINRA only reviewed Madoff's brokerage.
"One of the real lessons of this tragedy is that we have this stovepiped approach to regulation that allows misconduct to take place out of the sight of at least some of the regulators," she said. "There are many reasons for this crisis, and one of them is that our regulatory system has not kept pace with the markets."
Some critics have raised concerns that Schapiro is an industry insider who won't do enough to shake up Wall Street. The Project on Government Oversight, a nonpartisan watchdog, yesterday said lawmakers didn't question Schapiro enough about her experience regulating the financial market during its worst collapse in decades.
"Ms. Schapiro is deeply invested in the failed regulatory apparatus that is at least partly to blame for the economic crisis we now face," the group said.
In her appearance yesterday, Schapiro fired back at critics. "I have never been afraid to go after people I thought had violated the public trust," she said. "That will be not an issue for me at the SEC."
After Schapiro's hearing, several of Obama's other selections for economic posts addressed the banking committee, saying that it was necessary to spend hundreds of billions of dollars more to bail out the financial markets but that more strings should be attached for firms that take taxpayer money.
University of California economist Christina D. Romer has been nominated to lead the Council of Economic Advisers. She was joined by University of Chicago economist Austan D. Goolsbee and Princeton University economist Cecilia E. Rouse, both of whom would serve on the council.
Also testifying was Daniel K. Tarullo, a Georgetown University law professor who has been nominated as a Federal Reserve governor.