CNBC Interview - Transcript

Interview

CNBC Interview - Transcript

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MR. GRIFFETH: An hour from now, the House Financial Services Committee convenes a hearing on the Madoff scandal. You'll be hearing from the inspector general of the SEC, hear from the president of the SIPC, an investor who lost money, a couple of college professors to give their testimony in all of this.

Before all of that though, joining us, one of the members of the committee, one of favorite guests from that committee, Congressman Brad Sherman, the Democrat of California, who is on Capitol Hill and we still got Rob Cox of breakingviews.com with us as well.

Congressman Sherman, good to see you again. Welcome back, sir.

REP. SHERMAN: Good to be with you, Bill.

MR. GRIFFETH: Happy New Year. What a mess. What do you expect to hear out of this hearing today?

REP. SHERMAN: Well, I expect a lot of hand-wringing and a bureaucracy that's going to work very hard not to have to change very much except they'll ask for more resources. The fact is, this is something they should have caught by looking at the broker dealers financial statements for half an hour. They would have seen on those financial statements that they require to be filed, that's considerably cost to broker dealers across the country.

MR. GRIFFETH: But wait --

REP. SHERMAN: An audit and financial statement --

MR. GRIFFETH: So your solution is not necessarily to add more regulation, I mean, we keep hearing more regulation might solve this problem. You just want the members of the SEC to resign at this point.

Would you like to eliminate the SEC?

REP. SHERMAN: I don't think you eliminate the SEC and I haven't called for them to so much as resign as to tender their resignations. Let Obama pick who the five SEC commissioners are going to be because this country voted for change and there's no place where we need change more than the SEC.

MS. HERERA: One of the issues, congressman, is there's a call also for -- some call a super regulator, if you will, because of the new types of instruments, financial instruments that are traded, someone that would understand perhaps better than those who are now at the SEC how these instruments work and perhaps it might avoid future scandals.

Do you agree that a super regulator might be better in place of the SEC or not?

REP. SHERMAN: Well, you could call it the CES or the SEC; it might be the same agency. I do think that we should move commodity futures into the same regulatory agency.

MS. HERERA: You do? Okay.

REP. SHERMAN: Yes, because otherwise you can dance on the head of the pin. What we have is a lot of folks who get to choose their own regulator, banks to choose a state regulator or a federal regulator or a home bank, you know, or several of the federal regulators, and whenever you allow companies to choose their regulator, there's a race to the bottom as each agency competes to do a lighter job of regulation.

MR. COX: Congressman, can I ask you a question? It's Rob Cox here. You point out that the SEC commission should tender their resignations, but the president has already nominated Mary Schapiro take over after Christopher Cox.

Do you think that's maybe a rash choice and we should think of someone else, I mean, after all, she was in charge of FINRA, which is one of the regulatory bodies that arguably as you say should have been looking through these brokerage statements and should have ferreted it out the Madoff Ponzi scheme earlier than his nephews did.

Do you think maybe we need to rethink the choice?

REP. SHERMAN: I don't know if you rethink the choice because I don't really know much about Mary and the role that she played at FINRA and I do want to gather more facts, but it looks like FINRA was asleep at the switch. The Madoff broker dealer operation was filing annual financial statements showing $17 billion of assets and signed off on by an accounting firm with one CPA. Those two statements, those statements were filed with two agencies, FINRA and the SEC. Neither of them apparently spent half an hour reading the financial statements or perusing them because the two things that you look at is how big is the entity and what accounting firm is signing off on the audit report? And you had a one man CPA firm signing off on a $17 billion financial statement, that's fraud on its face. That's not just questionable; that's illegal because no accounting firm can get more than ten percent of its revenue from anyone audit clients.

So there's no way that a credible audit could have been done within the ethics of the profession.

MR. GRIFFETH: I know that this issue will be decided by Judge Stanton who is overseeing the Madoff scandal right now in the courts, but in your view since you'll have Steve Harbeck, the President of SIPC there, the question is: Who should qualify for SIPC insurance in their losses? And they're wondering whether they should include those individual investors who invested through these funds of funds and found themselves indirectly exposed to Madoff.

Do you have an opinion on that?

REP. SHERMAN: Well, I know, legally, I think they've got a weak case, morally, we tried to protect people and make them think that putting their money on Wall Street is better than putting it in a mattress. The fact is, right now, SIPC has a negative net worth, most probably, but if the SIPC loses the cases you're talking about, then every broker dealer you walk in the office, there's a big sign saying SIPC insured.

MR. GRIFFETH: SIPC. Right. Right.

REP. SHERMAN: And you're insured by an entity, which may have a slight positive net worth if they win this case and has a massive negative net worth if they lose it.

MS. HERERA: Congressman, before we let you go. It was suggested by many people and also in The New York Times over the weekend in an op-ed piece that perhaps there should be a cooling off period or even a firewall between those who work at the SEC and then want to go to Wall Street or vice versa, those who work at Wall Street and then want to go to the SEC. Those who penned that article say that it created an incestuous relationship between the two.

Would you be in favor of that of either restrictions or regulations over moving from Wall Street to the SEC or vice versa?

REP. SHERMAN: I think the greater concern I would have is moving from the SEC to a private firm because you don't want a circumstance where you're doing job interviews while you have regulatory power, and, yes, we should have regulations on that just as we have regulations on those of us here in Washington, my staff and, of course, members of Congress as well, all face regulations of the type you talk about.

MR. GRIFFETH: All right. Congressman Sherman, I know you've got to go get ready. We'll be watching. Thanks for joining us today again.

REP. SHERMAN: Thank you.

MR. GRIFFETH: Brad Sherman.

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