By David Dayen
I don't know how House Democrats managed to get a hearing in the Financial Services Committee on the SEC's tendency to settle with financial firms and allowing the companies to get off without admitting wrongdoing, but I'm glad they did. This put Financial Services Committee chair Spencer Bachus (R-AL) in the unusual position of saying that a federal regulator knows best and Congress shouldn't challenge them on their decisions. Democrats on the committee -- and one Republican, Rep. Bill Posey of Florida -- were fairly united in the idea that settlements without the admission of wrongdoing encouraged repeat offenses and perpetuates criminal behavior.
But I want to focus on another aspect of the hearing. Rep. Maxine Waters (D-CA), who is in line to take over as the lead Democrat on the Committee, actually referenced the interview I did with Elizabeth Warren yesterday, in questioning of Robert Khuzami, who is both the head of enforcement at the SEC and a co-chair of the RMBS working group, the panel that is supposed to be investigating fraudulent actions in the securitization of mortgages. Waters used the fact that Warren expressed no confidence in the working group or any other measures from the regulatory and law enforcement communities to hold banks accountable to launch into a series of questions about the RMBS working group and its progress. You can watch it here, starting around the 43:30 mark. I can't embed it, so let's walk through it.
After name-checking Warren, Waters noted that she and 40 members of Congress wrote a letter to the co-chairs of the working group "about my concerns that this important task force was stalled." She wanted to know if the working group had the necessary resources, where they are at on cases, and whether they have an executive director yet. "We want to know what went wrong in many of our financial institutions. We've been making a lot of promises. What's happening with this task force? Is it working? Where's the executive director? Could you explain to me what's going on?"
Khuzami started to respond by saying that the SEC has brought a number of financial crisis-related cases on their own, but Waters cut him off. She wanted to know about the task force. So Khuzami said that the task force has a "significant amount of resources," provided by the various agencies from which the co-chairs emanate -- the SEC, the Department of Justice and the New York State Attorney General's office. This suggests that all the money is coming out of existing budgets, and no new money will be dedicated to the purpose.
Waters asks about an executive director, and Khuzami says that the working group just hired a "coordinator," to coordinate activity between the agencies. And here was a key point: Khuzami said "We hired a coordinator, but most of the investigative work being done here is not really being done by a staff that belongs to the task force, it's being done by the individual investigative groups that make up the task force."
So the jig is up, then. The vaunted working group is really nothing more than a repository for existing cases and investigations, with a public relations patina applied to them. I don't think you can conclude from this that it will generate any new work. You might see different laws applied to the investigative work already going on -- maybe a case that the NY AG would have brought will now be prosecuted at the federal level to capitalize on FIRREA's 10-year statute of limitations or something -- but the idea that the task force is even a real entity is pretty much eliminated by Khuzami's remarks. It's more a way to publicize cases than anything else.
Waters then asked, "Are you going to proceed (in the working group) with some investigating that's going to lead to some litigation? Or are you going to continue to work in ways that will allow those who are being accused to neither admit nor deny, and just settle, settle, settle as usual?"
Khuzami reiterated a point that he made earlier in the testimony, that if they get offered a settlement that matches what they believe what they could get at trial, "then I think we would be unwise not to settle under those circumstances." He said he would handle it the way he does other cases at the SEC, though the other co-chairs may have a different perspective. Considering that the SEC has pretty much settled every case they've brought forward, which the "neither admit nor deny wrongdoing" language attached, get ready for the slaps on the wrist.
Waters closed with a comment for Khuzami to take back to his co-chairs on the task force: "A lot of people are watching to see what is happening with this Let the task force know, we anxiously await what they're going to be able to accomplish. And, you know, we think it's taking too long for them to get up and going and showing us what they can do."
I think Khuzami answered the question for Waters, however: this is an un-task force, and they'll be happy to settle at whatever opportunity they can get.