Street CopFordham Law School in The New Yorker, November 11, 2013
Mary Jo White, the chair of the Securities and Exchange Commission, has a personal page on the New York Road Runners Club Web site, which records a battery of figures (Pace per Mile, Age-Graded Performance Percentage, and so on) for each of the official events she has completed. There are two hundred and seven entries since the first one, which was recorded a week before her fifty-sixth birthday, in 2003, seven of them since she began working in Washington, late last year, just as she was turning sixty-five. Friends and colleagues characterize White as the most competitive and driven person they have ever encountered.
In the nineties, when White was the United States Attorney for the Southern District of New York, she would arrive in her office, a few blocks from Wall Street, early in the morning, with a stack of newspaper clippings. They were marked with yellow Post-Its bearing a recipient’s name and a nudge: Where are we on this? Are we on top of this? She had a famously expansive sense of what her office should be worrying about. She once sent Patrick Fitzgerald, who was in charge of terrorism cases, a note about some white powder that had been found at the site of a truck accident in another state, involving a driver with a Middle Eastern name. Today, she blizzards her staff and her friends with e-mails at all hours. Friends with insomnia who write to her at 2 or 3 A.M. may get an immediate reply.
White is plainspoken and doesn’t seem slick or fancy. Every year, she holds a Super Bowl party. Her favorite band is Fleetwood Mac. Her favorite charity is the A.S.P.C.A. She has had the same cohort of intimate friends since the seventies—three or four women who worked together in the U.S. Attorney’s office and helped form a female basketball team there. When she returns to New York on weekends, they still try to have dinner, and they go on occasional trips together. She does not put her competitiveness aside when conducting her social life. She and her husband, John White, have a tennis court at their country house, in upstate New York, where her style of play led her friends to give her the nickname Sid Vicious. After she organized a team to run in an athletic event called the Great Race, and it finished second, she successfully petitioned the race officials to create a special certificate for her team to take home. She makes sure to win even at Boggle or crazy eights. Although she is a sports fan (baseball first, especially the Yankees, football second, horse racing third) and often invites people to join her at games, she doesn’t carry on conversations while the ball is live. She doesn’t read much for pleasure. She doesn’t belong to a church. Her large apartment, on the Upper East Side, is said to look about as lived-in as a suite in an extended-stay motel. White’s life is about working, and winning.
Mary Jo White was born in Kansas City, Missouri. Her father spent his career as a lawyer for the Social Security Administration. Her grandfather was a lawyer, too, and so was her uncle. Her only sibling, an older brother named Carl Monk, recently retired from a long term as the executive director of the Association of American Law Schools. After her father was transferred to the Social Security Appeals Council, in Washington, she went to junior high school in McLean, Virginia, where she met John White. They married in 1970. He is a senior member of the Wall Street firm of Cravath, Swaine & Moore, and sold his ownership share there so that White could take her job at the S.E.C. Her only child, a son, is a student at Columbia Law School, and so is his wife.
In a small gesture of rebellion, White decided, after graduating from college, at William and Mary, to become a psychologist, although she also applied to law school. “I was going to be a therapist,” she told me, sitting in an armchair in her vast tenth-floor office at the S.E.C. “I find people fascinating—how they behave and why.” She enrolled in a master’s-degree program at the New School for Social Research (on a competitive scholarship that she had won), but she also sat in on one of her husband’s classes at N.Y.U. Law School. She completed her degree in a year, and then enrolled in Columbia Law School.
“Law is easier,” she said. “Everything is a problem.” She thinks lawyers “look at the world in a slightly different way. It’s almost a difference in physical perception. You look at the facts, you see the parts, and you repackage them into the analysis that produces the answer. In college, I took courses in English literature. I loved it. I loved Virginia Woolf.” But law school, she said, changes the way you think. “You’d read the book and ask yourself, What’s the point?” After law school, White became a litigator. “Litigators get a mess,” she said. “I prefer that. It’s back to problem-solving.”
As a litigator, White has spent her career moving back and forth between one of the big New York law firms, Debevoise & Plimpton, where she worked in three stretches over thirty-five years, and the federal government. Sometimes, the problems she has been assigned to solve have been those of Wall Street firms and corporations that are in hot water with the government, or in private disputes; other times, she has been one of those responsible for putting people like her private-practice clients in hot water.
Wall Street is the problem that White is now charged with solving. The S.E.C. is a child of the 1929 stock-market crash, the Great Depression, and the New Deal: it was created at the outset of Franklin Roosevelt’s Presidency to keep Wall Street from fleecing ordinary investors. (Its first chair was Joseph P. Kennedy—the fox in the henhouse.) Back then, the S.E.C. had a strict disclosure regime for newly issued stocks and bonds. Over the years, it came to be seen as the model of an effective government regulatory agency.
But, after waves of financial deregulation in the last quarter of the twentieth century, the S.E.C.’s job got much bigger. Ordinary investors who call their broker and place an order for a specific stock or bond are now an insignificant part of the markets. Because there is no longer a wall between banks and stockbrokers, it falls to the S.E.C. to oversee some of the activities of the largest banks—JPMorgan Chase, Bank of America, Citigroup, and the rest. And, because the major Wall Street firms are vast, high-tech, high-speed global operations that make much of their money from trading in exotic and volatile financial products, the S.E.C. has to think about protecting people from the risk that the whole system could go down and take their savings with it.
Even before the 2008 financial crisis, the S.E.C.’s reputation was getting wobbly. When Eliot Spitzer was New York’s Attorney General, and known as the Sheriff of Wall Street, he discovered that research analysts for the banks were writing overly optimistic reports about the prospects of new stocks that their employers were trying to sell to the public. The S.E.C. should have got to that problem first. Between 2000 and 2008, a Boston financial gumshoe named Harry Markopolos went to the S.E.C. five times with his suspicions that the investor Bernard Madoff was operating a Ponzi scheme, and the S.E.C. did not investigate. In 2004, the commission permitted the big brokerage houses to take on a much higher level of debt. The firms quickly began borrowing at possibly ruinous levels, which made them feel the effects of the crisis even more acutely. Among the financial firms that the S.E.C. was supposed to be regulating were the three largest that collapsed in 2008: Bear Stearns, Lehman Brothers, and Merrill Lynch. It picked up some warning signs, but failed to act.
As the country sank into a severe recession, many wondered why the major figures in the financial world, whose firms had received billions of taxpayer dollars at the height of the crisis, weren’t being punished for their misdeeds. Because the S.E.C.—unlike the Treasury or the Federal Reserve—is an enforcement agency, it became the focus of the frustration. It was publicly humiliated when, in 2009, and again in 2011, a federal judge in New York, Jed Rakoff, tartly rejected its proposed settlements in fraud investigations of Bank of America and Citigroup. The Bank of America settlement, Rakoff wrote, “does not comport with the most elementary notions of justice and morality.” Rakoff’s Citigroup opinion concluded with a flourish: “In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.” As one person who worked in the S.E.C.’s enforcement division put it when I spoke to him, “Judge Rakoff was wagging a finger at the S.E.C.” He raised his middle finger.
Mary Jo White took over at the S.E.C. more than four years after the full-on panic of the financial crisis, and just a few months before the end of the five-year statute of limitations on the misdeeds leading up to the crisis. President Obama announced her nomination last January, at a brief public ceremony at the White House. Tall, thin, dressed in dark colors, Obama towered over White, who may or may not stand five feet tall, and who was wearing a fiery-red suit. She has short brown hair and an open, doughty face, and is built as solidly as a hydrant. “It’s not enough to change the law,” Obama said. “We also need cops on the beat to enforce the law.” He swatted a fly away. “As a young girl, Mary Jo White was a big fan of the Hardy Boys. I was, too, by the way. As an adult, she’s built a career the Hardy Boys could only dream of. Over a decade as a U.S. Attorney in New York, she helped prosecute white-collar criminals and money launderers. . . . You don’t want to mess with Mary Jo.”
It was effective theatre, but White’s situation is a lot more complicated than a Hardy Boys story. The S.E.C. doesn’t just enforce rules that have been broken. It also writes rules to govern future activity, and it has enormous new assignments. The post-crisis Dodd-Frank law regulates hedge funds, over-the-counter derivatives, and ratings agencies—all deeply implicated in the financial crisis. For example, the S.E.C. is one of the agencies charged with writing and implementing the Volcker Rule, which is meant to prevent proprietary trading by banks, and which the banks will work hard to weaken. White told me, “The S.E.C.’s mission is tripartite: protect investors, facilitate capital formation, and insure the fairness and integrity of the marketplace.” Protecting capital formation means, in effect, protecting Wall Street, where White has spent much of her professional life. It is also where Obama found much of the financial support to run twice for President. Merely putting a cop on the beat at the S.E.C. will not insure that Wall Street will be tamed or that we will be safe from future crises. That depends substantially on where government sets the boundaries. And since the financial crisis the industry has added a wide range of new and potentially risky activities that it wasn’t engaged in at the time.
If you’re not a lawyer, and you meet a quiet, studious-seeming person and ask him what he does for a living, you may hear, “I’m an Assistant United States Attorney for the Southern District of New York.” Sounds dull, like “I’m a tax preparer.” But the answer is a little like the one you get when you ask someone where he went to college and he says, “Um, Yale?” What you were really meant to hear was: “I’m a member of the Killer Elite, baby! I’m special ops. I’m strike force. Be very afraid!”
U.S. Attorneys are federal prosecutors who work all over the country and report to the Justice Department in Washington. Working for a U.S. Attorney is a prestigious job for lawyers, and the U.S. Attorney for the Southern District of New York, whose jurisdiction is Manhattan, the Bronx, and the northern suburbs, has had a special, top-dog status ever since President Theodore Roosevelt appointed Henry Stimson, later Secretary of State and, three times, Secretary of War, to the post. The office’s nickname is the Sovereign District of New York. People who work in the Southern District went to the best law schools, were elected to law reviews, and clerked for federal judges. (Alumni of the office include former Mayor Rudolph Giuliani, former Attorney General Michael Mukasey, and the new director of the F.B.I., James Comey.) Now, in close coöperation with cops and F.B.I. agents, they prosecute the biggest, baddest, scariest criminals: evil billionaires, the Mafia, drug gangs, terrorists. This gives them macho points in addition to their academic credentials.
Lawyers who get jobs in the Southern District mostly spend their careers moving around a small circuit that encompasses the federal courthouse in lower Manhattan, the major Wall Street law firms, and a few government agencies in Washington, notably the S.E.C. (The S.E.C. is the only government agency directly connected to Union Station in Washington, so Wall Street securities lawyers can take the Acela there and argue for their clients without ever having to go outside.) Inhabitants of this closed world who work as prosecutors or enforcers have in the past and will in the future defend, for a lot more money, the sorts of people they’re going after now.
Members of the Killer Elite see government as the highest calling. As White told me, “Your job as U.S. Attorney is to do the right thing. You’re going after bad guys. You’re doing something for society every day. You feel good about your job every day. It sounds hokey, but it’s true.” On the other hand, if you spend your whole career in government, or in a fancy law firm or a big bank, you’re seen as ever so slightly a loser. In the Southern District, you get much more courtroom experience than you would in a firm, and in a firm you get much more training in the complexities of the financial world than you would working for the government. Robert Khuzami, who went from the Southern District to banking and then ran the enforcement division at the S.E.C., says, “When I was at Deutsche Bank, I had to spend hours in a conference room, with the whiteboard being filled and wiped clean five or six times, while the guys there explained a structured transaction to me.” He recently started a five-million-dollar-a-year job at the law firm Kirkland & Ellis.
While you’re busting your ass for relatively little money in the public sector, you need not worry that you’re sacrificing future earning potential. You’re actually doing the opposite, since law firms are increasingly seeking attorneys who can defend their clients against newly empowered financial regulators. As one former Assistant U.S. Attorney told me, the Southern District’s securities-fraud division is its “departure lounge.” John White was once the head of the corporate-finance division of the S.E.C. Both of Mary Jo White’s co-heads of enforcement at the S.E.C., George Canellos and Andrew Ceresney, formerly worked in the Southern District and at big New York law firms—respectively, Milbank, Tweed and Debevoise & Plimpton. Richard Walker, Khuzami’s boss when he was at Deutsche Bank, is a former head of enforcement at the S.E.C. The general counsel of JPMorgan Chase, Stephen Cutler, is a former head of enforcement at the S.E.C. Alan Cohen, the global head of compliance at Goldman Sachs, is a former Assistant U.S. Attorney in the Southern District. And so on.
The Killer Elite brush aside any suggestion that they might go easy on Wall Street firms because they expect to work for Wall Street later; or that, when they’re practicing law, they would trade on their connections with government prosecutors to make their clients’ problems go away. “Rightly or wrongly, there’s a kind of arrogance that comes from being in the Southern District of New York,” Steven Cohen, a former assistant there who is now a partner at Zuckerman Spaeder, says. “Most of these people do not view themselves as being subservient to their clients. The client is free to accept or reject their advice. That’s all I owe them. I’m not beholden to them.” Daniel Richman, a Southern District alumnus who teaches at Columbia Law School, told me, “When you hear about a former Assistant U.S. Attorney coming back to the office to talk about an investigation, one could say, ‘It’s the old-boy network.’ But those who are closer to the situation see that it’s a much more beneficent system. The company chose a former Assistant U.S. Attorney. That shows it’s committed to playing by the rules. And that’s rewarded.” Even Judge Rakoff, when I asked him about the practice of moving from prosecution to defense and back again, stoutly defended it.
But the system makes less sense to the rest of the world, including politicians of both parties. Two weeks after Obama announced White’s appointment, an organization called the Project on Government Oversight issued a report called “Dangerous Liaisons: Revolving Door at S.E.C. Creates Risk of Regulatory Capture.” Senator Charles Grassley, of Iowa, a Republican, made a statement in response, saying, “It’s especially important for the S.E.C. to fix this problem with the arrival of a new chairman who, if confirmed, would bring a lot of good things to the commission but also a lot of connections to the securities industry she’d be regulating. She’d need to operate under strict rules while at the commission and afterward if she returns to the private sector, and so should everyone else. Policing the revolving door is important to the integrity of rule-making and enforcement.”
Even clients of the Killer Elite can be surprised by how quickly people who defended them, with evident passion, can switch to prosecuting them with equal passion. The announcement of White’s appointment coincided with the World Economic Forum, in Davos, Switzerland. Jamie Dimon, the beleaguered C.E.O. of JPMorgan Chase, told a Fox Business reporter in Davos that White was “a perfect choice” for the job. In September, White, working with colleagues in other agencies, levied a $920-million penalty on Dimon’s bank, accompanied by a statement enumerating the bank’s misdeeds.
White was questioned intently at her confirmation hearing about whether she could be tough on Wall Street after so recently representing Wall Street. One of the most liberal members of the Senate Banking Committee, Sherrod Brown, a Democrat from Ohio, voted against confirming her. He explained, in an e-mail to me, “I believe there is too much bias toward Wall Street among regulators. At the time, I said I hoped she would prove me wrong. But I’m still waiting for the S.E.C. to break from the status quo and demand accountability from the financial institutions it oversees. It’s time we find watchdogs outside of the very industry that they are meant to police.”
In 2005, when White was at Debevoise & Plimpton, the board of Morgan Stanley hired her to investigate whether John Mack, who was about to be appointed chairman of the bank, was going to be charged in an S.E.C. insider-trading investigation. Investigations for corporate clients, meant to protect them from future prosecutions or lawsuits, were a big part of White’s practice in those years. White spoke with the head of the S.E.C.’s enforcement division, Linda Thomsen, and was able to report that Mack would not be charged.
In 2010, White represented Kenneth Lewis, the former chief executive of Bank of America. No charges were filed after an S.E.C. investigation, but Andrew Cuomo, then New York’s Attorney General, sued Lewis on fraud charges, accusing him of misstating the shareholders’ true cost when the bank rushed to acquire Merrill Lynch. White took the unusual step of issuing a blistering statement, calling the lawsuit “a badly misguided decision without support in the facts or the law.” Cuomo’s deputy counsel, Ben Lawsky, another Southern District alumnus, was, in effect, being publicly reamed out by his former boss. “That wasn’t a pleasant experience for me at the time,” Lawsky, who is now New York State’s Superintendent of Financial Services, told me. “It’s never fun when somebody you revere criticizes the work you’re doing. We had a fundamental disagreement. I perceive her as someone who, if the client wants x, and she . . . thinks it’s wrong, she’ll counsel the client that it’s not right and they’ll listen. . . . But when you decide to zealously advocate for a client, and you’ve been in that case for a long time, my guess is that you come to believe pretty deeply in your view of the world.”
The Senate easily confirmed White’s appointment, but with a sting: it approved her for a term of only a few months. People are still reeling from the effects of the financial crisis, and the senators wanted to see whether she would crack down on Wall Street. So her own reputation, too, became part of the problem she had to solve.
White went to work in the Southern District in 1978, as part of the first substantial cohort of female lawyers in its criminal division. Two years later, she was made head of the appellate division for criminal cases. In 1981, she returned to Debevoise & Plimpton, and was made a partner a year later. Not long afterward, her son was born. By the standards of the Killer Elite, her most unorthodox career move came in 1990, when she accepted the job of First Assistant U.S. Attorney for the Eastern District of New York. The Eastern District, in the outer boroughs, ranks a notch below the Southern District, and such small differences in prestige get enormous attention inside White’s world. White soon succeeded the U.S. Attorney there.
On February 26, 1993, a group of radical Islamic terrorists, financed by Khalid Sheikh Muhammad, bombed the World Trade Center, and within a few weeks the Clinton Administration announced that White would be moving to the Southern District. “Janet Reno”—the Attorney General—“called me when I was nominated and said, ‘Mary Jo, I want you to think about how this case is being handled,’ ” White told me. “A terrorist strike: it’s hard to think of anything more serious than that.”
White’s predecessor as U.S. Attorney, Otto Obermaier, was a career defense lawyer known for his minimalist approach to the job. White is aggressive to begin with, and inclined to see her representation of her client as a moral crusade. She is known for never publicly succumbing to the doubts and uncertainties that prey on the minds of so many of us. When she is working for the government, these qualities are enhanced. And although she thinks of herself as someone who does not overtly seek publicity, she has a sure sense of the drama of public life. Terrorism was a natural issue for her. One figure in the World Trade Center bombing case was Omar Abdel-Rahman, popularly known as “the blind sheikh,” an Egyptian jihadi who was living in New Jersey—which, if one wants to be a stickler, isn’t part of the Southern District. He had been involved in planning the bombing, but most of the government officials who were keeping an eye on him wanted to deport him, rather than indict him, on the pretext that there was a flaw in his visa.
White disagreed. She and two of her aides went to Washington and persuaded Janet Reno to let her indict Abdel-Rahman in the Southern District on the little-used charge of “seditious conspiracy.” She delivered, as one of her assistants later wrote, “a concise, between-the-eyes account of what this man had done, who he was, and what we’d be inviting if we shirked our duty.” Terrorism became a dominant theme in her long term as U.S. Attorney, and the Southern District was the only U.S. Attorney’s office outside Washington to maintain an anti-terrorism division.
In 1996, White began gathering information on Osama bin Laden, who was living in Afghanistan, and who had planned terrorist acts and had declared a fatwa against the United States. American intelligence agencies were tracking bin Laden but wouldn’t give information to the F.B.I.’s law-enforcement division, where White had many friends, because they weren’t permitted to talk to each other. The restriction had been created during the Carter Administration to allay fears about the government’s spying on American citizens. White told me that the policy, which was abolished by the 2001 Patriot Act, was one of her big frustrations. Her people, who regarded the intelligence agents as a bunch of genteel nine-to-fivers left over from the Cold War, were able to establish themselves as the prosecutors in charge of bin Laden. In June, 1998, they filed a sealed indictment against him, and, soon after the bombings of the American Embassies in Kenya and Tanzania, in August of that year, which bin Laden masterminded, the indictment became public. (It was finally dismissed, by a federal judge, in 2011, a few weeks after bin Laden’s death.)
White’s sweeping approach to the boundaries of the Southern District made her popular with her crusading staff and unpopular with some other U.S. Attorneys. Patrick Fitzgerald, now a partner in the Chicago office of the Wall Street law firm Skadden Arps, told me, “Her view was, Put a globe on your desk, and that’s the Southern District of New York.” Robert Khuzami worked for White in those days, and, while accepting the Henry Stimson Award, which goes every year to outstanding lawyers in the Southern and Eastern Districts, joked that his boss “sleeps three hours a night, lives on three ounces of tuna fish a day, and thinks she should have been consulted on where to place the space shuttle.” White brought terrorism indictments against people living in Brooklyn and Queens, indictments against gang members living in Brighton Beach, and securities-fraud indictments against people living on Long Island. As Fitzgerald put it, “The F.B.I. squad usually has a better relationship with one U.S. Attorney’s office or the other. Will they bring the guy to South Street Seaport”—in the Southern District—“to sell drugs? Or to the parking lot outside Shea Stadium?”—in the Eastern District. “It’s all about cultivating relationships at the Assistant U.S. Attorney-agent level.”
In an insider-trading case in 1997, White negotiated a plea bargain with a young woman named Marisa Baridis, who was already under indictment by the Manhattan District Attorney, Robert Morgenthau, one of White’s predecessors as U.S. Attorney. Morgenthau, a man strong-willed enough to have kept running for reëlection until he was eighty-five, went to court to try to get a judge to block the plea bargain. (White chaired the campaign of Morgenthau’s opponent in his 2005 reëlection campaign; Morgenthau won.) After the September 11th attacks, White issued a warrant for Ali al-Marri, a jihadi from Qatar who was living in Illinois. “Her attitude was, What have we got? Let’s charge him with what we can,” Mary Galligan, a retired F.B.I. special agent in charge who worked closely with White in those days, told me. The government had a charge that Marri had stolen credit cards. He was arrested in Peoria, Illinois, air-lifted to New York, charged in the Southern District, and then held for years before being indicted, tried, and convicted. White also co-signed the indictment of Zacarias Moussaoui, a jihadi who was living in Minneapolis.
White said of the terrorism cases, “You’re thinking at every moment that you’re going to be attacked again. Any card you can play, you use it.” She had become, in effect, the Secretary of Homeland Security avant la lettre. But, not long after September 11th, the Bush Administration moved the decision-making for terrorism prosecution to the Attorney General’s office, in Washington, so that it could be coördinated with the work of all the other government agencies involved in the war on terror. White’s loyal agents from the F.B.I.’s enforcement division were transferred to headquarters. White gamely maintained, when I asked her about it, that this move “was the right thing to do,” though she said that she had advised the Administration to put the New York agents in Maryland or Virginia, so that they could avoid having to spend a lot of time in meetings. In 2002, White resigned and returned to Debevoise & Plimpton. The firm had to hire someone just to field the client requests for her—not only from banks but also from corporations that were under investigation (Siemens, Hospital Corporation of America), institutions (the National Football League, the Roman Catholic Diocese of Albany), and famous people (Rosie O’Donnell, Tommy Hilfiger). Not so long ago, few white-shoe law firms had lawyers devoted to defending clients against investigation and prosecution. Now they all do.
To members of the Killer Elite, having proved yourself as a fierce advocate for private clients means that you’ve got the chops, and, if you switch sides and go to work for the government, you’ll be more motivated, because you’ll be working for the good guys. But it was clear that White was going to have to prove this point to the outside world in her early months as chair of the S.E.C.
In June, White told the Wall Street Journal that the S.E.C. would begin concluding some of its investigations by trying to force the target to admit to having broken the law, and going to court if the target refused. This came as a complete surprise even to most people who work in the S.E.C.’s enforcement division. The S.E.C., like the other federal agencies with civil enforcement power, has almost always ended investigations with a settlement in which the target pays a fine but does not admit wrongdoing. This spares the S.E.C. the expense of taking cases to trial and leads to a higher total volume of enforcement actions, and it protects the targets from the shareholder lawsuits that an admission of wrongdoing would draw.
When White was nominated, Judge Rakoff told me, he e-mailed her, saying, “Does this mean I have to be nice to the S.E.C.?” “Yes, it does,” she wrote back. I asked White whether she had been influenced by Rakoff’s two harsh opinions, before she arrived, accusing the S.E.C. of letting off Citigroup and Bank of America far too easily. She said, “The S.E.C. has discretion. I’ve thought about this issue for a very long time. . . . Judge Rakoff was a voice in the discussion, but no, I don’t think what he did was a trigger.” She gave a measured account of how the new policy would work: “The change is that in certain kinds of cases that require greater public accountability, we may make a judgment that it’s important to get an admission. Has there been obstructive behavior? Has there been high-level misconduct?”
White’s announcement got great press—finally, a tough S.E.C.!—and she quickly put the new policy into effect. In July, she rejected an already negotiated S.E.C. settlement in a fraud investigation of Philip Falcone, the head of a hedge fund called Harbinger Capital Partners. One of Falcone’s companies had been a Debevoise & Plimpton client, and the settlement White was rejecting had been negotiated by the S.E.C.’s enforcement division when it was headed by her longtime assistant in the Southern District, Robert Khuzami. A month later, Falcone admitted wrongdoing, and agreed to leave the investment business for five years and to pay a fine of eighteen million dollars. The S.E.C. further established its toughness in the case of Steven A. Cohen, the head of the giant hedge fund SAC Capital, whom it had been investigating on insider-trading charges. Traditionally, the heads of trading firms could say that they hadn’t known personally about an insider-trading incident. (In the SAC case, a doctor is accused of tipping off one of the traders about the not yet public failure of a drug trial.) White employed a long-dormant doctrine called “failure to supervise,” which enabled the S.E.C. to charge the heads of companies in connection with misdeeds they did not personally commit and may not even have known about, as long as they had “culpable involvement.” She made her enforcement action public the week before the Southern District indicted SAC on criminal charges.
Since shortly after the crash, the S.E.C. had been pursuing a case against Fabrice Tourre, a trader at Goldman Sachs, on fraud charges. Tourre was believed to have persuaded clients to buy a financial derivative based on the mortgage market, without telling them that Goldman had created it at the request of a hedge-fund manager named John Paulson, so that he could bet on the product’s value declining. In August, Tourre was found liable*. The next month, the S.E.C. and three other agencies announced that they had negotiated the $920-million settlement with JPMorgan Chase, on another failure-to-supervise charge. It involved the disastrous loss, totalling roughly six billion dollars, tied to Bruno Iksil, the trader whose nickname is the London Whale, and who was permitted to make multibillion-dollar bets on risky derivatives. Chase also admitted wrongdoing, though in a way meant to limit its highest officials’ exposure to further legal problems. It said only that it had failed to control Iksil and had issued overoptimistic early accounts of the scale of the losses. The S.E.C.’s settlement document frequently mentioned lax “senior management.”
During this run of cases, the S.E.C. was on the front pages almost every day. The news reinforced the perception that, under White, the S.E.C. had grown fangs. She was just about the only Obama Administration official who was having a good year. In August, the Senate voted to extend White’s term by five years. Hostility toward Wall Street is an unusually bipartisan cause in Washington. The most critical senators include two liberal Democrats, Elizabeth Warren, of Massachusetts, and Sherrod Brown; and two conservative Republicans, David Vitter, of Louisiana, and Charles Grassley. I spoke with Grassley about White’s tenure so far. He said, “She’s at least promised me, when she was in here during her confirmation, that she’s going to take a hard line on corporate failure. She’s taken a good step forward. I’ll be less skeptical if she keeps up her good work. When this guy Falcone had to admit wrongdoing, that was a good start.”
White’s announcement and the cases that followed from it don’t necessarily mean that she is initiating wholesale change at the S.E.C. By her own account, the new policy of demanding admissions of wrongdoing will be used very occasionally. The S.E.C., as a civil agency, can’t indict anybody on criminal charges, but it works closely with the Justice Department, which can. Several years ago, Arthur Andersen, the accounting firm, after being indicted in the wake of the Enron scandal, collapsed, even though the Supreme Court later overturned the conviction. “Is that in the public interest?” White said. “That should continue to be weighed. . . . Firms have to know you’re willing to indict. But the evidence doesn’t always take you there. If it doesn’t, it’s a miscarriage of justice to proceed.”
In early October, White came to New York to give a lecture at Fordham Law School. She presented it as a defense of the S.E.C., and took what seemed to be a shot at Judge Rakoff. “While I will not speak of any specific cases, or ill of any of my judicial friends, I will say a word about our new protocol requiring, in certain cases, admissions from defendants,” she said. She went on to argue that it was for the S.E.C. to determine when to seek these admissions, and that judges should not second-guess its decisions if it arrives at settlements that don’t require an admission of wrongdoing. She made a point, too, of criticizing as excessive a minor provision—resisted by the industry—of the Dodd-Frank financial-reform legislation. She seemed to want the S.E.C. staff and Wall Street to know that she hadn’t become another Elizabeth Warren.
Catching bad guys represents only a portion of the S.E.C.’s activities. The commission also regulates Wall Street, a fantastically complicated task that might as well be taking place in secret. Enforcement is onstage, regulation is backstage. But little-noticed changes in laws and regulations were far more important in causing the 2008 crash than was law-breaking by the heads of the financial industry. The closest we got to emotional satisfaction in the aftermath of the crash was watching the ruin and imprisonment of Bernard Madoff, but he was a medium-sized player in the financial system and had nothing to do with causing the crisis.
As Barney Frank, who was the leading financial-system reformer in the House of Representatives for years, and is now retired, said when I spoke to him, “A lot of that shit was legal!” Not so long ago, even the biggest American financial institutions were relatively small by the standards of the rest of the developed world, because government policy was designed to limit their size. There was no six-hundred-trillion-dollar over-the-counter derivatives market and no interstate banking; there were no money-market funds; and there was strict separation of businesses such as stockbrokers, savings-and-loan companies, and commercial banks. The S.E.C. was meant to keep a close eye on the stock and bond markets—certainly not on banks. Each of the five commissioners (there are three from the President’s party and two from the other party, and they vote on major policies) would read through every new proposed issuance of stock and then vote up or down. The S.E.C. didn’t even have a formal enforcement division until the nineteen-seventies.
The financial industry, which is one of the largest lobbying presences in Washington, has for years pushed relentlessly for fewer controls. On the whole, Congress and the White House have assented, and most of the dozens of major changes to the system received no attention while they were being made. As Barney Frank put it, “On enforcement, public opinion helps. But when it comes to the weeds of regulation it’s hard to muster public opinion, and the interest groups are more powerful.” Two of the most significant changes were the Financial Services Modernization Act of 1999, which ended the separation between commercial and investment banking; and the Commodity Futures Modernization Act of 2000, which legally banned the S.E.C. from regulating over-the-counter derivatives. The main lobbyist for the 1999 law, Sanford Weill, then the head of Citigroup, said last year, “I don’t think it’s right anymore.” Bill Clinton recently said that he regrets not having tried to regulate derivatives.
At the start of the twenty-first century, a series of market crashes (like the collapse of the tech bubble) and scandals (Enron, WorldCom, Global Crossing, Adelphia) led to new regulations, but, as soon as the markets recovered, Wall Street resumed its push for deregulation. Just eighteen months before the financial crisis, Senator Charles Schumer and Mayor Michael Bloomberg issued a report called “Sustaining New York’s and the US’ Global Financial Services Leadership,” which warned that, if the trend toward re-regulation continued, the financial industry would move to London, which had adopted a policy (now abandoned) of “light touch” regulation.
The events of 2008 made regulation popular again. Congress passed the massive Dodd-Frank legislation. The S.E.C. today has regulatory authority over thirty-five thousand entities, and a staff of four thousand people. But it has been more than three years since President Obama signed Dodd-Frank into law, and much of it—including the Volcker Rule—has not been implemented, because the S.E.C. and other agencies have not finalized the rules. The financial industry is intensely engaged in trying to shape these rules, while the rest of the country has lost interest. The economy is in better shape. Prosecution is retrospective, and narratively riveting. Regulation is prospective, and boring and technical. It’s entirely possible for the government to become a tougher prosecutor and a more lax regulator at the same time.
Obama’s first chair of the S.E.C., Mary Schapiro, who took office with the Obama Administration, a few months after the onset of the financial crisis, had spent most of her career as a financial regulator. She stepped down in 2012 and went to work for a financial consulting firm called Promontory. When I visited her in her Washington office, she seemed weary. “I probably had dinner with my kids ten times in four years,” she said. “I testified in Congress more than forty times. I worked seven days a week. I know everybody says they have a twenty-four/seven job, but that one really is.” Schapiro was on the receiving end of the charge that the S.E.C. was letting Wall Street’s bigwigs get away with their misdeeds, and was increasingly frustrated as the next wave of deregulation took form.
White’s attention goes naturally to enforcement. Schapiro’s went naturally to regulation, and she struggled to keep the S.E.C. on top of the new risks that the financial system was taking on. In 2009, a law professor at the University of Texas named Henry Hu published an op-ed piece in the Wall Street Journal speculating that Goldman Sachs likely had got billions of the government funds used to bail out A.I.G.; Schapiro hired him to start a new S.E.C. division of risk, strategy, and financial innovation. (Hu recently published an article in Texas Law Review saying that some Wall Street firms may have become “too complex to depict.”) Schapiro hired Gregg Berman, a physicist who had been in the business of measuring financial risk, as one of the few nonlawyers in a high position at the S.E.C. She bought a computer system called MIDAS to track complex financial data.
As time went on, Schapiro began losing key regulatory battles. The Silicon Valley technology and venture-capital industries, heavy supporters of President Obama’s campaigns, were pushing, along with parts of the financial industry, to be released from a series of long-standing S.E.C. regulations that applied to new companies seeking funds from investors. When the S.E.C. opposed some of these changes, the Administration proposed legislation that would make them. In 2012, Congress passed, and Obama signed, a bill called the Jumpstart Our Business Startups (JOBS) Act, which, among other things, exempts some new companies from having to file public reports with the S.E.C.—one of the few instances in which the government has reduced business disclosure requirements. “I remain skeptical that, in the absence of disclosure requirements and public reporting, the Internet will be an effective vehicle for policing the integrity of securities offerings,” Schapiro said. “That’s why it is so important, as the JOBS Act loosened the strictures on capital raising, for there to be at least basic investor protections built in.”
Schapiro’s final grand battle was over the regulation of money-market funds. In September, 2008, there was a run on the Reserve Primary Fund, one of the country’s oldest and largest money-market funds. Money-market funds managed $3.5 trillion in savings of thirty million ordinary Americans, but, unlike banks, they don’t have to hold capital reserves, and their deposits aren’t insured by the government. “In retrospect, I see that the industry’s setup was too good to be true,” Henry Paulson, President Bush’s Treasury Secretary and a former head of Goldman Sachs, wrote in a memoir on the crisis. “It had worked for so long only because people didn’t ask for their money.”
The Reserve Primary Fund had holdings in Lehman Brothers bonds. When Lehman collapsed, the fund announced that it had to devalue its depositors’ holdings. Within a week, more than three hundred billion dollars in deposits was withdrawn from money-market funds. Because money-market funds are among the main buyers of “commercial paper”—short-term debt issued by corporations to meet payroll and other immediate financial needs—as soon as the run on the money-market funds began, the commercial-paper market stopped functioning. Companies that couldn’t sell commercial paper would soon be unable to pay their employees, and financial panic could ensue. An adviser to Paulson, after conducting a desperate search for remedies, discovered that there was an obscure Treasury entity called the Exchange Stabilization Fund, which held fifty billion dollars that could be drawn on to stop the run, and Paulson persuaded George W. Bush to permit it to be used to guarantee deposits in the money-market funds.
Last year, Schapiro proposed a tough new set of regulations, meant to prevent another run. Money-market funds would have to tell depositors that the value of their money was fluctuating, or they would have to keep capital reserves. The U.S. Chamber of Commerce** waged a furious campaign against Schapiro’s proposal—at one point buying all the advertising space in the Washington Metro system’s Union Station stop, which S.E.C. employees pass through on the way to work. New S.E.C. regulations require a majority vote of the five commissioners. Three of the five—the two Republicans, plus one Democrat, Luis Aguilar, who had previously worked for a company that operates big money-market funds—announced that they would not support the new regulations. Schapiro retaliated by getting the Financial Stability Oversight Council, a new entity created by Dodd-Frank, to look into the issue of money-market-fund regulations. But the situation had become so toxic that Schapiro’s ability to continue functioning as S.E.C. chair was imperilled. “It probably needed to be left to someone else to continue to advance the money-market-fund debate,” she told me. Last November, she resigned.
When President Obama announced White’s appointment, he didn’t say that he wanted her to be a tough regulator—only a tough enforcer. In June, White obtained a unanimous vote of the S.E.C.’s commissioners for a set of money-market-fund regulations that were more lenient than what Schapiro had wanted, or than those Henry Paulson calls for in his book. “What you try to do with every regulation is deal with the problem as you see it, in an efficient way, and preserve the product if you can,” White told me.
Gary Gensler, who began serving as chair of the S.E.C.’s smaller sister agency, the Commodity Futures Trading Commission, when Schapiro was at the S.E.C., had a similar experience. Gensler, a former partner at Goldman Sachs, turned out to be a surprisingly tough regulator. After Dodd-Frank, he proposed applying American rules to swaps—a risky financial product that became famous when some of them lost their value during the financial crisis—even if the American financial companies that sold them did so through offices in other countries. (The London Whale case involved swaps being traded abroad by an American bank.) The financial industry opposed Gensler, and both Jacob Lew, the Treasury Secretary, and White took positions that differed significantly from Gensler’s; Bloomberg News reported that, at a meeting with Lew and White in July, Gensler said he felt as if he were in a meeting with financial-industry lobbyists. Gensler announced in October that he will resign before the end of the year. “We handle this somewhat differently from the C.F.T.C.,” White told me. “We think our rules are quite robust in addressing the global market.”
White also voted for a set of S.E.C. rules under the JOBS Act that would allow startups to advertise for investors. Traditionally, the S.E.C. has felt that venture-capital and hedge funds shouldn’t be permitted to seek funds from starry-eyed amateur investors. “We’re moving to a place where Grandma is more in the sights of aggressive marketers than before,” Donald Langevoort, a law professor at Georgetown who used to work at the S.E.C., says. None of these changes got significant press coverage, in contrast to White’s spectacular enforcement actions. If the National Security Agency wanted to protect its covert activities from being made public, all it would have to do is say they were S.E.C. rulemaking procedures.
White is the first career prosecutor and litigator to chair the S.E.C. She filled the top jobs in the enforcement division right away, with people she knew well. But there is still no head of the division of trading and markets, the key regulatory job. Evidently, she is being careful about the search, but it’s also not a job she can fill with a trusted member of her network. Even career enforcement-side S.E.C. people feel that the regulatory side is especially important now, because nobody knows just how much new risk the financial industry is taking on. Stanley Sporkin, who was one of the S.E.C.’s first enforcement chiefs, back in the seventies, and is still considered one of the toughest the agency has had, said in a speech earlier this year, “During these periods when regulation becomes out of favor, the S.E.C. and the other regulatory agencies must stand their ground. They cannot allow the industries they regulate to do anything they want to and only stop them when they have gone so far as to bring about a financial crisis.”
The question about Mary Jo White is whether she believes that the only real problem at the S.E.C. has been lax enforcement. Is Wall Street a vibrant, secure, and trustworthy industry once you get rid of the bad actors, or does it require tight systemic control by government? Andrew Ceresney, who was White’s right-hand man at Debevoise & Plimpton before coming to the S.E.C., and who recently remarked to a gathering of lawyers that his goal in his new job was “to help bring the S.E.C.’s swagger back,” told me, “Part of the mission is to protect investors and make sure the markets are fair and efficient. Through enforcement you do that by bringing the actions where the evidence supports it. You punish people to the extent the securities law allows. You try to deter misconduct. Take important actions in important priority areas.” If it turns out to require a lot more than that to prevent another financial calamity, White has yet to prove that she’s going to deliver it.
Somewhere in your consciousness, lodged there by CNBC, movies, documentary films, or Tom Wolfe’s description of “young men baying for money,” is a vivid picture of how trading works in the financial markets. It involves a lot of shouting and arm-waving and scraps of crumpled paper all over the floor. For people who work in the markets, this picture is a joke. The floor of the New York Stock Exchange, with the bell that rings at nine-thirty every morning and the ensuing pandemonium, is a stage set. More than eighty-five per cent of trading is generated electronically, by computer programs. The heart of “Wall Street,” if that means trading stocks and bonds, is really four data centers housed in unmarked, nondescript, long, low, warehouselike modern buildings in northern New Jersey: one in Carteret, one in Weehawken, one in Secaucus, and one in Mahwah (which is where most New York Stock Exchange trading takes place). In retrospect, the chaotic market floor looks like a zone of safety, because machines can make much bigger, faster, more consequential mistakes than humans.
In the years leading up to the financial crisis, the industry developed a generation of risky new products and practices. They are gradually being regulated, but now there is yet another generation of risky practices. They aren’t covered in Dodd-Frank, and pose a challenge to the S.E.C. “Dark pools,” private unregulated markets, enable banks to execute undisclosed trades; “private markets,” such as SecondMarket and SharesPost, allow hedge funds and venture-capital firms to offer shares in startups to online investors in ways that are only lightly regulated. Alternative stock exchanges have pioneered the high-frequency trading that now dominates the market.
Not long ago, I went out to the data center in Secaucus to meet with William O’Brien, the C.E.O. of a firm called Direct Edge. The company opened as a full electronic exchange in 2010 and now represents more than ten per cent of the trading volume on the American equities market. It has announced plans to merge with a Kansas City-area firm called BATS, which became an electronic exchange in 2006. If the merger goes through, the combined exchange may do more trading volume than the New York Stock Exchange and more dollar volume than the Nasdaq. We met in a windowless room behind the data center’s security desk. O’Brien, a neat, friendly forty-three-year-old in a white shirt and a tie, let me know that he thought the “legacy exchanges” were a little sad.
Tom Darling, a burly young man with a blond crew cut and a goatee, who was wearing a Harley-Davidson T-shirt, took us to see Direct Edge’s version of a trading floor. He keyed in a code to a locked door and then put his hand on a sensor. The door opened and we walked to the next locked door, and then to the next. Finally, we reached Cage 06505—a nineteen-hundred-square-foot box filled with humming, blinking black computer servers the size of refrigerators, enclosed in chain-link fence. Cage 06505, in the second of three linked buildings, sits in a long row of cages leased by other companies, some of them banks and trading institutions that, by having their cage in the same place as Direct Edge’s cage (“co-location”), can shave a few microseconds off the time it takes for an order to get to the exchange.
In 2000, the S.E.C. permitted stocks to be traded in pennies or fractions of pennies, rather than the customary eighths or thirty-seconds of a dollar. That made it easier for traders to make money by placing very large orders for very small variances in the price of a stock. During the first decade of this century, the S.E.C. issued a series of rules that allowed new exchanges to execute stock trades. That’s where BATS and Direct Edge came from. Nobody outside the trading world noticed any of this until May 6, 2010, when the Dow-Jones average fell by seven hundred points in eight minutes. The “flash crash” was caused by the cascading effects of too many orders to sell an obscure financial derivative called an E-Mini S. & P. 500 contract. Suddenly, the S.E.C. realized that it had to get a handle on high-frequency trading.
This kind of trading is a coder-versus-coder game. Banks and hedge funds hire high-priced computer engineers to write algorithms that can predict minor, transitory movements in the markets—for example, by continuously comparing the prices of stocks and derivatives. Then they place orders on the electronic exchanges, hoping to make a small amount per share. They rarely hold a position for long. Because companies’ algorithms are written to behave similarly, the way to make money in high-frequency trading is to get the order to the exchange ahead of the competition’s, by microseconds, which are millionths of a second. An electronic signal is transmitted from Cage 06504 to Cage 06505 a few hundred microseconds faster than an electronic signal is sent from Manhattan. Recently, James Barksdale, the first C.E.O. of Netscape, started a company called Spread Networks, which built a fibre-optic cable from New York to Chicago, in order to offer its customers a three-millisecond advantage in the time it takes an order to travel from one city to the other.
Because no human is part of the decision-making process, if an algorithm gets triggered to place large orders nobody can stop and check it. An enormous sell order for a stock, with no buy orders on the other side, will cause the price to crash. Programming bugs can cause markets to freeze. Minor crashes in one or another stock, generated by trading algorithms, happen frequently, and there have been serious instances. One crippled a large trading company called Knight Capital. Another screwed up the initial public offering of Facebook. Another, ironically, interfered with the initial public offering of the BATS exchange, last year. Another caused the Nasdaq to stop operating for several hours. After this incident, in August, White summoned the heads of the exchanges to Washington, including William O’Brien, of Direct Edge, to explain what had happened, and directed them to devise a way to prevent it from happening again.
High-frequency trading also offers opportunities for consumer fraud, including “spoofing,” placing and instantly withdrawing large orders so as to fool the other guy’s algorithm into taking a money-losing position in a stock, and the practice of selling some customers the ability to get their orders in front of orders from other customers who don’t know they’re being jumped in the queue. The S.E.C. has announced that it is looking into these activities.
In a statement that White released to accompany her confirmation hearing, she mentioned three “early priorities” at the S.E.C. One was to determine the best way to regulate high-frequency trading. The second was to engage in “bold and unrelenting” enforcement. The third was to produce rules for quickly implementing the JOBS Act and Dodd-Frank. But she took pains not to come down too hard on the financial industry. She said that the S.E.C. would conduct “rigorous economic analysis” before putting the rules in place, to make sure they would not impose “unnecessary burdens or competitive harm” on the financial companies. It isn’t clear yet where this mixture of concerns will lead her on her top-priority issues.
I asked Donald Langevoort, the Georgetown law professor who went to work at the S.E.C. thirty-five years ago and has been watching it closely for decades from an office a few blocks away, whether he thinks the S.E.C. can handle its new responsibilities and the rapid changes in the financial system even since 2008. He had a list of concerns. For one, he doesn’t believe that the S.E.C. can control high-frequency trading and money-market funds enough to make sure that they don’t cause another crash. “We have built a system, based on technology, that no human seems to understand,” he said. “Convene the smartest minds in the world, off the record, and you don’t see a lot of confidence that anybody is on top of this.”
Mary Jo White and her lieutenants project confidence that the S.E.C. and the financial industry can march forward together into a secure and prosperous future. I asked White if she loses sleep over the risks in the financial system. It was a question offered metaphorically, since she doesn’t sleep much, anyway, but she understood what I meant, and she said that she doesn’t. She smiled amiably. “I see any potential risks as a problem that needs to be solved,” she said. ♦