By William Patalon III
Money Morning/The Money Map Report
President-elect Barack Obama yesterday (Thursday) named Mary L. Schapiro – a strong proponent of protections for individual investors – to head the U.S. Securities and Exchange Commission when his administration takes office next month, the biggest of three nominations with potential financial crisis implications.
And in the latest addition to his Obamanomics plan, the president-elect has also proposed a massive stimulus package of as much as $775 billion over the next two years as part of a historic infusion that’s aimed at overhauling America’s infrastructure, schools, broadband networks and energy use, a Congressional source told MarketWatch.com yesterday.
But making the Schapiro nomination official was considered a key move. In its Thursday morning issue, Money Morning reported that Schapiro had been chosen and that an official announcement would be made later in the day. And that’s just what happened.
Obama named Schapiro as his choice for the top SEC post and nominated former Treasury undersecretary Gary Gensler to run the Commodity Futures Trading Commission (CFTC), which regulates trading in the commodities markets, and called for an overhaul of the U.S. financial-regulatory system in the wake of the credit and economic crisis.
“My priority is to create a regulatory structure that stops future problems in the financial system,” Obama said at the press conference where he announced the identities of the two latest nominees for his team. “Financial regulatory reform will be a top priority of mine.”
In a move that helps further define the Obamanomics platform, the incoming president indicated that a key mandate for both Schapiro and Gensler would be to reign in the multi-trillion-dollar derivatives market, which functions largely outside of the traditional equities market and is mostly unregulated.
“There is a huge amount of money sloshing [around] outside of banks and that is a problem,” Obama said.
A Merger in the Works?
Schapiro, 52, may have one of the toughest jobs in the new Barack Obama administration, for the SEC has come under increasing fire for allegedly failing to demonstrate much initiative in attacking the current financial crisis.
Currently, Schapiro is the chief executive of the Financial Industry Regulatory Authority (FINRA), the largest non-governmental regulator for all securities firms doing business in the United States, MarketWatch reported. FINRA was created in July 2007 through the merger of the National Association of Securities Dealers (NASD) and the member-regulation, enforcement and arbitration functions of the New York Stock Exchange.
Schapiro is also a former head of the CFTC and former member of the SEC. She has been appointed to top finance-related government posts by two Republicans presidents and – now – two Democratic chief executives.
If confirmed by the Senate, Schapiro would take over as head of an agency that has been roundly criticized for failing to detect signs of trouble on Wall Street, where enormous derivatives losses have led to the collapse of the investment banking sector, caused a near collapse of many top commercial banks, and forced the U.S. government to engage in a bailout effort that will end up costing taxpayers trillions of dollars.
Because Schapiro has experience in merging regulatory organizations, and because she’s held posts with all the key players, many observers believe that her nomination signals that the incoming administration is serious about merging the SEC and the CFTC. In fact, outgoing Treasury Secretary Henry M. “Hank” Paulson Jr. has called for the two regulatory agencies to be combined as an interim step in his “blueprint” for a regulatory reorganization in Washington.
Interestingly, Schapiro has publicly supported that “blueprint” for overhaul, both in speeches to organizations, and in testimony in Washington. She is well known for being a strong advocate of the rights of individual investors.
"If the Obama administration decides to merge the SEC and CFTC, Schapiro has the experience at both the agencies to make that transition happen," Barbara Roper, director of investor protection at the Consumer Federation of America, told MarketWatch.
But Schapiro's insider experience and knowledge of key regulatory players may also make it more difficult for her to make the tough decisions that will be required if the merger strategy is called for, Roper noted.
“Even though she has a great deal of policy expertise at both the CFTC and SEC, I'm not sure she will be prepared to bring in the broom that the agency needs. She has long years of relationships with people at this agency,” Roper said.
A Solid Resume
Schapiro has plenty of operational, management and regulatory experience. Before FINRA was formed, she had most recently served as chairman and chief executive officer of the NASD, an appointment that took effect in December 2006. Before her appointment as chairman and CEO, Schapiro had spent five years serving as the vice chairman of the NASD and president of its regulatory and oversight division. She’d been with the NASD since 1996.
According to some reports, because the NASD was an industry group, there were often accusations that it overlooked instances in which broker/dealer abuses trampled individual investor rights. Given the more-retail-oriented focus many markets have taken in recent years – with a majority of U.S. workers actually owning stocks via mutual funds or through their employer retirement plans – many industry insiders felt that a new organization was needed, especially one that would view protection of the public as paramount. The creation of FINRA was one offshoot of this push for increased indvidual-investor protection.
In a speech in June, Schapiro talked about the growing complexity of the financial markets and warned that highly sophisticated new products will only make matters even more challenging for individual investors. The upshot: bankruptcies and home foreclosures could jump, and many investors could find themselves facing a future in which they have little in the way of a financial cushion.
“In tough financial times, many investors feel pinched for cash – and some may search for different, often-risky ways to make ends meet, or to maintain a certain lifestyle,” Schapiro told listeners at a “Women in Housing and Finance” conference in Washington. “Troubling trends include investors leveraging or prematurely depleting their retirement savings, trading in their insurance policies in transactions known as ‘life settlements,’ and tapping their home equity through reverse mortgages. We are concerned that some investors may be risking their most valuable assets in an effort to raise cash—including those in or near retirement, who may not have time to recover their losses.”
And the other unfortunate part of that problem, Schapiro said, was that “some unscrupulous financial professionals—many of them unregistered—feed into this investor anxiety, pushing strategies and products that promise to provide balance and safety, but that often end up haunting an investor for a lifetime.”
Schapiro will bring skills – as well as experience – to her new post as head of the Securities and Exchange Commission.
In late 2006, at the time of her appointment as NASD chairman, Richard F. Brueckner, the presiding governor of the NASD’s Board of Governors, described Shapiro as a “highly respected and effective regulator who has proven herself time and again to be a strong investor advocate.”
"She is a proven leader and is uniquely qualified to take over as the head of NASD as it continues to execute its vital mission of protecting investors and ensuring market integrity,” said Brueckner, who was also the CEO of financial-technology provider Pershing LLC. “I am confident the securities industry will work closely with Mary and support NASD's efforts to make regulation both more efficient and effective.”
A Career Regulator
Schapiro joined the NASD in 1996 as president of NASD regulation and was named vice chairman in 2002. As head of NASD's Regulatory Policy and Oversight Division, she served as the primary regulator of 5,100 securities brokerage firms and the nearly 700,000 registered brokers who were doing business with the public.
The division was responsible for writing rules that governed the conduct of virtually all aspects of the securities industry, including sales practices and financial and operational integrity; examining firms for compliance with those rules; and enforcement of NASD rules as well as those of the Municipal Securities Rulemaking Board and federal securities laws.
At that time, the NASD also had regulatory responsibility for The NASDAQ Stock Market, the American Stock Exchange and the International Stock Exchange.
Before joining the NASD, Schapiro was the chairman of the CFTC, a post to which President Bill Clinton had appointed her in 1994. The CFTC is the federal agency responsible for regulation of the U.S. futures markets, including the financial, agricultural and energy markets.
As chairman, Schapiro participated in the President's Working Group on Financial
Markets with the U.S. treasury secretary and the chairmen of both the U.S. Federal Reserve and the SEC.
Prior to her time with the CFTC, Schapiro served for six years as an SEC commissioner. She was appointed in 1988 by President Ronald W. Reagan, reappointed by President George H.W. Bush in 1989, and was named acting chairman by President Clinton in 1993.
At one point, Schapiro was an active member of the International Organization of Securities Commissions (IOSCO) and was elected Chairman of the IOSCO Consultative Committee in 2002 and 2004.
Schapiro currently serves as the “lead director” of Kraft Foods Inc. (KFT), and has been a board member since last year. She’s also a director of Duke Energy Corp. (DUK), a post she’s held since 1999.
Schapiro is a trustee of.
In discussions with Congressional leaders, President-elect Obama has outlined the basics of a stimulus package worth in the range of $675 billion to $775 billion over two years to Congressional leaders, the published reports state. Obama talked to House and Senate officials Wednesday, but it’s believed the package will likely grow in size.
The package does not consist of another rebate for taxpayers, Congressional sources say. Instead, a number of other programs – such as infrastructure, schools, energy efficiency and health care – will be targeted.
States also will receive aid, and the package would assume more of the cost of Medicaid – perhaps even as much as $100 billion.
Obama transition team officials have declined comment on the financial plan, but Congressional leaders already are calling for a passage of the package. House Majority Leader Steny Hoyer, D-Md., said a package similar to what Obama proposes was needed in light of the Labor Department's report yesterday that another 554,000 Americans filed for unemployment benefits.
“This package must renew our infrastructure, stimulate our economy by extending unemployment insurance, invest in new energy technologies, and help cash-strapped states protect vital services like education and health care from damaging cuts,” Hoyer said in a prepared statement.
The Wall Street Journal reported there is concern the package could expand to as much as $850 billion as it works its way through Capitol Hill. But Obama is trying to keep the stimulus below $1 trillion, an important psychological barrier, as those on Capitol Hill and Wall Street would be wary of what one insider referred to as the “Dreaded T Word.”
Obama has said that the stimulus needs to be just that – a stimulus, and one that’s actually big enough to “jolt” the wheezing U.S. economy and put it back on a path to growth. Since the just-declared recession actually began back last December, almost 2 million workers have lost their jobs, and more than 500,000 jobs were shed in November alone, according to government data.
Passage would allow Obama to knock out a number of problems with a single blow. The president-elect wants to jump-start the economy on one hand while fulfilling a number of campaign promises with the other. In an ideal world, Obama would like to be able to sign the legislation immediately after he’s sworn in. The Republicans, however, have apparently been quite dismissive of such a time frame.
Obama actually hopes to get lawmakers to assemble a package that could be put before both the House and Senate when the 111th Congress convenes Jan. 6. The president-elect is to be inaugurated on Jan. 20.
“Congressional Democrats urge President Bush to drop his opposition to the recovery package; but if he does not, Congress will ensure that President-elect Obama can sign it soon after taking the oath of office,” Hoyer, the House majority leader, said in his statement.
News and Related Story Links:
Money Morning News:
Career Regulator Mary Schapiro – a “Strong Investor Advocate” – is Reportedly Obama’s Choice for SEC Chief.
Obama to name Mary Schapiro SEC chief: reports.
Mary L. Schapiro Profile.
Commodities Futures Trading Commission.
Financial Industry Regulatory Authority.
PR Newswire Release:
NASD Board Names Future Successor to Chairman and CEO Robert R. Glauber Effective December 2006.
The Bond Buyer:
Treasury Pushes Reforms.
Remarks by Mary L. Schapiro
Chief Executive Officer, FINRA.
Obama proposes job stimulus of up to $775 billion.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.