The best paragraph of President Obama's speech today:
I have always been a strong believer in the power of the free market. I believe that jobs are best created not by government, but by businesses and entrepreneurs willing to take a risk on a good idea. I believe that the role of the government is not to disparage wealth, but to expand its reach; not to stifle markets, but to provide the ground rules and level playing field that helps to make those markets more vibrant -- and that will allow us to better tap the creative and innovative potential of our people. For we know that it is the dynamism of our people that has been the source of America's progress and prosperity.
Also noteworthy is that he acknowledges some of the blame for the crisis belongs not to bankers but to Washington: "It was a collective failure of responsibility in Washington, on Wall Street, and across America that led to the near-collapse of our financial system one year ago."
The best timing, though, was that of Judge Jed Rakoff, who just as Mr. Obama was speechifying about the "weaknesses in oversight," rejected a settlement that Mr. Obama's Securities and Exchange Commission had reached with Bank of America. The judge said that the settlement "does not comport with the most elementary notions of justice and morality." The New York Times article notes that in a previous case, this judge increased a fine and "demanded that the money be paid out to the company's shareholders, rather than" to the S.E.C.
At the risk of seeming self-congratulatory, I repeat the original FutureOfCapitalism.com post on the S.E.C.-BofA settlement, written before Judge Rakoff so much as raised an eyebrow. That is the post in which I called the settlement "strange" and wrote:
All this raises some questions. If the government feels these bonuses are so inappropriate, why not claw them back, rather than impose a fine on the shareholders of Bank of America? That would punish the bonus recipients rather than the bank's shareholders, who have already suffered quite a bit. Since the federal government already in effect owns a third of Bank of America, imposing a fine on the bank is kind of like a person taking money out of one pocket and putting it into another pocket. The $33 million is chickenfeed, anyway, compared to the $3.6 billion in bonuses. What's more, if the SEC alleges that the people being misled were the proxy recipients, i.e., the shareholders, why not compensate the shareholders by giving them the $33 million, or, better yet, the $3.6 billion, rather than by punishing the victims, the misled shareholders, by taking the money from them and giving it to the U.S. Treasury? The non-governmental Bank of America shareholders get, arguably, a raw deal under this settlement, because the government shareholder gets the penalty money back in its other (S.E.C.) pocket, while the non-government shareholders are out their share of the $33 million, even though they were the ones who received the supposedly misleading proxy materials.
If sorting this out seems complicated, it's because the federal government is serving simultaneously as regulator of the bank and its part owner, while trying to maintain the appearance that the bank is an independent business. The Obama administration gets to have it both ways. By imposing the SEC penalty, it can maintain the appearance that it disapproves of big bonuses at money-losing Wall Street firms that get bailed out by the government. But by stopping short of making the bankers give back the bonuses, it can avoid the disruptive consequences that such a move would impose on a business it is now a big owner of. Meanwhile, Bank of America's non-government shareholders are stuck paying a share of the government-imposed penalty for approving a deal done at the government's behest and on the basis of what the government now says was a misleading proxy filed by a firm in which the government was a significant investor.
Mr. Obama's speech portrays regulation as a matter of "common-sense rules of the road." If it's just a matter of common sense, why can't his S.E.C. get it right?
