Wall Street is bracing for the start of a new era next month, as Mary Schapiro takes charge of the Securities and Exchange Commission, and prepares to give the securities industry the tough love it needs to survive. According to those who have worked with her or are familiar with her views, Schapiro has a breadth of experience and knowledge to address the intricacies of the financial crisis. They characterize her as an even-handed regulator who will balance her duty to protect investors without crushing the competitiveness of those who peddle Wall Street's wares. The 53-year-old blonde is a native New Yorker who has a resume packed with bi-partisan credentials across several regulatory arenas. She has had leadership roles at the Commodity Futures Trading Commission (CTFC), Futures Industry Association, NASD and the SEC under presidents Ronald Reagan, George Bush and Bill Clinton, before serving on an advisory council for President George W. Bush. She is currently head of the Financial Industry Regulatory Authority, or Finra, the largest non-governmental regulator for securities firms, which was formed last year through the consolidation of NASD and NYSE member regulations. Schapiro also serves as a director on the boards of Duke Energy ( DUK) and Kraft Foods ( KFT), roles she will be forced to relinquish once she takes the reins of the SEC under President-elect Barack Obama in January. Schapiro has outlined broad notions for regulatory reform in public statements over the past year, most of which echoes ideas espoused by other leading policy experts.
Among the reforms Schapiro has advocated are: Setting up a framework to identify systemic risk; handling firms that are "too big to fail"; getting rid of loopholes so that investors in similar types of products have similar protection; balancing innovation and safety for financial products; improving capital-adequacy standards; and modernizing the regulatory system to address such new-fangled products, like credit-default swaps, before they become a fragile link in the financial market's house of cards. The transparency of the so-called "shadow financial system," including hedge funds, structured investment vehicles (SIVs) and collateralized debt obligations (CDOs), is also likely to fall under her radar, since the SEC has little to no oversight of such elements, though they fueled the chaos of the financial crisis this year. Other reforms that have been floated are better regulation of derivatives and short-selling, as well as a potential merger of the CTFC and SEC, which have competed for oversight of different kinds of securities, and sometimes contradicted one another. In a statement about her new role, Schapiro said on Wednesday that her top priorities would be "effective, thoughtful reform of our regulatory structure and the consistent and robust enforcement of our financial regulations." In an October speech, she characterized the main flaws with the regulatory system as such: "Clearly, our regulatory system failed to compensate for the failures of market discipline and failed to appreciate the interdependencies of financial institutions and the risks they shared.. .
The system did not allow regulators to stay ahead of this crisis and prevent it from ever occurring."
Those who know her say that Schapiro is a competent leader who can be tough when necessary, but is also aware of the risks involved in cracking the regulatory whip too harshly. Therese Pritchard, a partner in the Washington, D.C. office of law firm Bryan Cave, dealt with Schapiro for several years when working at the SEC's division of enforcement. She says Schapiro is more knowledgeable about broker-dealer regulation than any other candidate, due to her roles at Finra and the wide array of government agencies. "When Mary first came to the commission as a commissioner, she was very, very quiet at meetings and we all wondered what she was thinking," says Pritchard. "It turned out she was absorbing and processing. When she became a more active participant, she was insightful and her votes always reflected careful thought." The turmoil of 2008 has dramatically changed the landscape of the financial industry. Top Wall Street firms like Bear Stearns, Lehman Brothers and Merrill Lynch ( MER) have been wiped off the map or engulfed by stronger competitors. The two remaining major investment banks, Goldman Sachs ( GS) and Morgan Stanley ( MS), changed their status to bank holding companies to survive. Thrifts like Washington Mutual and Wachovia ( WB) have also been erased, while the government has had to engineer massive bailouts to rescue Fannie Mae ( FNM), Freddie Mac ( FRE), AIG ( AIG) and Citigroup ( C), which were deemed too big to fail. Even the strongest companies within the weak sector, like Bank of America ( BAC) or JPMorgan Chase ( JPM) have received large chunks of the government's $700 billion rescue package, more than $200 billion of which has been injected into financial firms in exchange for equity warrants.
As the crisis unfolded, investors -- many of whom did not understand the risks at hand -- have gotten burned repeatedly by stock prices that shrunk to a fraction of previous worth, or in some cases, to zero. The recent Bernard Madoff scandal is a perfect example of a gap in the regulatory framework, in which Madoff allegedly got away with a Ponzi scheme to bilk billions of dollars from charities and retirees. In light of the situation, Schapiro will almost certainly err on the side of investor safety. Irving Straus, who has worked in public and investor relations with financial firms for several decades, says he dealt with Schapiro as an executive of a mutual-fund company, when she was at the NASD. He calls her a "great choice" and a "fair, knowledgeable, no-nonsense, administrator." "Recent shenanigans will not happen again under her watch," Straus asserts in an email message. So, should Wall Street be scared of Schapiro, or relieved that she might help put an end to the corruption, excessive risk-taking and regulatory loopholes? "It's a little bit of both," says Scott Talbot, senior vice president of government affairs at the Financial Services Roundtable, a lobbying group for the industry. "I think she's tough but fair -- there's some tough love that's needed and some restructuring that will have to go on to restore public confidence in the SEC."