A Real Regulatory Review: Interview with Bill Singer

I feel so strongly about my interview last evening with Bill Singer, the preeminent veteran Wall Street regulatory lawyer and market reform advocate, that I want to provide a highlighted transcript. My transcription is not totally word for word, so at the end of this post I will provide a BlogTalkRadio audio player so that you can playback the complete interview.

As time allows, I sincerely hope you read the entirety of this transcript and will listen to the complete interview. In my opinion, the issues addressed are that important. You will not be disappointed.

Given Bill’s extensive experience and relationships, he is uniquely positioned to comment on these timely and cutting edge issues. And now, on to the transcript . . .

Sense on Cents: Bill, we have just gone through a tsunami of epic proportions. Our financial industry brought our nation to its knees. We now get the sense that the regulatory oversight of our financial industry may not truly change. What are your feelings about that?

Bill Singer: I think you are right on point. My greatest fear is at the end of the day, we all go back to square one. It’s like asking for a mulligan in golf. People’s lives have been shattered and businesses destroyed. If you listen to the ‘garbage’ coming out of Washington, it’s as if the solutions are the same old things. We’ll set up panels, write papers, but what will really change?  I don’t know what planet these people are living on, but last I looked, we haven’t gotten out of this crisis. We owe the next generation a much better regulatory system and a much fairer market. You just get this overwhelming sense that the ‘fix is in.’

Wall Street is wiping their brow and sweat and saying “whew, that was a close one.” It’s as if Wall street is telling Washington, “You’re still with us, aren’t you? We’re still paying for your campaigns.” I’m just afraid that nothing will really change other than some cosmetic changes.

Sense on Cents: I hope some real statesmen step up to address these issues. Since I’ve been writing, I believe we always get into the sufficiency of regulations. Which regulations need to be improved and which should be wiped away. I strongly believe, first and foremost, any industry has to have transparency and integrity in its process. As you just mentioned, it seems as if the ‘fix is in.’

Bill Singer: Larry, I’ve been reading your columns for quite some time now. This is not the time for anybody to be blowing smoke up anybody’s “you know what.”  We have a career cast of politicians and regulators who by and large have never really worked for a living and who don’t really have a sense of what the ‘everyday Joe’ goes through. What we need right now is new ideas, new blood. You can’t break into the system. If you have been one of the individuals who has been warning about the major issues for years, you’d think that you would be invited in to ask to contribute ideas to fix them. That never happens. Those folks who regulate us are a very closed society. We have a system in our country that feeds cronyism and there is no way out of it.

I have reached out repeatedly over the years to regulatory bodies and as a 30 year veteran, and a former regulator, if I can’t even get an interview (and I’m not saying I would even want the job; they probably couldn’t afford me), that tells me how corrupt the system is.

When the public reads about Harry Markopolos and Gary Aguirre who have tried to expose issues and they aren’t embraced, that speaks volumes. Regulation has been “in bed” with Wall Street for very long. We need a vibrant and intelligent regulatory system to protect the public against fraud and the industry against its own folly.

Sense on Cents: Bill, let’s get more specific on that topic. You’re talking about the nature of the relationship between the regulators and the industry. Specifically are you talking about the NASD, the SEC, and FINRA?

Bill Singer: We have three levels of regulation: state, federal, and self -regulatory (SRO) and they don’t cooperate with each other. These silos are much like 9/11 where we have regulators on Wall Street who were aware of the issues at Bernie Madoff, Bear Stearns, and Lehman but did nothing about them. They protected their turf but did not cooperate.

Plus, we have a revolving door where people in regulation have come from Wall Street or go to Wall Street with many stops along the way. To be clear, that’s not a problem. It’s healthy, it’s good but when it becomes incestuous and a merry go-round where you have the same people going back and forth they become very susceptible to political influence and we end up with the crisis we now have. These regulators claim they did not have a clue about the issues as they developed and if that is the case, they should not be in the job.

Sense on Cents: From your standpoint, how can we develop a measure of accountability?

Bill Singer: First, I think we need to realize that self-regulation was a concept that was launched in 1938 after The Great Depression. It was the Maloney Act and it may have made sense at the time. Perhaps they thought we can rely on the industry to help get the country back on its feet rather than having the government do it, much like what is happening now. Frankly, at that time it may have made sense but here we are 70 years later and it’s absurd. You can’t have Wall Street as a business running Wall Street from a regulatory standpoint. Frankly, I would decertify FINRA. I would get rid of it. If you want to have something other than government regulation, then you can have private sector regulation where you set up a regulator with multiple interested parties involved in the process. Don’t just limit it to the industry.

Stockbrokers should be working for the investor at the firm rather than working for the firm with the investor merely being an account. We have many capable professional stockbrokers and they should be treated like doctors, lawyers, and CPAs in which they are cut loose from the servitude at their firms and go out and develop deep, meaningful relationships with their customers. You can’t do this with the current construct of self-regulation.

We need to junk self-regulation and then we can bring in new ideas.

Sense on Cents: Where does the impetus come to effect that sort of change? It certainly does not seem that it would come from within the industry. Do our political leaders in Washington have the political will and courage to take on the industry and change this?

Bill Singer: In my opinion, “no.”  Larry, that is what really scares me. I pride myself on being a student of history. We know countries have a zenith and a nadir. We’re at a very frightening period in our country’s history. What made us great–our fluidity, our innovation, our ability to fail, the ability to “throw the bums out of Congress”–I don’t know if we can do that anymore. It’s one thing to be able to see what’s wrong, it’s another to be able to prevent it from happening again. For us to do that, we need to be able to throw out the ‘old guard’ in Congress and in our state houses. I’m just afraid that the power that people in this country had to make these changes, we may not have anymore.

Sense on Cents: I concur with you. It just seems as if the issues don’t truly get out through the media for honest and open debate. To that end, that’s why I think the world of these blogs is growing extensively.

Let’s take it back a step. I think most people in America probably do not know who or what FINRA is, but from my standpoint, FINRA is really ‘ground zero’ as far as what did happen or did not happen on Wall Street. I speak of the leverage that totally exploded and the marketing of certain types of financial instruments. Under FINRA, led by Mary Schapiro, we saw fines and sanctions drop precipitously. Mary Schapiro is now the head of the SEC and that to me smacks of the insider’s game.

FINRA itself had a position of its own of $650-$800 million of Auction Rate Securities which it liquidated mere months before the market totally failed leaving thousands of investors with over a HUNDRED BILLION dollars totally frozen. FINRA, charged to protect investors, did not apprise investors until 2008 – after the market was frozen – about their concerns and issues in this sector of the market. Now here it is June 14, 2009 and FINRA has yet to issue their 2008 Annual Report. What say you?

Bill Singer: Correct. I really can’t add much to your statements. We really don’t get answers to these points. We get excuses. Nobody comes up with any logical response. We have an organization which most people don’t know what it is.

Sense on Cents: Who does FINRA report to?

Bill Singer: FINRA was created by Congress as a self-regulator. It promulgates its own rules and regulations but those have to be approved by the SEC. But there’s form and there’s substance and it is perfectly exemplified by Mary Schapiro. I know Mary. I like her. I am fond of her as a woman who has made her way in what has traditionally been a man’s industry. But there is a difference between liking and admiring a person and respecting what they are doing as a regulator. She is a career regulator and operates within a pretty closed circle. Part of the problem is how can an individual who ran a self-regulator come up with the ideas to get rid of that self-regulator which is filled with her friends and colleagues? These are such incestuous relationships. Mary Schapiro is now looking into executive compensation caps, but when she was at FINRA she was making $2-3 million and served as a director at Duke Energy. She served as a director at Kraft Food. How do you pretend that your past is not some sort of a prologue? She made probably ten times what we pay the head of the SEC. Paid for what? For not catching Bernie Madoff? For not catching Bear Stearns? I could have “not” done the job for a tenth of the money.

Sense on Cents: It seemed to me when President Obama or at that point President-elect Obama got his economic insights from Robert Rubin, Warren Buffet, Larry Summers, they got their insights from their friends on Wall Street that Mary Schapiro would do just fine as the new head of the SEC.

Bill Singer: Mary Schapiro has some very powerful political patrons in Washington. You have to remember that she was nominated by a Republican to head one regulator and by a Democrat to head another. That is a unique feat in Washington.

I think the reason why Mary Schapiro was put in charge of the SEC is because, in some sense, she is the consummate political animal. She doesn’t cause a lot of trouble. She has had a reputation to coming in and cleaning up to a degree.

Again, I’m not going to be a hypocrite. I know the woman and admire her. She could do the job but as with many of us, sometimes we do a job but when we are finally given the opportunity to break out of character to rise to the occasion, we stick with our old form.

We don’t need people who understand things. We need people who are going to knock down walls and fix and change things. That is not Mary’s suit. I think she was brought in because she can “talk the talk” of reform, but she was not going to break the sledgehammer out.

The public sees her as a reformer but her track record is to make minimal waves for the industry and create minimal issues for the politicians. That’s probably why they picked her. It may be good for politics. It may be good for Wall street. I hope I’m wrong. It may turn out in the next six months that she is the best regulator to head the commission, but her track record does not speak to that.

The same problem we have at FINRA. We have a new head of FINRA, Rick Ketchum.

Sense on Cents: What do you think of him?

Bill Singer: I am not a big fan of Rick Ketchum.

Sense on Cents: Is it just more of the same?

Bill Singer: I will be polite. In my opinion, it is worse than the same. He comes out of the SEC, he comes out of Citigroup, he comes out of the NYSE. When I was representing day traders and the SOES [Small Order Execution System] traders and ECNs [Electronic Communication Networks], in the 1990s, those folks were trying to democratize the process for these groups to get access to discount prices and Rick was the leading apologist for the market makers at Nasdaq and he was the individual who did everything he could to protect the market makers at Nasdaq. As many of us remember, in 1996 the Department of Justice Anti-trust Division brought a historic case against the Nasdaq market making community for price fixing. In that same year, the SEC issued a 21-A report which was a historic condemnation of the Nasdaq for becoming politicized and acting as a “lap dog” against smaller firms. To my sense of things, Rick is a powerful spokesperson for the “old guard.”

Sense on Cents: That’s what we don’t need at this time!

Bill Singer: Well, it’s even worse. The SEC is run by Mary Schapiro and FINRA is run by Rick Ketchum, and I just don’t see the political will there to make the necessary changes. What I do see is a lot of speeches and a lot of antagonistic behavior against people who disagree with them.

Sense on Cents: That sounds to me like the definition of pandering. We have way too much of that.

What truly bothers me is the situation involving Auction Rate Securities. Bill, have you in your practice gotten involved with clients who have investments frozen with ARS?

Bill Singer: I have to be careful to protect attorney-client privilege. I have a client whom this past Friday was in tears as proceeds from an estate were all invested in Auction Rate Securities. I told her to calm down as I told her I thought it would all work out.

The problem is that FINRA was invested in these ARS. To me, that is the problem in the industry. Are you in the business or are you regulating? Was FINRA trying to protect its investment or trying to protect the public? How could they not understand the danger in the ARS sector?

I find the stockbrokers blameless because they were told ARS were cash-like instruments. Now we hear from FINRA, well these ARS were very complicated instruments, it was an unprecedented event, we didn’t know.

Sense on Cents: It was their job to know.

Bill Singer: Here’s what I would tell you. I was a former regulator. If you are charged to regulate a product and you ask the industry to explain that product and you don’t understand it, then you issue a press release. You say that somebody’s got a hand grenade and they have pulled the pin and the spoon’s ready to fly off. I don’t ever recall seeing any releases from FINRA or the SEC about ARS, CDS, about Bear Stearns or sub-prime. The crap that we get from FINRA are press releases about money they give to charity and high profile speeches they give.

Go onto the SEC’s website, www.SEC.gov or FINRA’s website, www.finra.org, and I guarantee you if you look in 2005 or 2006 or 2007 you will see no credible warnings about ARS, CDS, and derivatives. They weren’t focused on it. At the end of the day, don’t tell me you don’t understand it because if the FDA said they did not understand a drug they would not allow it to be released.

Sense on Cents: I know currently that both the U.S. attorney in Brooklyn and the SEC, how about that, are investigating the executives who worked at Lehman for potentially dumping or front-running the ARS market in 2007. The question I would have is if the U.S. attorney and the SEC are going to look at Lehman Bros., then they should also look at FINRA which liquidated its own ARS holdings in the same time period. I would like to find out the trade date when Lehman liquidated its ARS positions and compare and contrast that with when FINRA liquidated its ARS positions. That’s a BIG story!!

Bill Singer: I agree with you. I know a number of us are aware of that. I know you have been writing about that recently. I saw your last few columns and I wish “main street press” would pick up on it.

Larry, look, it’s a very simple issue. If somebody goes into a morgue and pulls a stiff out and looks at the toe tag and tells me what he died of . . . well, that’s wonderful but what good is that?  We don’t need regulators reading toe tags in the morgue. We need people who are preemptive. What you’re talking about with Lehman and ARS is a perfect example. I don’t need regulators telling me what happened after things have been destroyed and people are living on the street. That’s not regulation. That’s garbage. We needed these people to do their job before these things happened.

In your home, you don’t have a fire detector, you have a smoke detector. We need regulation to act as a smoke detector. We have not had that for ten to fifteen years. We don’t have it today. That is really what we need. We need to demand this from the regulators.

We have complained of cops effectively falling asleep on the beat. This case right now that they are looking at with Lehman is a perfect example. Isn’t it convenient that they are looking at people and a firm that is no longer in business? How lovely.

Sense on Cents: It smells from so far. You can see they are trying to get some sacrificial lambs which they will put up on the totem pole and say, “We got em! Now come on back in the water’s fine!” The fix is in.

I’m playing phone tag with some people from FINRA right now and they left me a message asking “what exactly are you looking for?” My response is and will be: “It’s June 14th, where’s your 2008 Annual Report? Can you tell us what hedge funds, what fund of funds, and what private equity deals you are in? Give me the trade date when you liquidated your ARS positions along with the price and dealer through whom you sold them.” There are thousands of individuals with over a hundred billion dollars frozen in ARS. This is not small potatoes. This is BIG MONEY.

Bill Singer: The same way that FINRA is asking you, Larry, what you’re looking for is what the public has been asking FINRA and the SEC for the last ten years. “What were you looking for?”

You did not catch Madoff, you did not see what was going on at Bear or Lehman. Now they are hot on the trail of firms that are out of business?! We can’t survive like this. We need them out ahead of the curve and they’re just not there. Part of the reason I believe is the incompetence of the regulatory community, but the other part is the corruption in the system. We just don’t seem to be able to get these people out and change it. That’s what scares me the most.

Our politicians don’t care about us. They don’t listen to us. Neither do our regulators.

Sense on Cents: Bill, this has been fabulous. I thank you profusely for coming on.

How about the arbitration process used in the industry? Is it fair and useful?

Bill Singer: The feeling’s mutual.

Arbitration tends to be a relatively fair process. That being said, I don’t believe in arbitration. It’s a mandatory system with no real option for investors. It is not set up in a fair fashion because the customer gives up the right to go to court and has to go through the industry arbitration process. Wall Street should no longer be allowed to use this process.

Larry, keep up the good fight!!

* End of transcript *

For those who would like to listen to my interview with Bill Singer in its entirety, the audio player is provided below. In addition, please check out the extensive bio of my guest, Bill Singer.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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