Regulation and the Depository Trust Clearing Corporation
No Associated Press content was harmed in the writing of this post
On Wednesday lambert pointed me to a Bloomberg article by Robert Schmidt and Jesse Westbrook claiming the Obama administration will call for moving some of the powers of the Securities and Exchange Commission (SEC) to the Federal Reserve. While the SEC has come under fire for its reluctance to aggressively monitor Wall Street, the solution (as lambert points out) is to give the agency the resources, incentive and mission to do so, not to transfer authority elsewhere. Schmidt and Westbrook note that it "still has powerful supporters, including a number of Democrats on the Senate Banking Committee who aren’t likely to support having an agency they oversee cut back," so maybe this is just a trial balloon. Either way it doesn't deserve to make it past the rumor phase.
Whenever the news turns to the world of financial services, though, it seems like the path grows dark very quickly. (If so, that probably is by design.) I read stories like this and think, Congress oversees the SEC which is as it should be - and the SEC should be regulating...what? One of the most interesting reports I have read this year is The Story of Deep Capture by Mark Mitchell (pdf). First published last year, it is a 69 page report alleging corruption and collusion among hedge funds, regulators and financial reporters. It is tempting to dismiss it as tin foil hat conspiracy paranoia, but Mitchell is a former editor of the Columbia School of Journalism. Maybe he went off the rails after working there or maybe he was a bad hire in the first place, but that is something that should be backed up with evidence. All I have seen so far are ad hominem attacks from targets of his investigation.
The problem with establishing anything with confidence is wrapped up in one of Mitchell's main contentions: That the world of financial journalism is relatively small; limited - at the time of his reporting, anyway - to one network (CNBC), a couple of newspapers (New York Times, Wall Street Journal) and a handful of magazines (Forbes, Barron's, Fortune). If the economic news cycle is almost entirely determined by such a tiny group then it is possible to court and capture the prime movers. Even more importantly, the scope of respectable topics and people can be so strictly defined and narrowed that those marked for ostracism can be almost entirely silenced.
This puts the ordinary reader who encounters Deep Capture in a bit of a bind. Anyone coming to it from the world of politics will probably not need to be persuaded that an insular and self-reinforcing elite can decide what is and is not within the bounds of acceptable discourse. It is entirely possible to see a subject like the naked short selling of phantom stock marked as verboten and simply ignored by the most influential outlets. Anyone looking for independent confirmation of Mitchell's allegations will necessarily be pushed to the fringes of financial journalism, and going there with no prior experience makes it impossible to weigh the credibility of what one finds. You have to go based almost entirely on your intuition and what seems reasonable.
Which is a real shame, because there are some fascinating elements to the story. Sometimes the web he weaves seems a little too sprawling, but other parts ring true. The idea of having a company like Gradient Analytics appear on the scene and almost instantly be hailed as an unimpeachable source of sound research looks a little fishy. So too is the role of an institution I had not heard of before (emphasis in original):
It is also important to recognize the role of The Depository Trust and Clearing Corporation (DTCC), an organization headquartered in New York City. DTCC is where stock trades are processed - more than $1.5 quadrillion worth of them every year. That’s 30 times larger than the entire gross product of the entire planet.
Which brings us back to the SEC. It ostensibly regulates the DTCC, but according to Mitchell that amounts to little more than walking in a couple times per year, kicking the tires and asking, "so how's everything going?" When I read about moving SEC oversight to the Fed I immediately thought, would they do a better job? Would we know more about how the DTCC operates, and what role it might have played in the meltdown of the financial services industry? What would it take to get some light shining in there? With all due respect to the president, spending time and energy trying to yank pieces of authority out of Congress' orbit and closer to his helps prevent discussions like that from even starting.