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How New SEC Chief Mary Jo White Can Help Wall Street

Rick Newman

Do you trust bankers? Most Americans don't. After a brutal recession caused by massive financial speculation, Wall Street firms rank near the bottom in Gallup's annual survey of trust in institutions.

The nomination of Mary Jo White--who spent a decade in New York as a hard-nosed federal prosecutor--to run the Securities and Exchange Commission has produced muted groans among business leaders worried she'll be too tough. Many business honchos feel President Barack Obama has vilified them as "fat cat bankers" and private-plane aristocrats, generating hostility that could intensify if a new SEC chief comes in looking for scalps.

They've got it backward. One of the surest ways to improve Wall Street's reputation is for a tough new cop to clean house. If ordinary people felt like they knew who the good guys and the bad guys were on Wall Street, they'd have better confidence in the whole financial system.

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The problem now is that virtually nobody has been held responsible for the implosion of the financial system in 2008 and the grinding recession that followed. It's obvious there was massive dishonesty in the mortgage industry, from the brokers who wrote loans, to the people who couldn't afford them, to the Wall Street geniuses who packaged those loans into securities--and derivatives tied to securities--and sold the "toxic waste" to unsuspecting clients.

Except for a few mid-level traders, nobody has been prosecuted for crimes associated with the meltdown that required the U.S. government to rescue the entire financial system. If nobody can be fingered as the villain, it's reasonable to conclude that the whole system is corrupt, along with everybody in it.

White's predecessor at the SEC, Mary Shapiro, spent much of her tenure reorganizing the commission to make it more nimble and better able to spot abuses in the financial industry before they become calamitous. She also had to oversee the drafting of hundreds of new regulations passed as part of the massive 2010 Dodd-Frank overhaul.

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Shapiro wasn't considered a Wall Street lackey, but she did lead an agency that seemed perpetually flat-footed in the face of epic financial industry abuses. If White can create the impression that the SEC is up to its job, it will help restore some confidence in the whole financial system. If she can go further and corral a few bad guys, it might even convince skeptics that she's weeding out the rotten apples, with the better ones left to run the banks.

Many Wall Street denizens are brazenly dismissive of government regulators, convinced they can police themselves better than any bureaucrat can. A few probably feel it doesn't matter one bit whether confidence in Wall Street is sky high or in the gutter. The money keeps flowing whether you're popular or not.

Here's the argument for why that view is wrong and it's important for Americans to have more trust in their financial system. First, it typically takes a public outcry for Congress to beat back intense lobbying and pass the kind of dense regulatory overhaul that got through Congress in 2010. Bankers may be right when they complain their industry is being choked by regulation--but they brought it on themselves. If you want to get regulated to death, keep screwing up.

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Over-regulation wrought by abuse makes the U.S. financial industry less competitive globally and hamstrings a sector that was once a strong competitive advantage for the United States. In surveys of global business leaders by the World Economic Forum, the ranking of the U.S. financial system has dropped from 9th to 16th since 2008. Norway, South Africa and Malaysia rank higher. That decline is due at least in part to the impression--and perhaps reality--that greedy power-brokers run the system, with no adults in charge.

Finally, the bunker mentality among many consumers who don't really trust any institution any more contributes to depressed confidence and a slow-growing economy, which forces everybody to make downward adjustments. Free markets depend on trust, enforced by tough, fair-minded authorities. Wall Street might chafe under the intensified scrutiny of a dogged investigator, but flushing out those who don't play by the rules would benefit those who do.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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