Underfunded SEC

The head of enforcement at the Securities and Exchange Commission (SEC), Linda Thomsen, testified before Congress today about her group’s handling of the Bernard Madoff Ponzi-scheme scandal. Particularly noteworthy is her having said, “While we appreciate and examine every lead we receive, we simply do not have the resources to fully investigate them all.” I have stated several times that Republicans have had as a goal since the Ronald Reagan era to intentionally underfund the SEC. Why would they do this?

The goal is to have a well-oiled capitalist machine that is not gummed up by over-zealous, mounted on a mole-hill, regulators. However, as we have seen time and time again throughout economic history, and history, in-general, the better resourced entity usually wins when there is a fight. In this case, the SEC’s budget was $905 million in 2008. Whereas, Bernard Madoff alone managed around $50 billion, and is annual management fee was about the same as the entire SEC budget. And we are only talking about one individual, Madoff. And it’s not as if we are dealing with unsophisticated people whose malfeasance is easily discovered. By definition it takes a more clever person to uncover a clever schemer, yes? So for the SEC to work as an institution, it needs to have people who are, in general, more clever than their adversaries. Or they need adequate resources that allow them to create tools to identify wrongdoing. Or they need resources to investigate tips that come from people outside of the SEC.

The underlying theme of Ms. Thomsen’s testimony is an obvious one: the SEC needs more resources. According to “CFO” magazine 32% of the SEC’s budget is spent on salaries. That works out to $289.6 million. The SEC employs approximately 3,800 people. Thus, the average total compensation at the SEC is $76,211. Approximately half of all compensation is benefits such as health insurance and retirement, so the approximate salary of an SEC employee is $38,105. Meanwhile, entry-level Wall Street analysts make low six-figures. So how can the SEC attract the “more clever” talent necessary to carry out its mission? The answer is that it cannot.

By comparison, the Federal Government spends $36 million per year on a program called the U.S. Department of Agriculture’s Animal Damage Control Program. This is a program that hunts and kills coyotes to protect livestock. The approximate cost per coyote killed is $100 per coyote, however sometimes the cost is up to $2,000 per coyote. It is estimated that this program is very biased toward western livestock ranchers and to several states in particular. In general, the program benefits around 30,000 ranchers. Additionally, statistically-speaking, the program doesn’t work. In the states where the ADC is most active, predation rates are higher than in those states where ADC is less active. Source for all of this is: http://www.ti.org/adcreport.html#RTFToC1 My point is that the SEC is clearly a more important priority than the ADC. If we can some how find money for the ADC, why can we not increase the budget for the SEC? During the Bush Administration there were years (FY 2006) when the requested increase in the SEC’s budget was as low as $177,000!

Among the issues that you should support as an investor is a well-resourced SEC. Anything less than that and you have a market free-for-all that is largely headed up by a bunch of grown frat-boys.

Jason