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Elizabeth Warren's war on Mary Jo White, explained

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When Mary Jo White was first selected by President Obama to serve as head of the Securities and Exchange Commission, she was a controversial pick, with different reads of her biography leading to different views about her likely approach to the gig. In the end, though, Democrats overwhelmingly backed her confirmation. Tuesday morning, Senator Elizabeth Warren expressed profound regret for her past support, releasing a letter complaining of "misinformation," broken promises, and "extremely disappointing" leadership.

The controversy speaks in part to some peculiar aspects of White's career and clearly reflects a personal breakdown between a key financial regulator and a senator with a keen interest in financial regulation. But it also highlights a continued conceptual divide within the Democratic Party — should the structure of the American financial system be fundamentally altered, or should the same companies be allowed to control the commanding heights of the American economy, come what may?

Warren's ongoing effort to tilt the playing field against the big banks pits her against the Obama administration. But perhaps more importantly it probably pits her against Hillary Clinton, who has happily embraced Warren-style populist rhetoric, but not her fundamental view of the financial sector. But in contrast to a few earlier Warren-Obama blowups, which have been about issues with specific expiration dates, this time Warren is taking on a very broad aspect of the entire system, starting the type of political and rhetorical war with no natural end.

White is a former prosecutor … and a former bank lawyer

There were two basic narratives heading out of White's initial nomination to run the SEC. One was that she was a former US attorney — a criminal prosecutor, in other words — who wouldn't be afraid to take on difficult cases in order to secure convictions. This is the Mary Jo White who early in her tenure swore the agency would stop accepting settlements in which banks pay fines without admitting guilt.

The other narrative was that she was a former Wall Street lawyer, the former top federal prosecutor in Manhattan who spent her time prosecuting organized crime and terrorism cases rather than financial misconduct, and then cashed in working white-collar criminal defense. A classic revolving door story, in other words.

Warren's basic complaint is that during her confirmation hearings, White promised she'd be Mary Jo White Number One but while in office she's acted like Mary Jo White Number Two.

Warren's four complaints against White

In her letter, Warren outlines four major grievances against White:

  1. Her SEC has not finalized a Dodd-Frank rule requiring companies to publicly disclose the ratio of their executives' pay to that of their median employee.
  2. Her SEC has not, in fact, required admissions of guilt as part of the terms of settlements.
  3. She has repeatedly recused herself from cases due to conflicts of interest related to either her Wall Street work or else to her husband's work as a lawyer — leaving the commission split 2:2 between Democrats and Republicans rather than with its natural 3:2 Democratic majority.
  4. Last but by no means least, the SEC has granted waivers allowing banks to retain their status as Well-Known Seasoned Issuers (WKSI) even in the wake of guilty pleas to criminal charges and other serious misconduct.

The first three of those complaints are pretty easy to understand. But the WKSI is both extremely obscure and substantively the most important of the four.

It speaks directly to Warren's view that right now major Wall Street firms are coddled by the government and showered with special privileges, and also to the anti-Warren view that she's a demagogue pushing unsound policies.


The details of the WKSI rule are complicated and not strictly relevant to your life unless you are planning to issue large quantities of bonds or stock shares in the new future. Suffice it to say that if you are planning to do this, you are probably going to want to make what are known as shelf offerings and it will be faster and easier to do this if your offerings are automatically effective, rather than requiring a lot of extra paperwork with the SEC.*

The law firm Morrison Foster has a detailed explainer of shelf offerings if you happen to be interested. The short version, however, is that "an effective shelf registration statement enables an issuer to quickly access the capital markets when needed or when market conditions are optimal. The primary advantages of a shelf registration are timing and certainty. Takedowns from an effective shelf registration can be made without SEC staff review or delay."

A major bank wants to be able to make shelf offerings, and to access this procedure you need to qualify as a Well-Known Seasoned Issuer.

To qualify as a WKSI you need to have issued at least $1 billion in bonds over the past three years, or else for the total value of your company's stock to be over $700 million. You need to be a big company, in other words.

But you also can't be an "ineligible issuer," which means you can't have been convicted of violating various provisions of federal securities law. But at its discretion, the SEC can issue a waiver of the ineligible issuer rule.

In summary, the SEC has a lot of rules about issuing securities, but you can get an exception to those rules if you qualify as a WKSI, but there's an exception to the exception for companies that have violated federal securities law, but the SEC can create an exception to the exception to the exception for companies it wants to help out. Got it?

The issue Warren and White are disagreeing about is that at the same time as elements of the federal government have gotten more aggressive about seeking criminal admissions of guilt, the SEC has tended to remove the sting of those convictions by granting waivers.

Warren's view of WKSI waivers

Warren's basic view of the waiver issue is that WKSI status is a privilege the SEC should be stingy with. She says that being a WKSI "confers significant benefits" on the companies who get it.

Waivers were a prominent element of the government's recent settlement of foreign exchange market-rigging charges with five major banks. Warren says these waivers "apparently reflected the Commission's view that these banks continued to deserve special privileges under the securities law despite the breach of trust and evident mismanagement displayed in these cases." Warren sees favoritism in this, noting that under White's tenure in office "a total of 20 WKSI waivers have been granted, with virtually all going to large financial institutions."

Warren quotes Democratic SEC Commissioner Kara Stein, who's complained that the SEC "continues to erode even this lowest of hurdles for large companies, while small and midsize businesses appear to face different treatment."

The contrary view

As pushback against Warren's criticisms, Politico offered the idea that "some Democrats worry that Warren in her sharp attack on White, the most prominent female regulator in Washington, is now pushing the party even farther to the left in ways that could complicate the election prospects for likely nominee Hillary Clinton as well as the party’s congressional candidates."

The same article quotes Wayne Abernathy, a lobbyist for the American Bankers Association, saying, "I don’t understand Sen. Warren’s criticism of White for recusing herself where there is a conflict of interest" even though it seems pretty clear that Warren's concern is that White has too many conflicts of interest and that the frequent recusals are evidence of this.

A stronger argument on the merits was offered by Republican Commissioner Daniel Gallagher back in 2014.

Gallagher starts from the premise that financial markets are over-regulated, and that establishing the WKSI rule is "an all-too-rare example of the Commission taking a major action of its own volition to facilitate capital formation." His view is that given the significant advantages to the economy of allowing companies to take advantage of this lighter regulatory touch, waiver decisions should be driven by "a dispassionate analysis, undertaken by the technical experts in the Division of Corporation Finance, separate and apart from the enforcement process."

In other words, revocation of WKSI shouldn't be done as a form of bonus punishment over and above whatever other punishment a company is already receiving. Instead, it should happen if and only if the SEC has specific reason to believe the company's financial statements are untrustworthy. The key factor should be "a careful analysis of the facts underlying the misconduct and whether they negatively impact the issuer's ability to produce accurate and reliable financial information."

What's this really about?

Like her recent battles against Treasury official Antonio Weiss and against the inclusion of a small derivatives deregulation in the most recent government funding bill, Warren is fighting a larger battle about the direction of the Democratic Party.

Barack Obama and Mary Jo White certainly believe in regulating Wall Street to try to reduce the risk of giant blowups and crises. They also believe in high taxes on Wall Street bankers. But they don't want to fundamentally change the role that Wall Street plays in the American economy, or the prominence of a handful of very large diversified financial institutions in the Wall Street mix.

Warren, by contrast, sees the biggest banks as enjoying special political privileges that are inherently unfair and that create a constant danger of under-supervision and new economic disasters. She wants to see firm, decisive action taken to break the back of their political and economic power. Stinginess with waivers is just one of several ways in which a determined executive branch could help do that — and Warren is now dedicated to hunting down essentially every available avenue and pressing on it, in hopes that either this administration or the next one will be more aggressive.

* Correction: As originally written, this article said that WKSI status was required to make shelf offerings. In fact, it is required to make shelf offerings automatically effective and therefore maximally advantageous.

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