Few cops are as well liked as Securities and Exchange Commission Chairman Mary Schapiro. “Oh, Mary is just a really nice, good person,” former S.E.C. commissioner Isaac Hunt told The Observer. “I don’t think anyone doesn’t love Mary.”

“Mary is extraordinarily smart, open-minded and her integrity is absolutely above reproach,” said Susan W. Phillips, an economist and a former chairwoman of the Commodity Futures Trading Commission, who employed Ms. Schapiro as an executive assistant during the 1980s.

Niceness and an open mind aren’t usually the first qualities one looks for in a sheriff, someone who would rarely be able to maintain her integrity and be universally beloved at the same time. Perhaps that’s why some outside Washington look at Ms. Schapiro and see someone a little less fearsome than Wyatt Earp, Eliot Ness or Theo Kojak.

“Well, you’ve got to think she’s at least extraordinarily incompetent,” said Tom Ferguson, a political science professor at the University of Massachusetts who specializes in financial regulation, referring to the recent scandal around Ms. Schapiro’s general counsel, David Becker.

He resigned in February after being sued by the trustee in the Bernard Madoff bankruptcy case over $2 million he and his brothers made in 2005 liquidating their mother’s then still fictitiously profitable account with Mr. Madoff. Mr. Becker told Ms. Schapiro about the account, but did not see this tricky inheritance as a reason to recuse himself from writing a legal brief reversing the agency’s long-standing pyramid-scheme policy so that “long-term investors” in Mr. Madoff’s fraudulent fund (like his late mother and her heirs) would be entitled to favorable terms during its unwinding.

Ms. Schapiro told Congress she was aware of Mr. Becker’s connection to Mr. Madoff, and the lapse is jarring in light of the embarrassment Mr. Madoff has already caused not only the agency but Ms. Schapiro personally. She and Mr. Madoff were friends–”dear friends” according to his testimony to the S.E.C.’s inspector general, David Kotz, who is currently probing Mr. Becker’s misbehavior. In her previous job as head of the Financial Industry Regulatory Authority (FINRA), Ms. Schapiro named Mr. Madoff’s son, Mark Madoff, to a post on a disciplinary board. Whatever the difference between the criminals and the cops, all parties tend to be on friendly terms.

Ms. Schapiro grew up middle class on Long Island, and at college she majored in anthropology and captained the field hockey team, the Franklin & Marshall Diplomats. She came to Washington for law school at George Washington in 1977 and never left. She was by all accounts the type of person–moderate, wholesome, ambitious, a “team player”–who thrives in D.C.

In 1980, Ms. Schapiro landed her first job, in the enforcement division–the wing of any regulator that investigates and prosecutes alleged fraud and other violations–of the Commodity Futures Trading Commission. She often recalls in interviews that that year the division began investigating two right-wing oil billionaires, Nelson and Herbert Hunt, who were suspected of scheming to corner the silver market. “I was fascinated with the whole concept that there were people out there who thought that they could corner a truly international market like silver,” Ms. Schapiro said in a 2005 interview with the S.E.C. Historical Society. “I think it was the anthropologist in me” she told Time in 2009, “that was fascinated by this idea that people thought they could control a world commodity.”

What is perplexing about these statements is the implication that some force existed to prevent the brothers Hunt from achieving their bold market manipulation fantasy, when in fact they not only made between $2 billion and $4 billion, controlling with their partners at least two-thirds of the international silver market and driving the price of silver from less than $2 an ounce to more than $50 before the scheme collapsed, but they did so with almost total impunity and certainly very little to fear from the then five-year-old regulator. Even bolstered by a fierce legal and public-relations campaign waged by Tiffany and other jewelers, the CFTC repeatedly failed to do much to rein in the brothers.

When a silver market crash ultimately wiped out the Hunts’ highly leveraged positions, their billion-dollar bank bailout was backed by the Federal Reserve. Seven years later, a team of lawyers and investigators hired by a Peruvian state-owned bank that had lost heavily on silver produced a painstakingly documented reenactment of the conspiracy, but by then it was too late for the government to pursue a criminal case. And although they were technically bankrupted by the lawsuits made possible by the Peruvians’ revelations, the Hunts’ trust funds were legally immune from those claims. In 1999, Nelson Hunt was able to return to his old passion for thoroughbred breeding. “At my age,” said Mr. Hunt, born in 1926, “I don’t plan to do any breeding or buy a farm; I just want to have some fun and try to get lucky racing.”

It has since the 1980s become easier for schemers like the Hunts to get lucky in the markets because regulators like Ms. Schapiro generally spent the next two decades rescinding most substantive requirements that traders disclose anything to them. The silver market once again looks to be the locus of a massive, multiyear price-manipulation scheme, but three years into its investigation, the CFTC has yet to sue (much less charge) anyone, leading one frustrated commissioner to go “rogue” with his allegations that a major bank controlled 25 percent of the market. This inscrutable state of affairs is all theoretically supposed to change this summer, on the one-year anniversary of the passage of the Dodd-Frank financial reform bill, which awards the federal government the long-denied authority to regulate derivatives. Both Ms. Schapiro and her CFTC counterpart, Gary Gensler, have asked for extensions. In the meantime, lobbyists, lawyers and Republicans are waging a formidable campaign to prevent the reforms from being implemented, ever.

 Ms. Schapiro was not long for the enforcement world. When Ronald Reagan appointed a woman, the libertarian finance professor Susan Phillips, to one of the five commissioner slots in 1981, Ms. Schapiro sought and obtained an assistant position in her office. 

“She wanted to get out of enforcement and into the policy side,” Ms. Phillips told The Observer. Two years later, when Ms. Phillips rose to the commission’s chairmanship, she made Ms. Schapiro her chief of staff. “That’s when she told me she had registered as an independent,” Ms. Phillips said. “She had been a Democrat before that. I don’t know why she did that; she didn’t need to.”

Ms. Schapiro was nevertheless nominated by President George H.W. Bush in 1989 to one of the designated Democratic slots on the five-member Securities and Exchange Commission after attracting the attention of then Treasury Secretary Nicholas Brady at a conference, according to a former colleague who remembers him inquiring about the identity of “the blonde” delivering a presentation at a futures industry conference. When Bill Clinton took office in 1993, he promoted her to the acting chairmanship of the S.E.C., and the next year the chairmanship of the CFTC.

Then, as in 2009, Ms. Schapiro inherited an agency that had been gutted by an ideological Republican predecessor, the economist Wendy Gramm, an ardent exponent of the strain of libertarianism that opposes any government policing of financial fraud. (During her tenure, Ms. Gramm appointed one administrative law judge out of the University of Chicago who promised never to rule on behalf of a plaintiff; two decades later, he is still making good on the promise despite numerous complaints and reprimands from the agency.) Then, as in 2009, a GAO investigation documented the regulator
‘s dysfunction in vivid detail, describing the enforcement division as having “no clearly articulated goals and no clear lines of authority.” The endlessly repeated cliché about the S.E.C. being “asleep at the switch” has often proven accurate, but Ms. Schapiro’s predecessor, Chris Cox, had been nominated with the specific mandate of turning the switch off entirely in the wake of an unexpectedly aggressive chairman, Bill Donaldson.

Few doubted Ms. Schapiro could turn the agency’s switch on again in the near term, but after her underwhelming performance holding Wall Street accountable to old laws, can she be expected to hold the financial system to 2,300 pages of new laws? It’s a fair question, but as is generally the case in Washington, the people posing it do not have the remotest interest in fairness. The Republican Congress has called Ms. Schapiro to testify before seven hearings so far this session, and over the past year, Congressional Republicans have demanded at least four inspector general investigations into agency practices. While NPR and Planned Parenthood have gotten most of the press, the S.E.C. is high the G.O.P. list of targets for budget downsizing next fiscal year; while the Obama administration is seeking $1.4 billion to fund the agency this year, the Republican proposal calls for about $850 million, a figure that would render Dodd-Frank financial reforms effectively unenforceable.

“Which is insane,” said former SEC commissioner Isaac Hunt to The Observer about the proposal. “With all the new bills she has to enact?” Like most Washington lifers over a certain age, Mr. Hunt, who from worked at the S.E.C. from 1996 to 2002, fondly remembers a time when Republicans and Democrats were allowed to agree on certain issues. “I served under Arthur Levitt, and I served under Harvey Pitt, and there was no ideological shift in the commission whatsoever.” Of course, he conceded, back then everyone seemed to agree that “self-regulation” was the way of the future. “Arthur Levitt never told me about the fights he was having with Brooksley Born,” the woman who replaced Ms. Schapiro as CFTC commissioner after she drew up a proposal to regulate derivatives. Mr. Levitt, then the S.E.C. chairman, has since publicly regretted his bullying of Ms. Born on behalf of the deregulating mandarins of the Clinton years, Robert Rubin and Larry Summers of the Treasury and Fed Chairman Alan Greenspan.

Ms. Schapiro’s futile campaign as CFTC chair to regulate derivatives earned her the moniker “Bloody Mary” and, she joked at the time, a tie with Vince Foster as the subject of negative Wall Street Journal editorials. The Chicago exchanges still dominated the industry, and a bellicose coalition of floor traders and imperious Chicago School economists met every departure from Ms. Gramm’s anti-regulatory approach with vehement indignation.

When Ms. Schapiro reminded the Chicago Board of Trade that they were behind schedule on introducing new systems for recording trades and preventing illegal front-running, the board’s pugnacious chairman, Tom Donovan, a former aide to Mayor Daley, assured the board that he would not be “intimidated by some blonde five-foot-two girl.” When she fined the German oil refiner MG Refining & Marketing $2.25 million for threatening systemic risk with its profligate trading in unregulated oil futures contracts, the Nobel Prize-winning economist and Chicago Mercantile Exchange board member Merton Miller wrote a paper defending the trades as theoretically profitable, chalking up its billion-dollar losses to the ignorant meddling of cowards and bureaucrats. When Orange County, Calif., declared bankruptcy in 1994 after an official invested in some exploding swaps, it barely helped her case. The most significant public response to the bankruptcy at the time was the rise of a “tax protest” movement calling for the privatization of local government services.

Feeling “beleaguered” by the end of 1995, Ms. Schapiro gave up and interviewed for a position running at the National Association of Securities Dealers, the independent “self-regulatory” group that licenses stockbrokers and investment advisers. “I think she was ready to make some money,” Ms. Phillips told The Observer.

News reports at the time estimated the move immediately tripled the $125,000 salary she made in the government. The NASD was renamed FINRA in 2007. By the time of her 2008 nomination to the S.E.C., she was making $3.1 million a year running the organization. Her relatively controversy-free 12-year tenure in the job was a boon when Mr. Obama was vetting potential S.E.C. chairpersons. She was also known to be a favorite of Mr. Rubin, who first bonded with Ms. Schapiro when he interviewed her for the CFTC post in 1994, when she was nine months pregnant. Ms. Schapiro in 2009 was ranked by Forbes as the 56th most powerful woman in the world, 54 slots behind Ms. Bair. In 2010, Ms. Schapiro rose to the 17th spot on the list, published a month after the agency announced its $550 million settlement with Goldman Sachs over the infamous ABACUS trades.

“She’s just so violently focused on the hot-button, HuffPo-sexy, like, ‘Goldman Sachs’ headlines,” said Roddy Boyd, a former trader and the author of Fatal Risk: A Cautionary Tale of AIG’s Corporate Suicide. “And no one’s gotten nailed for institutional fraud?”

Instead, Ms. Schapiro’s agency has elected to focus its energies prosecuting the insider trading racket around Raj Rajaratnam’s hedge fund Galleon Group currently being detailed before a federal jury downtown. The firm is accused of making $36 million–a fraction of Ivan Boesky’s alleged gains from his similar exploits a quarter-century ago. When Goldman Sachs CEO Lloyd Blankfein was called to the stand, Mr. Rajaratnam’s lawyers were barred from asking him about his role in the financial crisis and thus distract the court from the case at hand by turning its attention to the infinitely larger systemic con the government was not seeking to punish.

Ms. Schapiro’s agency has been so aggrieved for so long now that most of the headlines it makes are also allegorical meta-stories: an inspector general report that chronicled the epidemic of porn addiction that seized agency attorneys in 2008, as a wave of (warranted) panic was washing over the credit markets. A lesser publicized 2009 internal probe detailed the less prurient workplace pastimes of a pair of S.E.C. enforcement attorneys in the Dallas office who shared a passion for day trading, in violation of the agency’s rules against investing in stocks; both ended up losing money. The S.E.C.’s repeated failure to pay attention to the steady stream of credible and evermore substantive tips about Mr. Madoff’s Ponzi scheme was the subject of another epic inspector general report.

But most indicative of the woeful state of the S.E.C. has been its 2009 suit against Bank of America over the billions of dollars in bonuses the bank haphazardly agreed to pay Merrill Lynch employees as part of the firms’ shotgun 2008 merger. The case was complicated by the fact that, according to Bank of America CEO Kenneth Lewis’ later testimony before Congress, the Fed coerced the marriage and that former Merrill Lynch CEO John Thain had done nothing apparently illegal in coaxing Mr. Lewis into agreeing to pay $3.62 billion in early Christmas bonuses to Merrill employees as a condition of the merger. The compensation was doled out despite the $15 billion in “unexpected” mortgage losses they were on the verge of reporting. And the merged bank was on the receiving end of the second-largest handout of federal bailout funds.

In September 2009, when the S.E.C. filed a motion to settle its case against Bank of America for a miniscule $33 million, the federal judge assigned to the case was alarmed. Assailing the settlement as a “contrivance designed to provide the SEC with the facade of enforcement” that failed to “comport with the most elementary notions of justice or morality,” Judge Jed Rakoff threw out the proposed agreement
and told regulators to revisit the case.

The S.E.C. dutifully reopened its investigation, while at the request of the House Oversight Committee its inspector general opened its own investigation into the initial investigation, and the agency returned five months later with a new figure: $150 million, along with a more detailed list of assurances that everyone involved conducted themselves in accordance with the law. The day before the agency brought its amended settlement proposal before the court, the New York attorney general’s office sued the bank, alleging that the bank had orchestrated a cover-up and in due course fired its vociferously opposed general counsel because he “knew too much.” For its part, the S.E.C. stuck to its conclusion that everything was basically kosher, and the termination had been wholly “unrelated” to the merger. Judge Rakoff responded with an approval more incredulous than his rejection: “Given the somewhat tortured background of these cases and the difficulties this motion presents, the Court is tempted to quote the great American philosopher Yogi Berra: ‘I wish I had the answer to that question because I’m getting tired of answering that question.’”

The 100-page report on the internal investigation into the case is sympathetic to Ms. Schapiro’s agency. Staffers are quoted complaining that the New York attorney general’s office mostly refused to cooperate with them. The report claims that such turf battles weren’t specific to the two agencies but commonplace in New York City white-collar-crime cases, where prosecutors compete to pack as many big cases onto their résumés before selling out to provide defense in criminal cases. (The team that sued Bank of America was led by a former S.E.C. enforcement attorney, who has since left the AG office for Goldman Sachs.)

But many of S.E.C.’s problems getting along with other investigators seem unmistakably political: Staffers also complain of suspecting TARP overseer Neil Barofsky of conspiring with the New York lawyers against them. Separately, they also lament an apparent unspoken mandate to go easy on TARP recipient banks like Bank of America. The obvious–but seemingly unrecognized–subtext is that the agency is hamstrung by the political agenda of the Obama administration, which openly loathes Mr. Barofsky and most other critics of the bailout program White House officials like to tout as one of their landmark achievements.

In Washington, where passing laws is somehow considered a sexier business than enforcing them, all that matters now is whether Ms. Schapiro can win the fiscal stalemate with Republicans and secure the funding to hire the 800 new employees she and most sober-minded analysts estimate are needed to enact the Dodd-Frank reforms. If she can, no one will even remember how valiantly she fought the unwinnable war with Wall Street. And if she fails, the blame will mostly lie in the fact that the war was unwinnable to begin with.

editorial@observer.com

 

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