It’s SOS for the S.E.C.! Polite Mary Schapiro Polices the Plutocrats

Few cops are as well liked as Securities and Exchange Commission Chairman Mary Schapiro. “Oh, Mary is just a really

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.”

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“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.”

It’s SOS for the S.E.C.! Polite Mary Schapiro Polices the Plutocrats