Opinion: Is Schapiro up to the job?

Does Mary Schapiro have the right stuff to take on the big firms? Although praise is coming in from many quarters for President-elect Barack Obama’s nomination of the Finra chief to head up the Securities and Exchange Commission, there may be cause for concern. After all, numerous industry scandals festered on her watch at the Financial Industry Regulatory Authority Inc. Take the credit crisis. While the SEC has taken the brunt of the blame for not heading off the meltdown on Wall Street, Finra of New York and Washington also supervises every brokerage firm. Finra should have been checking to see if firms were correctly pricing securities held in inventory and adjusting margin levels — well before the meltdowns occurred. In June 2007, Brookstreet Securities Corp. of Irvine, Calif., went out of business after it couldn't meet margin calls on collateralized mortgage obligations. A month later, The Bear Stearns Cos. Inc. of New York said that one of its hedge funds with holdings in subprime debt had failed, but only in March of this year did Finra raise margin requirements — for auction rate securities. Speaking of ARS, the credit for getting the major dealers to buy back ARS goes to state regulators, not the SEC or Finra. The states' assertive role in the ARS investigations is reminiscent of New York Attorney General Eliot L. Spitzer's action with the research analyst case, settled in 2003 with $1.4 billion in fines for the major firms. Back in 2002, when he began his investigation, research conflicts were well-known among regulators and the industry, and then SEC Chairman Arthur Levitt had been threatening action. But after the SEC neglected to take action, Mr. Spitzer's office began its investigation. According to press reports and his public statements, he convened a meeting of the CEOs of the firms involved, together with the senior-level regulators. At the meeting, Mr. Spitzer suggested ways to fix the problem. But Ms. Schapiro and Edward Kwalwasser, the New York Stock Exchange's heads of self-regulation, both expressed concern that they couldn't sell such a deal to brokerage firms. "You don't have to sell it to Wall Street," Mr. Spitzer told them, according to press reports. "You are their regulator." Whether Ms. Schapiro will become an aggressive watchdog over the powerful Wall Street dealers remains to be seen. Her record so far suggests a hesitancy to confront the big firms.