Mary Miller, a Treasury Department official seen as the expected pick for the next head of the SEC, dropped out of contention yesterday, leaving an unclear path forward. Elisse Walter, who was designated as the new chair, replacing the departing Mary Schapiro, is seen as a stopgap pick. But her elevation to the top slot means that the SEC is one member down on its commission, with a 2-2 split between Democrats and Republicans. This will likely stall out almost all its important initiatives in the coming months until a new commissioner gets nominated and confirmed, and unless the Administration wants to give credence to the theory that they want to tie the bureaucratic hands of a key financial regulator, they need to nominate someone soon.

Speculation has focused not on a career prosecutor or someone with a record of tough oversight of the financial industry, but Sallie Krawcheck, “a longtime Wall Street executive” from Bank of America, and Robert Khuzami, the current head of enforcement. Yves Smith makes the definitive case against Khuzami, showing how terribly weak SEC enforcement has been in the post-crisis period. Somehow, media elites like Dana Milbank have been snookered into thinking that the SEC has gone “from lapdog to watchdog,” but the evidence for this doesn’t exist. The fact that they filed more enforcement actions than any time in history, in the wake of the biggest financial crisis in the SEC’s history that was almost entirely based on fraud, says absolutely nothing. The agency has largely let the industry off the hook for their actions, punctuated by giving up on any action against Wells Fargo’s mortgage backed securities.

U.S. securities regulators have dropped an inquiry into Wells Fargo & Co mortgage securities offerings, the bank said in a securities filing on Wednesday.

The staff at the Securities and Exchange Commission notified the bank on November 20 that it closed its investigation and doesn’t plan to recommend an enforcement action, the bank said in the filing.

In February, the No. 4 U.S. bank by assets received a so-called Wells notice from the SEC over disclosures provided in certain mortgage-backed securities offerings. Such notices usually indicate the agency plans to take some kind of enforcement action and gives firms a chance to respond.

This follows the closure of a big case against Goldman Sachs, and the weak settlement with JPMorgan Chase and Credit Suisse (even while the New York Attorney General sued the same two banks over the same exact securities fraud). And needless to say, absolutely nobody responsible for the crisis has gone to jail. The SEC has stepped up enforcement on insider trading, catching a few big fish (and one of the biggest, Steve Cohen of SAC Capital, is on the way). Outside of that, which was trivial to the actual fraud at the heart of the crisis, the SEC largely stood down. Here’s Yves:

Khuzami’s overarching failure is the SEC’s embarrassing record in pursing fraud that was instrumental in causing the financial crisis. Khuzami has repeatedly claimed that it’s hard to go after these cases. Yes, if you aren’t competent, anything looks hard.

Let’s start with the first big crisis case the SEC tried making, that of a criminal suit against the managers of the two Bear Stearns hedge funds that ate too much subprime and died as a result (note that this case was filed in tandem with a SEC civil fraud lawsuit, which continued and was settled for what one observer called “peanuts”). This was a weird choice, since the hedge funds were VICTIMS of bad subprime packing/selling practices. But this was a classic example of “if the only tool you have is a hammer, every problem looks like a nail.” The SEC and DoJ conceptualized the case along the lines of an insider trading case: one principals was reducing his holdings in the fund even as he was twisting investor arms to stay in. And they thought they had some slam-dunk evidence in the form of damning e-mails of the two managers saying how awful the funds’ holdings looked

But the effort botched basic case development, as in doing sufficient discovery. Turns out the dubious-looking sale was part of a program; the timing was not market-driven. And the e-mails were taken out of context; there were contemporaneous ones that were far more positive.

That’s just one example. Yves also mentions the failure to use Sarbanes-Oxley as an enforcement tool, and the constant tactic of settling cases with banks without forcing them to admit wrongdoing, rather than taking them to court. Khuzami, of course, is implicated in many of these bad bank practices from his time at Deutsche Bank.

The Administration can make the choice to break with this recent past, but that would involve admitting dereliction of duty to prosecute Wall Street, so I’d expect more of the same.

Photo by naughtomaton under Creative Commons license.