The Whites Go to the SEC: Why Wall Street Still Owns Washington

By Pam Martens: March 11, 2013 

John W. White

At 10 a.m. tomorrow, Mary Jo White, President Obama’s nominee for Chair of the Securities and Exchange Commission (SEC), will take her seat in the Dirksen Senate Office Building while the Senate Banking Committee goes through the motions of weighing her worthiness to serve. If confirmed, this will mark White’s fourth spin over 36 years through the revolving door at her corporate law firm, Debevoise and Plimpton. 

White’s husband, John W. White, has had only one-spin through the revolving door – but it tells us a great deal about why Wall Street remains unrepentant and continues to pillage and plunder.

On March 5, 2005, John W. White, partner at the international law firm Cravath, Swaine & Moore LLP, which represents Wall Street firms and large corporations around the world, was not at all happy with Section 404 of the Sarbanes-Oxley Act.  That’s the part of the financial reform legislation that requires the auditor of publicly traded companies to attest to management’s assessment of its internal controls for financial reporting to the public. 

White penned a 5-page, single-spaced letter to the Securities and Exchange Commission, outlining his objections. He wanted the rules to be watered down.  Less than a year later, White was in a position to personally get the job done. After 30 years as a corporate attorney at Cravath, Swaine & Moore LLP, representing the interests of financial firms, White was magically transported to a top slot at the SEC. On February 8, 2006, SEC Chairman Christopher Cox named White the Director of the Division of Corporation Finance. 

Why does a lavishly paid partner of a corporate law firm take a lowly paid public servant’s salary? You be the judge. It’s relevant to note that John White returned to his partner status at Cravath less than three years later and remains there today. 

One of the first things White tackled at the SEC was (drum roll) Section 404 of Sarbanes-Oxley, where he achieved much of the wish list that he had outlined in his 2005 letter to the SEC. This is what the SEC had to say when announcing White’s departure from the SEC and return to Cravath:

“Mr. White was instrumental in crafting the ‘next steps’ plan the Commission announced in May 2006 to improve implementation of Section 404. He worked with the Commission as well as the PCAOB [Public Company Accounting Oversight Board] board members and staff to roll out this plan, under which the Commission issued for the first time guidance regarding management’s report on internal control over financial reporting, worked with the PCAOB to issue a new audit standard for internal controls, and phased in the Commission’s rules implementing Section 404 to accommodate smaller companies.”

But White wasn’t finished; he attempted to push through rules allowing U.S. companies to substitute international accounting rules instead of the far more stringent U.S. accounting rules.

The California Public Employees’ Retirement System (CalPERS) responded to this SEC proposal as follows, comparing the Financial Accounting Standards Board (FASB) in the U.S. to the International Accounting Standards Board (IASB):

“The independence of the FASB has been strongly protected to ensure it is able to develop unbiased standards designed to provide transparency for investors. More recently, Congress enhanced the independence of the FASB by providing independent funding. We are concerned that the independence of the IASB may be compromised by its current source of funding which includes companies and accounting firms. Even though the International Accounting Standards Committee Foundation (IASC Foundation), the overseer of the IASB, has proposed a broad-based open-ended funding that will have contributions country-specific based on a proportionate basis using gross domestic product as a measurement to share the costs, we are not confident at this point that these steps will ensure an independent well-governed IASB that is free of potential influences. 

“CalPERS also questions whether the IASB currently has the enforcement infrastructure to ensure compliance with international standards. As an investor, we believe it is critical that a rigorous international regulatory oversight infrastructure be developed to ensure adequate protections for investors prior to convergence. We also believe that auditors play a vitally important role in ensuring these protections through effective audits and advocacy by auditors for investors. CalPERS is not aware of a single regulator or law enforcement agency that is responsible for enforcement of international accounting standards. This issue must be fully addressed before one international financial reporting standard can be successful.” 

White’s plan to allow U.S. corporations to use international accounting rules was shot down but his plan to allow foreign issuers to use the international accounting rules without reconciling their financial statements to U.S. Generally Accepted Accounting Principles (U.S. GAAP) went through. 

That plan received a hearing before the Senate Committee on Banking, Housing and Urban Affairs’ Subcommittee on Securities, Insurance and Investment on October 24, 2007. The highly respected Lynn Turner, a former Chief Accountant of a very different SEC than that which we have today, testified as follows: 

“When the FASB issues a new standard in the United States, it effectively becomes ‘law’without further review by the SEC or U.S. Congress. Only in very few instances, has the SEC or Congress overturned a new accounting pronouncement in the U.S. and it is almost universally acknowledged that intervention in those cases proved to be fatally flawed. This process has also contributed to the independence and lack of bias in the standards issued by the FASB. 

“Unfortunately, the IASB lacks this level of independence. It must go hat in hand to companies impacted by its standards, and their auditors, to obtain funding for its operations, which are relatively small in size given its responsibilities and obligations. The IASB’s meager preliminary budget for 2008 is for just 45 full time staff equivalents at a staffing cost of $11.7 million pounds. It is difficult to understand how this organization can even remotely keep up with the financial reporting needs of the world’s capital market. Indeed, its manpower is less than half the staffing of the U.S. national office of just one of the Big 4 auditing firms. 

“One should also be mindful that corporations and auditing firms currently provide 60 to 70 percent of the annual budget for the IASB. These organizations overwhelming control the seats of the members of the IASB and its trustees. As such, the IASB risks a negative outcome were it to anger those who provide funding with rules they oppose.” 

Back in the spring of 2009, Illinois Senator Dick Durbin made the following remark on a local radio show: “And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place.”  A few months later, on the Bill Moyers’ PBS program, Durbin was asked about that remark and added:  “It’s counterintuitive. The people who brought this crisis to us are the ones that are dictating policy.” 

And here we are in 2013, witnessing the second term of the President of “hope” and “change.” The banks still “own the place,” and their preferred lawyers will head the U.S. Treasury Department, the General Counsel of the SEC, and the SEC. Is it any wonder the American public continues to lack trust in Wall Street or Washington. 

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