Tim Fernholz questions whether the Securities and Exchange Commission can hold bankers accountable through prosecution as opposed to out-of-court settlements.
On Monday, a single, ringing court decision gave hope that Wall Street will finally be held to account for its role in causing the financial crisis. Federal District Court Judge Jed Rakoff's opinion may soon force the SEC, the federal government's investment regulator, to take big banks to court, rather than continuing to come to terms with them in out-of-court settlements. Millions of Americans are no doubt looking forward to the prospect that deep-pocketed bankers will soon be receiving their comeuppance in open court.
But it's an entirely open question whether the decision will amount to anything more than a symbolic victory. The court's demand that the SEC be more aggressive failed to consider just how much the agency's scope of action is already constrained by policymakers in the federal government. Rakoff wants regulators to redouble their efforts to investigate crimes committed by banks—but he may have inadvertently made the SEC's job of recovering defrauded investors' money that much harder.