Fielding questions at his Monday press conference about the growing epidemic of Wall Street fraud, President George W. Bush several times pointed to the crucial role played by the U.S. Securities and Exchange Commission in rooting out corporate corruption. Touting the agency's watchdog and investigative capabilities, Bush insisted that to uncover fraud, "we need a strong, vibrant SEC."
But even earlier this year, Bush was pursuing a markedly different strategy, catering to a pro-business lobby and rejecting pleas from within the SEC to strengthen the commission.
In the first two budgets his administration submitted to Congress, funding for the SEC was essentially frozen at a time when the commission was reeling from an exodus of employees.
Salaries for SEC employees are notoriously low, even by government standards. On average, commission lawyers and accountants earn 30 percent less than examiners at other federal financial regulatory agencies. Not surprisingly, turnover among SEC professionals is more than twice the rate for comparable positions elsewhere in the government, according to a recent report by the U.S. General Accounting Office. In the last three years, the SEC has lost 30 percent of its employees to the private sector, half of them lawyers. And nearly 300 positions -- roughly 10 percent of the commission's workforce -- went unfilled last year.
In Bush's first budget, for fiscal year 2002, the SEC's budget was increased a meager 3.5 percent, to $437 million, barely more than the rate of inflation. In fact, the Bush budget forced the commission to eliminate 57 staff jobs, 13 of which were related to preventing fraud.
Even after the Enron scandal had broken, and at a time when Bush's own SEC chairman, Harvey Pitt, was beseeching White House budget director Mitch Daniels for more money to pay for fraud investigations, the White House unveiled its $2.1 trillion 2003 budget and stiffed the SEC with just a 6.6 percent increase in funding, to $467 million. Since most of that new money is targeted for computer improvement and security, and to offset inflation, keeping up with inflation, the commission's budget would remain effectively frozen for the second straight year with no additional funds to hire more employees. If approved by Congress, the budget goes into effect Oct. 1.
By comparison, as part of President Clinton's final budget for the 2001 fiscal year, the SEC's budget was increased 12 percent, from $377 million to $428 million. (Over the course of the 1990s the commission's budget increased 73 percent; the number of initial public offerings, which the SEC reviews, grew by 242 percent.) And that was before the high-profile accounting scandals of Enron, WorldCom and others burst onto the front page and stretched the SEC to its breaking point.
For instance, in the first eight weeks of 2002, the SEC's Enforcement Division launched inquiries into 45 companies for questionable accounting practices, a 165 percent jump over the previous year. Between 1998 and 2001, total SEC enforcement cases were up 42 percent.
Earlier this year, Pitt told congressional leaders he could not afford to replace 140 employees who left the SEC last year. He asked Congress, which ultimately funds the SEC, for an extra $91 million to hire 100 more accountants and lawyers and to increase existing salaries.
Congress, acting in rare bipartisan fashion, already addressed the issue of SEC pay last year, passing legislation that would make sure the SEC pays its employees at levels comparable to those of other federal financial regulators. But once again, the Bush White House stiffed the SEC.
The bill, which passed overwhelmingly, was drafted primarily as a way to eliminate the fees companies pay every time they file a document with the SEC. Introduced decades ago, the fees were once used to fund the SEC. Today they total more than $2 billion a year, and are simply passed along to the federal treasury -- and Wall Street lobbied hard for relief. But a provision of the bill required that $76 million to $100 million be used to raise salaries among SEC professionals.
Bush opposed the SEC pay increases, but in January he signed the bill into law. It is expected to save companies an estimated $14 billion over the next 10 years. But when the proposed 2003 fiscal budget was revealed weeks later, the White House had refused to provide funds to pay for the SEC pay raises. At the time, White House budget director Daniels said the administration didn't consider the raises justified.
Even some Republican members of Congress, who in recent years had been hostile toward the commission, thought Bush's budget was unfair. Rep. Frank R. Wolf, R-Va., chairman of the House Appropriations subcommittee that oversees the SEC, wrote Bush in March asking for more money for the agency.
"Recent events such as the Enron and Global Crossings bankruptcies highlight our country's need to ensure that the SEC is staffed with highly trained and experienced federal regulators to protect the integrity of the securities markets, the accounting industry, and the economy in general," Wolf wrote.
That's a long way from 1995 when, as part of the Republican Revolution, House leaders launched a war on regulators and threatened to cut the SEC's budget by 20 percent. More recently, in 1999 then-SEC chairman Arthur Levitt moved to bar accountants from consulting companies they also audit -- a conflict of interest cited as a key to many of the recent accounting scandals.
Both Republicans and Democrats in Congress opposed the move, but it was Republicans who threatened to cut or withhold funding for the SEC's budget if Levitt went through with his plan.
With political pressure growing to address Wall Street corruption and questions about his own stock dealings being resurrected, Bush finally gave in. During his Tuesday speech on corporate responsibility, he asked Congress to provide the SEC with additional funds to hire more enforcement officers.
Those are the same funds Bush denied the SEC just five months ago.