It is not news that Wall Street is Washington’s whipping boy lately. The Fed, Rep. Frank, and Fannie Mae can all relax, because they have pushed their culpability on to nefarious Wall Street bankers. Even though the financial meltdown involves trillions of dollars, the millions in Wall Street bonuses are the real problem. The AFL-CIO and a few high tax Democrats smell blood as well, and want to impose a $50bln per year tax on stock transactions. While this would be yet another barnacle slowing the ship of capitalism, Sen. Schumer wants to steer us straight into an iceberg with his latest regulatory idea.

Schumer’s seemingly innocuous proposal is to make the SEC self-funded through the fines it would collect from violators. How can that be corrosive to the financial system that fuels US prosperity? Another government agency already operates under Schumer’s model, and its overreaching thug-like tactics are a troubling example. The workplace safety agency, OSHA, is the Tony Soprano of the construction industry.

OSHA is self-funded through the fines it imposes on the violators of its byzantine rules. Because OSHA largely sets the rules it enforces, its incentive is to maximize its funding. An OSHA inspector rarely leaves a job site without at least a few hundred dollars in fines. That is unless the construction company pays protection money. OSHA has a program whereby it will schedule an inspection for a fee, but then not issue any fines. Of course, any commercial construction site that does not schedule a ‘voluntary’ inspection is very likely to have a surprise inspection, and much higher fines. OSHA inspectors sit across the road from job sites and wait for any violation of any rule to extract their tribute. With OSHA, it is either pay them now, or pay them (much more) later.

As with any for profit organization, OSHA seeks to expand its operation. In 1997, OSHA sought to regulate computer keyboards. Not content to worry about hard hats and ladders, OSHA wanted a taste of the sore wrist racket. While OSHA backed off from random inspections of home offices, the rules remain. Every keyboard now has the sad warning label that reminds us we are government wards and can’t even type without their oversight. OSHA was meant to protect workers from grievous bodily harm, but greed and typical government overreach has vaulted them into the realm of paper cuts.

Perhaps unknowingly, Schumer wants to model the SEC after the mobsters at OSHA. If function follows form, the capitalist system can expect a Tony Soprano hit.

• Look for the SEC to start offering “voluntary” audits, for a hefty fee, in lieu of unannounced ones. Not only would the SEC abandon impartiality in favor of a list of “friends of ours,” even the SEC’s friends would have a new level of audit.
• Expect the SEC to emphasize the enforcement of esoteric rules to maximize its revenues. It is easier to collect a series of smaller fines than individual larger ones. This will reduce the investigation of material violations in favor of paperwork oversights. The trial lawyer racket of suing corporate insiders for immaterial trading violations is an ideal precedent for how the SEC can gin up substantial revenues from trivial violations.
• The culture of self-reporting will end. Currently, when an internal audit exposes some wrongdoing, companies routinely turn themselves in to the SEC with the expectation of minimal consequences. The majority of violations are thereby self-corrected. With the SEC living off of its fine revenue, this cooperative arrangement that enhances transparency will surely die off.
• To maintain is revenue base, the SEC will constantly look to new areas it can regulate and fine. As with OSHA, the SEC will be forced to stake out small businesses and bully them into paying protection money.

Schumer’s plan will criminalize all of Wall Street, turn the SEC into a mob racket, encourage the prosecution of trivial offenses over substantial ones, and create an ever expanding parasite that feeds on legitimate companies. In effect, Schumer wants to take the SEC off of its oversight leash and allow it to tear up the US business community. If Congress moves on Schumer’s ill-conceived idea, voters should let their representative know that unconstrained government bullies are not welcome.