Exactly what does it mean to cut the budget of the Wall Street police?

This week, in their continuing resolution, House Republicans proposed to reduce the budgets of the Securities and Exchange Commission, the Commodities Futures Trading Commission and the new Consumer Financial Protection Bureau.

At the CFTC, Chairman Gary Gensler says bluntly that proposed funding cuts mean his agency “wouldn’t be able to fulfill our statutory mission.”

At the SEC, the budget cuts will mean that the agency initiates fewer investigations. They will send one attorney to a deposition instead of two, where their subject may be represented by a phalanx of six white shoe firm lawyers. As the enforcement division considers new cases, they are crossing some off the list. That’s not because the case might be weak, but because accounting will only finance so much enforcement. Rather than travel to the scene of the financial crime, agents will gather second-hand information by telephone and email.

Even the email may be limited. The SEC’s electronic surveillance is compromised. SEC chair Mary Shapiro laments, “Our market analysts to continue to use decades-old technology to recreate market events or to monitor trading that occurs at the speed of light.” Some larger Wall Street firms spend more annually on technology than the entire SEC budget, Shapiro observes.

A few numbers may instruct:

  • Number of SEC staff: 3,800
  • Number of New York City police: 34,500
  • Number of publicly traded companies subject to SEC reporting requirements: 6,473
  • Number of institutions that the Dodd-Frank financial reform act adds to the SEC’s oversight responsibilities: 30,000
  • Pay for trial attorney at SEC: $126,661
  • Pay for first year law associate at major Boston firm: $160,000

Critics enjoy highlighting those episodes where the SEC let criminals escape undetected for too long, such as the Madoff tragedy. Criticism deserved. But is a staff reduction the answer?

With less enforcement, there will be more insider trading, market manipulation, financial reporting and accounting fraud, offering fraud and violations by professional market intermediaries.

Apparently, Republican leaders understand that. Sen. Richard Shelby, the leading Republican on the Senate Banking Committee, explained, “A lot of us voted against and oppose Dodd-Frank. Obviously, we’d repeal it. So I certainly don’t think we should rush to implement it.” According to Politico, when asked whether taking down funding levels is a “legitimate” way to slow the process of implementation, Shelby responded: “Always.”

If the Republican budget is implemented, victims of future financial crimes may send “Thank you” cards to Republican leadership.