Mary Jo White Teaches Old Wall Street Watchdogs New Tricks

There is a room at the U.S. military prison at Guantánamo Bay where hunger-striking al-Qaeda suspects are strapped to chairs and force-fed through tubes in their noses. Mary Jo White is one of the few outsiders to have seen this in operation, watching as more than a dozen inmates had their meals administered to them. White went to the prison at the behest of President Barack Obama in 2009 to report on conditions there. Rather than confirm allegations of torture from human-rights groups and the U.N., she concluded that the force-feedings were humane. And what was her general impression of Gitmo? Sitting in her sprawling, light-filled office overlooking the U.S. Capitol, White sounds like a prosecutor. “It was enormously satisfying to see how well run the facility was,” she says.

Last year, Obama gave White a new assignment: police America’s financial markets as chair of the Securities and Exchange Commission. And while White is best known for convicting terrorists as the chief U.S. prosecutor in Manhattan from 1993 to 2002, her credentials also include jailing New York City’s top mobster, John Gotti, and successfully prosecuting three big banks for criminal fraud. Which explains Obama’s chief reason for making her the nation’s top financial cop: “You don’t want to mess with Mary Jo,” he said when he nominated her.

Since taking over the commission last April, White, 66, has given both fans of regulation and free-market types something to complain about. She has changed SEC rules to require crooked financial actors to admit guilt rather than just pay fines. She has stepped up investigations of so-called gatekeepers–the board members, lawyers and accountants who sometimes shield companies by failing to flag fraud. The SEC recently announced the latest of nearly 700 busts since White took over–a fraudulent peddler of mortgage-backed securities in Connecticut and alleged inside traders at Morgan Stanley and at a law firm in New York City–and warned big banks they’d be punished if they suppressed whistle-blowers. By expanding her agency’s focus from rogue traders to include politically connected lawyers, accountants, consultants and other enablers, White is putting cops back on beats they haven’t closely patrolled in recent years–a “be everywhere” approach to enforcement, she calls it.

But she has also lifted barriers on businesses, to the dismay of some liberals. White has told fellow members of the commission that in coming months she may, for the first time, vote with its two Republicans against its two Democrats on several important new rules, sources familiar with the discussions tell TIME. Her willingness to work both sides of the aisle on the once deeply divided commission suggests that the former prosecutor is a cannier politician than was widely expected. “Her purposeful nonpartisanship has kept Washington’s political players guessing,” says former SEC commissioner Annette Nazareth.

As White begins her second year on the job, she faces renewed concern over the effects of high-frequency trading on the fairness and stability of America’s markets and questions about whether the SEC has been moving fast enough to respond. She is preparing new rules that will determine protections for everyday investors, affect billions of dollars in annual profits for big banks and shape the future of the U.S. financial system. At stake, White says, is America’s “confidence in the safety of its markets and the credibility not just of law enforcement but of government itself.”

Can the SEC Keep Up?

The SEC was created 80 years ago in the wake of the 1929 stock-market crash to fix a key cause of Wall Street’s Depression-era dysfunction: the corporate secrecy that gave financial titans an unfair advantage over average investors. Over the decades the SEC grew from being the repository of legally binding financial reports to a powerful enforcement agency capable of levying massive fines or barring highflyers from working in the financial industry.

But as markets grew ever more complex, the SEC grew too close to the industry it regulates. Over the past 20 years, the SEC missed all sorts of gigantic frauds, like the multibillion-dollar scams run by Bernie Madoff and Allen Stanford. Unexplained market swings and unprecedented failures at major exchanges like the tech-heavy Nasdaq showed that the agency was failing to fulfill its original mission of imposing transparency and order on an increasingly complex financial system. Its Bush-era leaders included poster children for the see-no-evil oversight delivered by revolving-door regulators, and by the end of 2009, SEC enforcement seemed at times a contradiction in terms. Could the commission even keep up with financial markets?

When White arrived at the SEC’s steel-and-glass headquarters near the Capitol, she found a broken agency. Its record at trial has been mixed and has included high-profile losses and public rebukes by judges. Divided between three Democrats and two Republicans, the commission was unable to tackle many of the most important but politically contentious rules needed to restore confidence in the markets. More than 60 regulations were waiting for proposal or passage, some of them two years overdue. “The agency had become,” says Barbara Roper of the Consumer Federation of America, “really dysfunctional.”

First, White pushed through new rules for legal settlements. If a company or individual engaged in what the SEC considered “egregious” conduct or risked great harm to investors or the market, she said, they should be forced to admit guilt. When the enforcement division proposed a settlement with Harbinger Capital Partners without an admission of guilt by its founder, Philip Falcone, White joined two other commissioners to shoot it down. Since White became chair, six companies have been forced to admit guilt, including Credit Suisse, which paid $196 million, and JPMorgan Chase, which paid $200 million as part of a settlement in the case of the London Whale, a trader who lost billions on speculative bets.

White next turned a spotlight on personal responsibility. She brought a longtime aide from her days as a federal prosecutor to head the SEC’s enforcement section and launched Operation Broken Gate, an investigation of financial reporting and auditing crimes committed by lawyers, accountants, consultants and other so-called gatekeepers. With only 1,000 investigators in its enforcement division, the SEC relies on the hundreds of thousands of third parties who are legally obliged to catch and report fraud and other deceptions if they see them. The best way to get them to do that is to punish some of them publicly when they don’t. In September the SEC busted five auditors for “repeated instances of unreasonable conduct,” part of a total of 80 accounting and auditing enforcement actions since Operation Broken Gate began.

White’s focus on these secondary gatekeepers has alarmed some big-name law firms, which now realize that rubber-stamp legal advice for banks and securities firms might land them in trouble. One large Washington law firm, WilmerHale, declared in a report on the SEC that White’s new regime had “increased risks to lawyers practicing before the commission more than ever before.” White has also sought to rebuild the agency’s courtroom credibility by focusing less on the number of cases it brings than on the number it can win. Last summer, White restructured the agency’s trial unit, tying investigators more closely to the lawyers who will ultimately have to argue cases in court. In 2013, the SEC brought 686 actions against individuals, companies and municipalities, down from 734 in 2012.

But enforcement is what White is known for; more surprising has been her ability to break the political stalemate at the commission and pass new rules governing Wall Street. White organized weekly one-on-one meetings with each commissioner during which she discussed upcoming business–or, when there were few pressing items, major league baseball. The meetings and White’s demeanor in them changed the dynamic at the agency, says Daniel Gallagher, a Republican commissioner who fought with Obama’s first SEC chief, Mary Schapiro. “She’s down-to-earth, funny,” he says. “It’s harder to go out and attack initiatives or rule makings when you have that personal relationship with the chair.”

The backroom politicking helped White break a three-year impasse on one of the most important postcrash priorities: proposing new rules for the $2.6 trillion money-market-fund industry, which functions something like a circulatory system for the world economy. A run on U.S. money-market funds, which keep a fixed balance for investors like a savings account but yield higher interest and are not federally insured, brought the financial crisis to its most dangerous moment in September 2008. Since 2010, regulators had been battling over whether the commission should limit possible runs by blocking how much investors could take out at one time or by forcing fund managers to let the dollar value of the accounts float up and down like it does in investment funds. On June 5, White proposed a combination of both.

It was a baby-splitting move that drew criticism on the right and the left but got the vote of all five commissioners and helped change the atmosphere: now even Republican commissioners are calling for increased regulation of money-market funds. “The steps that were proposed are in the right direction of reducing systemic risk even if they didn’t go as far as some wanted,” says Donald Kohn, a former vice chairman of the Federal Reserve Board, now at the Brookings Institution. A final rule is expected this year.

White’s other big win came with the SEC’s passage of a key part of the 2010 Dodd-Frank reform act, the so-called Volcker rule, which was supposed to bar banks from betting taxpayer-guaranteed deposits and other assets in the markets for the institution’s own profit. After years of delay, many in Washington predicted a weak rule would emerge from the politics-clogged regulatory process. But White worked with Democratic commissioners to toughen it. The final rule has accelerated the departure of some big banks from risky trading by imposing tougher limits on when and how they can bet in the equities markets. Says Democratic SEC commissioner Kara Stein, who had hinted she might oppose the rule but ultimately voted for it: “Mary Jo’s reputation as an effective executive is well deserved.”

Though she has made life somewhat harder on banks, White isn’t antibusiness. She lifted an 80-year ban on small firms’ advertising to the general public for investment in their companies. In October, she pushed through a proposal to let entrepreneurs use crowdfunding to raise up to $1 million a year from lower-income investors. Both measures enraged liberals, who fear that such changes will put small investors’ nest eggs at risk. Then in November, White struck from the SEC’s agenda a measure championed by Democrats that would require corporations to disclose their political contributions. Her feel for compromise in a city that can barely remember what the word means has boosted her clout.

Playing to Win

With several politically charged decisions coming in the next two months, she is going to need all the clout she can muster. The Democratic and Republican commissioners are engaged in an intense, behind-the-scenes battle over rules limiting executive pay and controlling the swaps markets, where $700 trillion of assets were bartered last year. They are also fighting over final rules for money-market funds and crowdfunding. Both sides have taken rigid positions. White has told them she may side with the two Republican commissioners on swaps and crowdfunding but stick with Democrats on executive pay, sources familiar with the discussions tell TIME. White continues to discuss bipartisan options for all the rules with both sides.

White is the 31st person to chair the commission–Joseph Kennedy was the first–and the third female boss in a row. But she is surely the least likely SEC chair to join a pickup basketball team. Born in Kansas City, Mo., in 1947, she moved to McLean, Va., as a child when her father got a promotion as a government lawyer working for the Social Security Administration. In her junior year of high school, she met her future husband John White, now a securities lawyer and the former head of corporate finance at the SEC under Republican Christopher Cox. The Whites went to college in Virginia, married in 1970 and settled on New York City for law school.

Though only 5 ft. (152 cm) tall, she improbably joined a women’s basketball team when she started as a young prosecutor in New York in the late 1970s. (She and several other self-described “short women” from the office won at least one championship while she was on the team.) White’s competitive drive is the stuff of legal legend. When she rose to head the federal prosecutor’s office in Manhattan, she successfully fought to have the FBI bring its best cases in her district rather than in the neighboring Eastern District of New York. She fiercely blocked any efforts by the Justice Department to try cases in her district, insisting that her own attorneys–rather than those from Washington–be the ones to go to trial. “She’s very smart, very driven and very competitive,” says Michael Piwowar, a Republican SEC commissioner who has publicly clashed with White.

In person, White is affable and businesslike and conveys uncommon drive. She sleeps only about four hours a night. (“Never the same four,” she explains.) A registered independent, she has long kept her politics properly opaque. When a line attorney working for her in the U.S. prosecutor’s office in Manhattan in the mid-1990s was denied a top-secret security clearance by social conservatives at the Justice Department because he was gay, White angrily backed them down before the attorney had a chance to resign. Though White was appointed to the prosecutor’s job by Bill Clinton, she was chosen by George W. Bush’s first Attorney General, John Ashcroft, to investigate Clinton’s pardon of financier Marc Rich. (Neither she nor her successor uncovered any wrongdoing by Clinton in the case.)

The only Senator to vote against White’s confirmation in committee was a Democrat, Sherrod Brown of Ohio, who said her work as a top defense lawyer for the likes of Morgan Stanley, JPMorgan and Bank of America meant she was too close to Wall Street. White says she has recused herself from more than a dozen enforcement cases at the SEC because of her private-practice work. The firm she has worked for off and on since law school, Debevoise & Plimpton, is a traditionally liberal one, but she recruited Bush’s last Attorney General, Michael Mukasey, to join it. He did so, he says, in large part because “she was here.” (White is often mentioned, as it happens, as a potential replacement for Attorney General Eric Holder should he decide not to serve out the remainder of Obama’s second term.)

If competition is White’s dominant philosophy, it may end up shaping America’s financial future in the digital age. Where the markets once moved at the pace of trades between two human beings, computer programs trade with one another millions of times a second. It’s a largely ungoverned process that may increase market efficiency but can give unfair advantage to big firms over small investors. The SEC has blamed it in part for confidence-damaging episodes like the “flash crash” of May 2010, when the Dow Jones industrial average dropped nearly 1,000 points, or 9%, in a matter of minutes. White said at her confirmation hearings that she would bring “a sense of urgency” to the task of understanding and regulating high-frequency trading. Now the SEC says the results of a new agency computer program called MIDAS, which can track trading down to the microsecond, have shown that, for the most part, high-frequency trading is not undermining fair and competitive markets. White says the right course is monitoring and further study, not new rules.

Those who believe that recent history shows the markets are unfair or dangerous chafe at that instinct. But others think White deserves the benefit of the doubt. “She’s been good at every job she’s ever had,” says the Consumer Federation’s Roper. “And she will try to be a good SEC chairman. The question is how does she define that.” When asked that very question, White says she wants to be able to say she “did a good job and was a strong leader of a strong agency.” You get the idea that anyone looking for more on what that means can start with the inmates at Guantánamo Bay.