In the late 1960s, a young attorney at the Securities and Exchange Commission named Roberta Karmel was assigned with a daunting task: telling Lehman Brothers to shut down.
The trouble at Lehman was the result of the "paperwork crisis" following the switch to computer records from handwritten files that brokers previously kept. When records were compared to the securities actually held in Lehman's vaults, the firm had $128 million less than records reflected. At the time, that amount exceeded the firm's $100 million in capital, Karmel explained in an interview with CNBC Digital.
Lehman wasn't shut down and the episode didn't seem noteworthy for another 40 years, when the firm went bankrupt in 2008. "I had forgotten it till they went bust," she said. "I was supposed to put them out of business."
That episode is one of many covered in Karmel's new book, "Life at the Center," which spans her 50 years of experience in securities regulation. Karmel describes a series of controversies in financial regulation that have never been resolved and continually reappear under different guises.
"It makes you wonder, should the SEC be abolished? I don't think so, but a lot of these problems are endemic to securities regulation," said Karmel, who later went on to become an SEC commissioner and is now a professor at Brooklyn Law School.
In the case of Lehman in the 1960s, Karmel was told to bring in the heads of the firm, including Robert Lehman, who died shortly after. "Mysteriously, every attorney senior to me ... was unavailable for this meeting," Karmel wrote. "I was more scared than the Lehman Brothers leaders and their lawyer ... and could not imagine that I would actually compel this firm to close its doors."
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When Lehman ran into trouble in the 1960s, it wasn't clear whether the firm was short of capital or not - a problem that's eerily similar to what transpired in 2008. "No one really knew the right number," Karmel said. After being pressed, Lehman's leaders agreed to make a "substantial" contribution to their firm's capital to satisfy the SEC.
Lehman's problems weren't identical in 2008, but the lack of strong internal controls is striking. And capital injections, of course, weren't enough to save Lehman in the more recent crisis. "It seems that managers at the top of financial institutions who were clueless about risk did not suddenly emerge in the 21st century," Karmel wrote.
Another old problem that continues to pop up is regulation of securities issued by small and new companies. In the 1960s, Karmel pursued a case involving a small cosmetics firm that went bankrupt. When she questioned investors about the sales tactics, they said salesmen had pitched the stock as cheap because it cost only 10 cents a share.
Karmel said she sees parallels in the Jumpstart Our Business Startup Act (JOBS Act) in its provisions for crowdfunding. That law loosens restrictions on filing requirements and reporting for companies that are still in their early stages of growth, potentially putting investors at risk. She asks: "Will crowdfunding scams be any different than my first SEC injunctive action?"
Another current controversy that regulators have tried to grapple in the past: trading outside of traditional exchanges. Karmel said that many brokers pressured the SEC to allow block trades and other transactions outside of traditional exchanges over the years, and ultimately got their way.
Karmel draws a comparison with trading in "dark pools" that are out of sight. The same goes for high-frequency trading, which has become especially controversial since the publication of "Flash Boys" by Michael Lewis.
Karmel isn't optimistic about the problems' being fixed anytime soon. In the past, the SEC has "let the securities industry try to solve this problem," she said. "The SEC just isn't in a very good position to get to the answer."
A big reason that industry participants have a very wide range of views, so it's difficult to reach a real consensus, she said. In the case of high-frequency trading, some say it's a force for good, adding liquidity to the market. To others, high-frequency trading "is turning the market into a craps game," she said.
Karmel also remains skeptical of derivatives, which she believes have been responsible for a range of problems from the 1987 crash to the 2008 financial crisis. "Every market break is about too much leverage in the markets," she said. "Derivatives undercut all the restrictions."