Cracks in the SEC's crackdown

s the new cop on the U.S. securities beat armed with a pea shooter? The size of the penalties meted out by boss Mary Schapiro's team at the Securities and Exchange Commission makes it appear so.

Schapiro should be applauded for cranking up the agency's notoriously lax enforcement efforts. But letting companies off the hook so easily could undermine her new get-tough policy.

At first glance the penalties appear impressive. General Electric agreed to a $50 million settlement. Former American International Group (AIG, Fortune 500) head Hank Greenberg has to pay $15 million. And Bank of America has to pony up $33 million.

But these amounts are trivial when compared with the resources of those charged. BofA (BAC, Fortune 500) is the country's largest bank by assets. Greenberg is a billionaire. And GE, even today, remains a $150 billion company. The SEC didn't even get the defendants to admit guilt.

Perversely, the puny size of the penalties could provide an incentive for managers to stretch the rules. Take GE (GE, Fortune 500). The SEC alleged that it massaged its 2002 results so that it could continue its eight-year stretch of meeting consensus earnings estimates. The regulator says, absent GE's accounting fiddles, it would have missed by about 1.5 cents a share.

When GE missed estimates in the first quarter of 2008, its stock slid some 13%, wiping over $40 billion off its market cap. Using that percentage decline as a rough guide, GE's moves back in 2002 saved shareholders -- and managers with chunks of stock -- nearly $33 billion.

The comparison isn't entirely fair. GE missed by a greater margin in 2008, during a worsening financial crisis and a month after boss Jeff Immelt had promised to meet expectations.

But applying even a third of the 2008 percentage drop to GE's early 2003 market value -- more in line with the average decline by S&P 500 companies that miss estimates -- would mean the conglomerate still saved investors some 220 times the cost of the SEC's fine. That's easily enough to turn the temptation to tweak the rules into a no-brainer.

Of course, such calculations are not clear cut. There's the "name and shame" aspect, the legal costs and the loss of investor confidence to consider. Nonetheless, for the watchdog's crackdown to have a real deterrent effect, its bite needs to better match its bark.