Regulatory capture, or the practice which occurs when government regulators become too friendly with the industry they are regulating, is a well-documented sociological-political event.
It happens in every industry regulated by state and federal governments, especially those agencies which regulate the financial services industry. What makes regulatory capture among financial regulators especially egregious is that regulators have to give the impression they are protecting the interests of millions of unsophisticated individual investors. Too often, this is not the case.
However, this façade continues for as long as regulators remain in their government posts. But when the experience of being a civil servant runs is course, becomes boring, or fails to pay the bills, there are always good job opportunities in the private sector.
Here are some recent examples:
Democracy Now reports that Lanny Breuer, the former Justice Department official who led the agency’s investigation of Libor and the financial crisis, has hit the jackpot with a new $4 million a year job. Democracy Now said Breuer “is taking a post at a law firm that represents Wall Street firms who have faced federal scrutiny. Lanny Breuer left as head of the Justice Department’s criminal division last month. In the latest sign of the revolving door between Wall Street and agencies that purport to oversee it, Breuer is returning to his former employer, the law firm Covington & Burling, where he is expected to defend corporate clients and receive a salary of $4 million a year.”
Mary Schapiro, the former chairwoman of the SEC, has accepted a new post at the Washington consulting firm, Promontory Financial Group. A release said she will be heading activities in corporate governance and market practices. The SEC has power to influence both of these activities, yet the agency’s record in the governance area, specifically adopting the fiduciary standard, were derailed under her tenure.
The “Shadow Regulator”
The firm is termed “a shadow regulatory group,” which is confusing since Shapiro headed what is billed as the real regulatory group (the SEC). So maybe it is logical to work for the “shadow” version of the same agency she once headed. No salary details were revealed.
In the meantime, the Promontory Group made the news in August when the Standard Chartered in England agreed to pay a $340 million fine to settle charges with New York State banking regulators that it laundered money for Iranian entities under sanction by the U.S. government, according to MarketWatch. The bank was a client of Promontory. Before the settlement, the bank tried to minimize the damage by hiring Promontory, which found that there were only $14 million in illegal transactions. In the settlement, by contrast, the bank and regulators agreed that the illegal transactions were at least $250 billion. This is what it must mean to be a “shadow regulatory agency.”
In another matter, Promontory was paid around $1 billion to help three banks sort out the number of illegal foreclosures they had committed during the so-called robo-signing scandal. Despite the enormous fees Promontory collected to review if foreclosures had broken the law, no homeowners received relief, the program was shuttered and the banks instead agreed to a federal settlement.
MarketWatch also said another recent Promontory hire was Julie Williams, the former chief counsel for the Office of the Comptroler of the Currency (OCC), who joined the firm in January. While at the OCC, Williams had defended the hiring of Promontory and other consultants to comb through robo-signing cases and was also a prominent regulatory figure in the JPMorgan Chase investigation of huge trading losses in London.
These are some of the recent highlights of the firm Shapiro has joined after she left the SEC in December 2012.
Prior to working at the SEC, she headed the Financial Industry Regulatory Authority, Wall Street’s self-governing body and the U.S. Commodity Futures Trading Commission. When she left FINRA in 2008, Schapiro received a $9 million bonus.
Former Treasury Secretary Tim Geithner is having talks with Larry Fink, CEO, of Blackrock, the world’s largest money manager, about a possible job, according to news reports. Again no details were reported, but the Business Insider reports that Geithner spoke with Fink 49 times over an 18-month-period when he was serving as Treasury Secretary, according to government records.
According to reporters Shahien Nasiripour and Dan McCrum of the Financial Times: “The close relationship between Fink and Geithner, which dates back to Mr. Geithner’s days heading the Federal Reserve Bank of New York between 2003 and 2009, reflects how governments have turned to the asset manager as a trusted adviser after the financial crisis.”
Temporary Public Servants
At first glance, what these three regulatory executives have in common is that they successfully parlayed their government positions into more lucrative ones in the private sector without suffering any loss in incomes. That is a very rare event when people resign from their positions and is certainly a career patter being followed closely by thousands of other federal regulators who want to move into the more lucrative financial sector.
But these seamless transitions also show that tough regulation is bad for careers and shapes everyday behaviors of regulators. It makes no career sense for any regulator to adopt any non-pre-approved pro-investor policies simply because it can upset very lucrative, long-term professional relations with an assortment of future employers.
This is all more bad news for individual investors since these job appointments should wipe away any pretense that they have regulatory advocates. The upcoming confirmation drama with Mary Jo White, should produce some impassioned phrases about the need to protect and advocate for individual investors, but it’s all part of the show.
As noted on other posts on this site, her blatant conflicts-of-interest show they can be publicly flaunted without any serious repercussions.
Based on reports from the New York Times, when White’s name was floated for the top SEC position, she was offered a stipend of $42,000 per month from her law firm, Debevoise & Plimpton. Instead, White countered the offer and asked for an upfront payment of $500,000 a year for life to tide her over as she accepted a significantly lower federal salary to head the SEC.
Prior to this nomination, White headed the litigation department at Debevoise & Plimpton, a prominent New York-based law firm, whose clients include JPMorgan Chase, General Electric, Microsoft and Toyota. One news report said White’s law firm priorities “could raise questions about her possible conflict of interest, although previous SEC chairmen have faced similar questions.” Maybe so, but White is getting $500,000 for life, so people should ask why is she paying paid this lifelong pension? What does she have to deliver in return for the money?
The potential appointment of White is too similar to that of former SEC Chairman Harvey Pitt, a George Bush nominee,
Pitt was forced from that post a scant 15 months after he was sworn in after he was found soliciting law clients for his former firm from the SEC’s office. Pitt’s appointment showed how low the selection process can go when that office is diminished by blatant conflicts of interest. But is is also an object lesson about what the office is all about.
Conflicts of interest are a Washington’s reality and will exist as long as appointed and elected officials line up to take lobbying money and let the financial services industry run the regulatory offices. Unfortunately, that will not change. It is build into the system, so that means individual investors are again on their own, with no friends working for them at the financial regulators.
