In plain-English, Yellen says the banking system is broken;
Commentators and politicians suspiciously silent on her comments;
Average Americans agree with Yellen.
Welcome to 2015 America
Fed watchers who routinely wax on for hundreds of thousands of words about possible rate hike details and changes in quantitative easing have been largely silent about Fed Reserve Board Chair Janet Yellen’s plain-English comments about the sorry state of ethical business practices at major U.S. banks.
Yellen made her comments in a March 4, 2015 New York speech in which she said the Fed expects banks to follow the law and act ethically. “Too often in recent years, bankers at large institutions have not done so, sometimes brazenly,” she said.
But suspiciously, market pundits (such as this report on CNBC) are silent. Instead, they continued to write their nuanced nonsense, such as this, about the Fed and its future unknown plans:
“The word “patient” in the Fed’s statement has become a point of debate, since its chair, Janet Yellen, said in congressional testimony that removal of the word would be a precursor to a rate hike. “
In her speech, she also addressed the issue of regulatory capture, an academic term which means that regulators become too close to those they regulate and fail to be objective and exercise their police roles.
This commonly happens in all industries and was first recognized by President Dwight Eisenhower when he noted that that the military industrial complex was evolving after World War II. Eisenhower saw how his fellow senior officers were being hired by military contractors for their political connections, as well as their military expertise. Eisenhower made this observation as his presidency ended, but he never did anything to prevent it.
But regulatory capture is nothing new.
It happens in every industry which is regulated by the state and federal governments, especially those agencies which regulate the financial services industry. What makes the financial regulator move into the financial services industry especially egregious is that regulators have to give the impression they are protecting the interests of millions of unsophisticated individual investors.
That façade continues for as long as regulators remain their government posts. But when becoming a civil servant runs is course, becomes boring or fails to pay the bill, there are always good job opportunities in the private sector.
Here are some recent examples:
Democracy Now reports: “The former Justice Department official who led the agency’s investigation of Libor and the financial crisis 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, now has 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 firm is termed “a shadow regulatory group,” which is confusing since Shapiro headed what is billed as the real regulatory group. So maybe it is logical to work for the “shadow” version of the same agency she once headed. No salary details were revealed.
Schapiro left the SEC in December 2012. Prior to that, 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 confirmation drama with Mary Jo White, should produce some impassioned phrases about individual investors, but it’s all part of the show.
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.”
While that’s an understatement, conflicts-of-interest are a Washington reality. And that means individual investors are once again on their own, with no friends at the financial regulators.
Why Are the Commentators Silent?
Fed commentators prefer to wax on about the vagaries of Fed Speak, dates and rate hikes, but criticisms of the banking system could hurt their careers. This conflict is the essence of regulatory capture and it explains why individuals who would criticize the banking practices of UBS, Well Fargo, Chase and Citi would be cut off from thousands of calories in free dinners, access to fun PR events, as well as lucrative future job prospects. After all look at how well former politicians such as Eric Cantor (R-Va) and Billy Tauzin (R-La.) have done in their political afterlives.
Such criticism would also raise issues about the big banks and their role in the mortgage crisis and other upcoming market disruptions. Those are really tough issues. That’s why it’s better to talk about basis points, nuanced language and Fed meeting dates.