Saturday, January 26, 2013

Elizabeth Warren Warns Someone About The Beltway/Wall Street Revolving Door


Elizabeth Warren wrote in Politico that although she likes the idea of technical expertise coming to bear on staff positions in government (and political expertise coming to bear on Wall Street staffs), there is a "peril" to be wary of as well-- especially in Washington.
Big business orthodoxy against rules and regulations can seep into the bones, including the bones of new policymakers who are charged with protecting consumers and strengthening markets. Industry groupthink and overconfidence can prevent clear and evenhanded analysis of problems. The result can be a group of decision makers who are self-confident in the extreme and who end up clearing the path toward the sort of recklessness and excessive greed that have already broken the economy once.

As jobs open up and the shuffle continues, policymakers in Washington ought to think seriously about some key indicators when considering people with industry experience:

1. Who do they listen to and who do they trust?

Not all the expertise and good ideas are on Wall Street. Small banks, credit unions, academics, consumer groups, regional Federal Reserve banks and foreign financial commentators often have important insights. If potential appointees coming from industry don’t show a real willingness-- and even eagerness-- to listen to smart people outside of the industry, that’s a real problem. If they aren’t already having serious conversations with people who are not from Wall Street, the blinders may have grown too big to remove. It matters who they talk to and who they will rely on for advice.

2. Where do they disagree with industry and lobbyist orthodoxy?

No one is perfect; they should be able to see some areas for improvement. If a potential appointee can’t give thoughtful examples of where the lobbyists and the industry have gotten it wrong over the past generation and give specific examples of where they have it wrong now, then they aren’t right for the job.

3. Do they recognize the advocacy imbalance in Washington?

Industry lobbyists are highly specialized, well-funded and enormous in number. That means they can provide important information, but it also means they so outnumber advocates for the public interest that the playing field is badly tilted in their favor. If a potential appointee doesn’t recognize that imbalance and have a thoughtful view about how to address it, that person shouldn’t be under consideration.

4. What their real intention is for getting into government?

Many people get involved because they made money from the industry but know that greed and recklessness in some quarters have given everyone else a bad name-- and they want to see real reforms and changes. Some may have ideas about how to make government work more efficiently. On the other hand, others are just looking to advance their careers and put themselves in line for promotions in the industry. Intentions matter.

5. Are they attuned to the diversity of institutions and actors?

Big banks and small banks operate very differently. Some companies engage in deceptive practices to cheat consumers, but many add enormous value to the financial system. Some create business models that create private benefits and public risks, while others are responsible for both risks and rewards. If a potential appointee isn’t willing to differentiate the virtuous from the villains-- and treat them differently-- then they will make mistakes by over-regulating those who don’t need it and by not cracking down on the real scofflaws.

Transition is afoot in Washington, and if the right people go back and forth, the country will develop smarter, stronger rules. But if the wrong people make the shuffle, then Washington will be rigged even more for Wall Street-- and every middle-class family will pay the consequences.
Great to see someone in Washington talking about ideas instead of just self-serving, partisan bickering. But I don't see Obama taking these particular ideas to heart as he fills out his administration. Let's take his SEC nominee, Mary Jo White, for example. Matt Taibbi writes that appointing her is tantamount to putting the fox in charge of the hen house.
I was shocked when I heard that Mary Jo White, a former U.S. Attorney and a partner for the white-shoe Wall Street defense firm Debevoise and Plimpton, had been named the new head of the SEC.

I thought to myself: Couldn't they have found someone who wasn't a key figure in one of the most notorious scandals to hit the SEC in the past two decades? And couldn't they have found someone who isn't a perfect symbol of the revolving-door culture under which regulators go soft on suspected Wall Street criminals, knowing they have million-dollar jobs waiting for them at hotshot defense firms as long as they play nice with the banks while still in office?

I'll leave it to others to chronicle the other highlights and lowlights of Mary Jo White's career, and focus only on the one incident I know very well: her role in the squelching of then-SEC investigator Gary Aguirre's investigation into an insider trading incident involving future Morgan Stanley CEO John Mack. While representing Morgan Stanley at Debevoise and Plimpton, White played a key role in this inexcusable episode.

As I explained a few years ago in my story, "Why Isn't Wall Street in Jail?": The attorney Aguirre joined the SEC in 2004, and two days into his job was asked to look into reports of suspicious trading activity involving a hedge fund called Pequot Capital, and specifically its megastar trader, Art Samberg. Samberg had made suspiciously prescient trades ahead of the acquisition of a firm called Heller Financial by General Electric, pocketing about $18 million in a period of weeks by buying up Heller shares before the merger, among other things.

...[Paul] Berger was passing notes in class to Mary Jo White about wanting to work for Morgan Stanley's law firm while he was in the middle of quashing an investigation into a major insider trading case involving the C.E.O. of the bank. After the case dies, Berger later gets the multimillion-dollar posting and the circle is closed.

This whole episode highlights everything that's wrong with modern Wall Street. First of all, everybody's buddies with each other-- cops and robbers, no adversarial system at all. As Bill Murray would say, it's dogs and cats, living together.

Here, a line investigator gets a good lead, it's quickly taken out of his hands and the whole thing is negotiated at 50,000 feet by friends and former co-workers of the top regulators now working at hotshot firms.

If Barack Obama wanted to send a signal that he's getting tougher on Wall Street, he sure picked a funny way to do it, nominating the woman who helped John Mack get off on the slam-dunkiest insider trading case ever to cross an SEC investigator's desk.

When I contacted Gary [Aguirre] today, his take on it was simple. "Obama is not going to clean up financial corruption," he said, "by pinning a sheriff's badge on Wall Street's protector-in-chief."
And it makes it so hard for a good guys/bad guys narrative in American politics when almost everyone, regardless of party, is either corrupt or abets a corrupt system as a matter of course.

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