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Maintaining Ethics in the Move From Regulator to Regulated

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Sheila Bair took a banking job last week — an occasion for breaking out the axes and giving them a good grinding.

Ms. Bair, who served under Presidents Bush and Obama as the head of the Federal Deposit Insurance Corporation, will be a director of the Spanish banking giant Santander. Because Ms. Bair has been a persistent critic of the major banks and had spoken out on the perils of the revolving door, the move prompted a bit of outrage in the financial world

Just as Ms. Bair was taking her new job, Mary L. Schapiro, the former chairwoman of the Securities and Exchange Commission, was giving one up. Nine months ago, Ms. Schapiro took a managing director job with the financial services consulting firm Promontory. She has decided to leave that position (although she is staying on the firm’s advisory board).

Post-regulatory life is fraught, especially if you try to have standards. Both Ms. Bair and Ms. Schapiro grappled with the issues raised by moving from regulator to regulated. Each created a set of personal principles to avoid conflicts, ones that are much stronger than the current law.

From the outset, Ms. Bair decided not to work for a financial services firm in the United States. She had been approached by American financial institutions and by institutional investors and reform groups to see if they could entice her to join bank boards. She declined.

“I wanted to stay away from the U.S. because of the revolving-door concerns,” Ms. Bair told me in an interview. When she gives a speech to a bank that the F.D.I.C. oversaw in any fashion, her fee goes to charity.

As for Ms. Schapiro, she had set up much stricter personal rules for herself than the Obama administration has, which are in fact stricter than the rules for civil servants. The former S.E.C. chief decided that she would never lobby regulators on behalf of any clients.

“We all went through hell together for four years, seven days a week,” she told me, referring to the financial crisis and the herculean rule-making that followed. “I never wanted to go back to the team that I led through all of that to ask them for anything.”

Ms. Schapiro didn’t find that her job at Promontory fit her well. Technically, the firm doesn’t lobby, according to the Washington rules of what constitutes lobbying. But just as banking has its shadow banking, lobbying has its shadow lobbying. Promontory lives in a shadow kingdom between banks and regulators, “interpreting the rules” in exchange for large fees from the banks.

Perhaps Ms. Schapiro’s tight restrictions made her less useful to Promontory.

Given her own guidelines, Ms. Bair chooses jobs carefully. She said she joined Santander because it was one of a handful of moneymaking opportunities that would deliver intellectual stimulation without obvious conflicts of interest with her previous work.

Santander’s structure appealed to her. The Spanish giant is like a collection of regional banks — in Europe and Latin America and with a small subsidiary in the United States. The top entity has its own board, on which Ms. Bair will serve. Subsidiary banks have their own boards and management that provide more localized oversight.

We can hope that the other Santander directors will start to have some interesting conversations. European banks have not done as much to reduce their leverage and improve their capital as American banks have. (And many think American bank capital is still too low.) Ms. Bair has been a consistent and loud voice for more capital and stronger regulation.

“Financial stability and long-term shareholders’ interests are aligned,” she said.

Kudos to Santander for putting a bank reformer on its board. No big American bank has been so moved.

“How about Simon Johnson on the Chase board? Gary Gensler at Goldman Sachs? Anat Admati at Deutsche Bank?” Ms. Bair proposes, referring to the former top economist for the International Monetary Fund, the just-departed head of the Commodity Futures Trading Commission and the Stanford finance professor.

All are reformers who “understand banking and markets but have a different perspective on the role of regulation and financial stability,” she said.

This is likely to happen as soon as Lloyd C. Blankfein steps down from his role as chairman and chief executive of Goldman Sachs to devote his life to making sand mandalas.

Ah, but did Ms. Bair get caught in a bit of hypocrisy? In her 2012 book, “Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself,” she wrote that regulators should be barred for life from serving for financial firms they regulated.

Amid the hullabaloo, a nuance has been lost: She was referring to bank examiners, the staff that looks most closely at bank operations. She wants to give examiners raises and wants them treated with respect, in an attempt to accord them the prestige of Foreign Service officers.

The revolving door is clearly a problem for capitalist democracies, but of what sort? Officials work in government, learn the weaknesses in the law and how to work their way through the halls of Congress and sell those skills to the highest bidder. Government work serves as an internship program for law firms and large corporations, many of which are seeking to test the boundaries of the law and regulations if not subvert their intent.

Yet government officials cannot be monks, taking vows to live only lives if not of poverty than of civil servitude. Regulatory bodies need to import professionals with real-world expertise. The regulated entities benefit when they hire former regulators who have respect for the rules. Pure prohibitions aren’t the solution.

And regulatory alumni aren’t remotely the sole problem. The financial industry employs plenty of brilliant legal and business minds who have never worked a day for government.

Ms. Schapiro made this point to me: The industry’s resources are of greater concern than prodigal alumni. The volume of lobbying is “extraordinary,” she said. Bank lobbyists sometimes write bills for Congress. And loopholes are rife, as a New York Times article showed this weekend.

“It wasn’t the people.” Ms. Shapiro said. “ It was the sheer amount of influencing that became an issue.”

Yes, it turns out people who have never worked in government can also lobby quite effectively, thank you. Even stricter rules can’t solve that.

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Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)