Forbes: To Police Banks, Obama Spins Revolving Door To Bring In More Of Wall Street’s Own

This is the fifth in an 11-part series on the failed promises of the Dodd-Frank financial reform package and the continued, dangerous imbalances in our financial system.

Like F.D.R. before him, when President Obama came into office he was confronted with a collapsing economy and a fragile banking system. Roosevelt’s answer to that challenge included as a top priority fixing the systemic problems on Wall Street that had caused the 1929 stock market crash and led to the Great Depression.
President Obama, despite his promise of “change we can believe in,” concentrated only on stabilizing the financial system and supporting our major banks. To do this, he chose as his top financial advisors and regulators people whom he felt understood Wall Street investing and banking.
Looking back, it is still surprising to see how many of his initial appointments in the Treasury Department and other agencies and departments that deal with financial matters reflected this policy. Treasury Secretary Tim Geithner, Director of the National Economic Council Larry Summers, SEC Chair Mary Schapiro, SEC Enforcement Head Rob Khuzami, CFTC Chair Gary Gensler, Attorney General Eric Holder, Criminal Division Head Lanny Breuer, and many more–all came to Washington from Wall Street.
Not so surprisingly, once they got in office most sided with the big banks whenever financial reforms were discussed. Many of the regulators, in fact, had worked in jobs before their appointments that would be affected by any new rules they made. Many of them would go back to Wall Street after they left Washington, part of what is known there as “the revolving door” between private industries and government.
There is also a long, troubled history in Washington of “regulatory capture”— regulators being co-opted by and ruling in favor of the industries they are supposed to regulate. Certainly they had been captured during the George W. Bush administration, when belief in self-regulation of the financial industry became a litmus test for new appointees. But by late 2008, even some of those who had been the most vocal proponents of that ideology had changed their minds. “The last six months,” said a chastened SEC Chair Chris Cox, “have made it abundantly clear that self-regulation does not work.”
As disappointed as many of us were with the lack of support for genuine reform during President Obama’s first term, some felt they could cut him some slack. Escaping a catastrophic depression, stabilizing the banking system, and starting to rebuild the economy were understandable first priorities. But I was hopeful that his second term might be different, that major appointments would reflect a commitment to the kind of real reforms we desperately need.
I was hopeful that the second Obama administration would become part of the growing consensus that our megabanks are still too big to fail. I thought it might support efforts to raise their capital requirements and impose transparency and real limits on their trading in derivatives. I wanted them to fix Fannie Mae and Fannie Mac and do something to straighten out the problems with credit rating agencies. I wanted to see real penalties imposed on banks engaged in unlawful behavior.
The first major appointments of the second term make it clear that none of those things is likely to happen.
Jacob Lew, our new Secretary of the Treasury, is in many ways an ideal public servant. He did well as Deputy Secretary of State, Director of the Office of Management and Budget, and Chief of Staff to the President. But when he left government service in 2006, his employment contract with Citigroup said, in effect, that if he left the bank he wouldn’t receive his guaranteed bonuses unless he were leaving “as a result of your acceptance of a full-time high level position with the United States government or regulatory body.” If that doesn’t spell out an incredible conflict of interest, I don’t know what does.
At his confirmation hearing, Lew said, “Dodd-Frank dealt with too-big-to-fail.” The National Journal reported that, at a congressional hearing in May, “Lew gave the clearest indication yet that he’s not especially worried and is going to take the light-fingered approach of his predecessor, Tim Geithner–and that he doesn’t appear to agree with recent Federal Reserve proposals to correct the too big to fail problem.”
Wonder of wonders, last week Lew had a small epiphany. “If we get to the end of this year, and cannot, with an honest, straight face, say that we’ve ended ‘too big to fail,’” he said, “we’re going to have to look at other options.” I guess that’s progress, but can anyone explain to me why it is necessary to wait until the end of the year? And can anyone assure me, with an honest, straight face, that his options will then actually fix the problem?
Mary Jo White, the new Chair of the SEC, was a tough, effective U.S. Attorney for the Southern District of New York from 1993 to 2002. While that background would have been perfect in 2009 when there should have been prosecutions for financial malfeasance, what is needed now is an experienced financial expert, not a prosecutor. In addition, she has been with the Wall Street law firm Debevoise & Plimpton for the last 11 years. She will have to recuse herself in cases involving law firm clients such as JPMorgan Chase, Bank of America, and Morgan Stanley.
Ms. White’s first SEC vote would create a gigantic loophole to allow continued risky derivative trading by our banks in their foreign subsidiaries—exactly what happened in the London Whale Fiasco. Her appointments so far have perpetuated the revolving door tradition at the SEC. Her chief counsel, Robert Rice, came from Deutsche Bank, and according to the Financial Times, is facing a pending legal complaint that alleges he covered up losses by the bank during the financial crisis. For one Co-Chief of the all-important Enforcement Division she picked Andrew Ceresney, from her former law firm. His former clients are involved in seven continuing SEC investigations. The recusal problems will be a nightmare.

The other Co-Chief of the enforcement division is George Canellos, who joined the SEC in 2009 after six years with the Wall Street law firm of Milbank, Tweed, Hadley & McCloy. He’ll have recusal problems too.
Ms. White’s SEC was described in a New York Times headline last week as “feistier,” because it had rejected a settlement over insider trading with one hedge fund manager and had accused another one of the same offense. All well and good, but finding insider trading in the world of hedge funds is an example of successful hunting in a target-rich environment. It does nothing to address the systemic problems that led to the financial meltdown.
So while the cast has changed, the second act of the Obama administration may look much like the first when it comes to financial reform.
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This article is available online at:
http://www.forbes.com/sites/tedkaufman/2013/07/23/to-police-banks-obama-spins-revolving-door-to-bring-in-more-of-wall-streets-own/