Obama’s appointments reflect Washington Problems

For those of us who believe fundamental changes are necessary to help prevent another financial crisis, the first four years of the Obama administration were a disappointment. But many of us were also willing to cut him some slack. Given what he confronted when he came into office, escaping a catastrophic depression and starting to rebuild the economy were necessarily his first priorities.

Nevertheless, after disaster had been avoided, it became obvious that the people he appointed to fill the major positions in the Treasury Department and the financial regulatory agencies, nearly all from Wall Street, usually 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. Some would go back to the same jobs after they left Washington, part of what is known there as “the revolving door” between private industries and government.

There is 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.

But I was hopeful that the 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 real limits on their trading in derivatives. I wanted it to fix Fannie Mae and Freddie Mac, and do something to straighten out the problems with credit agencies that are still paid by the bond issuers they rate.

The first major appointments of the second term make it clear that none of these things are 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 revealed that he is one of the few people not working on Wall Street who thinks, “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.”

Mary Jo White, the new chairwoman 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 and 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.

White’s first SEC vote created 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, there is a pending legal complaint that alleges he covered up losses by the bank during the financial crisis. For 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.

President Obama has another crucial appointment pending to head the Commodities Future Trading Commission. Despite what has happened so far, I am still hoping he picks someone on our side instead of Wall Street’s.

Ted Kaufman is a former U.S. senator from Delaware.