Reforming the financial services revolving door

Regulatory capture, revolving door, conflicts of interest — these are just a few of the phrases used to describe a systemic corruption of government caused by the movement of high-level officials back and forth between government regulatory positions and the private sector to work in the industry they formerly regulated. The American people believe that they cannot trust government in large part because of this endless cycle.

{mosads}In fact, according to the April 2014 Gallup poll, only 40 percent of Americans trusted the government to do what was right a majority of the time. The opportunity for this kind of revolving-door corruption is particularly ripe in the banking industry, where large financial institutions are overseen by a range of regulators — from the Federal Reserve to the Securities and Exchange Commission to the Commodities Future Trading Commission — and where these federal agencies continue to recruit Wall Street veterans with obvious conflicts of interest, as well as send alumni back into the private sector to benefit from relationships with those who remain at the regulators. Former agency staff members are able to more easily influence new agency rule-makings, counter investigations of suspected misconduct at their financial institutions and win exemptions from federal law, and conversely, former industry staff members in positions of power in government may be lax on their old employers. Former Citigroup employees, for example, head the Treasury Department and Office of the U.S. Trade Representative.

In addition, the big banks know the benefits of having these positions filled by those who are loyal to them and might put their interests above that of Main Street, and so choose to incentivize such moves into government. A number of the biggest Wall Street banks, including Goldman Sachs, JPMorgan and Citigroup, have provided special financial rewards, or “golden parachutes,” to their company executives who become senior government officials. Current Treasury Secretary Jack Lew received an exit bonus of more than $1 million from Citigroup shortly before joining the Obama administration. The package said explicitly that the payout was contingent on his securing a high-level position within a government regulatory body. This clearly showcases the value to corporate America of getting loyal employees into high-ranking positions within the financial regulatory agencies. More recently, Antonio Weiss’s Treasury appointment took center stage when Weiss, a former investment banker from Lazard, said in his financial disclosures that he would be paid $21 million in unvested income and compensation when he left Lazard for a full-time job in government.

Beyond the golden parachute phenomenon, another recent conflict of interest story that grabbed public attention is that of Carmen Segarra. Segarra is a former New York Federal Reserve examiner who was placed at Goldman Sachs to oversee their behavior. In her time there, she said she witnessed far too much deferential behavior to the big bank and saw her colleagues withholding information that would have placed checks on Goldman’s behavior. She captured 40 hours of audio recording during her tenure as an examiner, showing other Fed employees acting inappropriately by purposely not reporting on bad practices that they witnessed to protect the bank behemoth.

One check (although an impermanent one) has already been placed on this problem. Early in his first term, President Obama signed ethics Executive Order 13490, which set restrictions on presidential appointees entering government through the reverse revolving door.

This order should be extended; however, we also need a more comprehensive solution to deal with the rampant conflicts found in the troubled financial services sector. Sen. Tammy Baldwin (D-Wis.) and Rep. Elijah Cummings (D-Md.) just introduced the Financial Services Conflict of Interest Act, will provide the broad reform that this sector needs and hopefully lay the groundwork for similar reforms in other arenas. The bill provides five reforms: It will ban golden parachutes; prevent regulatory capture; strengthen restrictions on procurement officers; slow the revolving door from regulatory agencies to the private sector; and expand the restrictions on private-sector employment by former bank examiners and their supervisors.

Only by moving such sweeping reforms can we begin to restore the people’s trust that our bank regulators will behave in an ethical manner and put the well being of the economy and the public above any given private institution.

Gilbert is the director of Public Citizen’s Congress Watch division.