BANKTHINK

How to Lock the Revolving Door

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Sheila Bair recently made the weird proposal that bank examiners should serve for life, to keep them from going to work for banks—where she suspects her former regulatory colleagues would favor them unfairly. Not a very flattering view of the FDIC! Furthermore, such a requirement of lifetime employment would be legally unenforceable.

If authors are free to promote their books with silly sound bites for fun and profit, examiners should likewise be free to use their own more modest skills to best advantage. Let's put reasonable restrictions on a former government employee's going to work for an institution supervised by the same regulatory office where he was recently employed. That's enough.

The worse abuse runs the opposite way. Elite individuals who made their fortunes at big institutions turn to "public service" offering splendid opportunities to benefit the institutions where they previously worked. Maybe Robert Rubin should be the poster boy for these. From Goldman Sachs to Secretary of the Treasury. (I'm not complaining about his subsequently becoming prime architect of Citigroup's ruin, where he insisted for years that the bank wasn't taking enough risk. Having bailed out Mexico, maybe Rubin saw that Citi, too, would have to be bailed out.)

How about Henry Paulson (31 years at Goldman)? William Dudley (20 years)? Gary Gensler (18 years)—who came with exceptionally heavy baggage and has been ineffective. How about Jamie Dimon, rebounding after a brief burp from London to promote himself as a business statesman uniquely suited for a top Washington job? It would be unduly cynical to argue he's done such a poor job for shareholders that he'd do less harm in Washington. Let those shareholders keep him.

Such people can sell their stock or put their assets into blind trusts. What they can't shrug off are their values, attitudes, and their ingrained belief that their former employers are the indispensable bulwarks of the U.S. economy, to be coddled, relied upon, and when possible, saved. The underlying idea: We have the cleanest, deepest capital markets in the world. Don't mess with them.

So, where can we draw the line?  Here's a simple rule.  After you've worked for a TBTF (SIFI, GSIB's or whatever) in any capacity including director, you can't serve (or disserve) the U.S. in any capacity, for a number of years equal to triple the years you spent working for the TBTF. Triple, like antitrust damages. After all, this is an oligopoly. 

Such a rule would have the additional benefit of at least modestly reducing the wrong incentives that render the TBTF's so noxious. If you work for one, expect to be labeled, stigmatized, contaminated, and to give up some rights. It's not a badge of greatness, only of great wealth. This might even dissuade some people from choosing or staying with TBTF career paths, reducing these firms' unfair advantage in recruiting top talent.

Will this rule deprive us of the indispensable services of individuals whose selfless sacrifices can enable government to crash through market and legal obstacles like a greased pig? No. In the past most key federal financial officials, whether FDIC chairpersons, Comptrollers of the Currency, or Secretaries of the Treasury, were not veterans of the TBTF's. Geithner wasn't. And who's to say he's been a worse Treasury Secretary than Paulson or Rubin?

There are actually people—seldom heard from, but I'm among them—who think Ed DeMarco is an exceptionally able public executive, who deserves our gratitude. He didn't have to be a veteran of Citi or Morgan Stanley to do the good things he's done as cleaner-up of the Fannie Mae and Freddie Mac train wrecks. Obama may fire him now that the election is over, but the President shouldn't be able to replace him with someone who marshaled mega campaign contributions at a TBTF.

The overgrowth, the immensely excessive share of the economy and the unprecedented, dangerous concentration within the financial sector have been remarked upon. What is seldom mentioned is that along with this unmanageable size comes not just regulatory capture, but inordinate influence on government. It inevitably follows that when the going gets rough, the reflexes of a Paulson or a Dudley are always going to be to look to the TBTF's for a "solution," and to pay handsomely for it. That's the easy way. And after all, the TBTF's have such great people.

Call logs as well as transactions document these habits.  It's our recent history.  Let's not repeat it.

Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.

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Comments (2)
Mr. Kahr's main thesis that anyone who has worked in a regulated industry is inevitably and irrevocably corrupted by the worst imagined ethic of the industry is absurd. When President Roosevelt set out to impose order and control on the securities markets during the Great Depression he picked one of the greatest stock and market manipulators anywhere, Joseph Kennedy, to organize and run the SEC. Roosevelt picked Kennedy for his knowledge of how the markets worked and what was needed to fix them, not because Kennedy exercised some corrupt and improper influence over Roosevelt. Roosevelt's biggest challenge was ensuring that Kennedy worked for the public good, not his own profit, and it worked out well. Kennedy had the expertise to design a sound system and tried hard to do just that. And I think Paulson was a very good Secretary Treasury. He pulled us back from the abyss when I suspect a political hack or President Bush by himself would have failed. The brightest thing George W Bush ever did was giving Paulson a free hand to manage that crisis. Expertise is no less important for a regulator than a CEO. To work best the regulatory system needs to mesh as well as possible with the markets and companies it regulates while enforcing principles necessary to protect the public interest. The revolving door spreads the expertise in both directions. If the door is locked misunderstandings and mismatched goals and processes will likely increase. Neither side is on the same page and will tend to become adversaries. President Obama already locked the door in the way Mr. Kahr proposes and it has been a serious mistake. His administration's record of managing the economy is poor in part because the legislators and regulators do not understand the impact the current programs are having on the companies in they regulate. For example, they don't understand (or possibly care) how the layers of complexity imposed in the past few years will affect many small banks and impose unwise and counterproductive constraints on all banks, or how the war they launched on credit has constrained housing finance and prolonged the housing crisis.
Posted by amuranaka | Tuesday, November 13 2012 at 4:19PM ET
You're right. I've always found that bootleggers make excellent administrators. Send a headhunter team to the Kentucky hills pronto!
Posted by My 2 Cents | Wednesday, November 14 2012 at 3:46PM ET
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