Bank Super Lawyer, Rodgin Cohen of Sullivan & Cromwell, Says Regulatory Capture is a Myth

Yesterday, the Wall Street Journal ran a credulity-straining account of how Rodgin Cohen, the dominant bank regulatory lawyer in the US, was trying with a straight face to convey a line that legitimates his role: move along, there is no such thing as regulatory capture.

Funny, that, since none other than former central banker Willem Buiter called it out in 2008 at the Fed’s Jackson Hole conference. And a key bit of evidence, not cited by Buiter, came at the 2005 Jackson Hole conference. He delivered his paper, “Has Financial Development Made the World Riskier?” and ran into a firestorm of criticism when he answered his own question,”Yes.” Rajan’s paper described widespread bad incentives in the financial services industry, which led to excessive risk taking and periodic busts, and fingered credit default swaps as a possible driver of a systemic crisis.

The current Fed appears to have learned a bit and clearly disagrees with Cohen’s sunny view that cozy, collegial relationships between regulators and their charges are desirable and normal. I gather Cohen was somehow missing in action when the fruit of all that chumminess and credulous acceptance of what Wall Street was selling was the crisis just past. The Fed has belatedly taken some initial steps to create some sunlight between it and major financial firms, by removing key elements of regulatory oversight from the New York Fed, which has always been close to Wall Street. The central bank also the practice of embedding supervisory staff at bank offices, recognizing that the information gain by being onsite is more than offset by coming to see the world through the institution’s eyes and not wanting to have friction in dealing with the people they work with every day at those banks.

Financial regulatory experts pounced on the Cohen Big Lie messaging. From Georgetown law professor Adam Levitin:

For Rodgin Cohen to downplay regulatory capture is a like the scene in the Wizard of Oz when the Wizard says, “Pay no attention to that man behind the curtain.” It’s hard to think of an individual more at the center of the regulatory capture phenomenon than Rodgin Cohen.  Cohen plays a particular and unique role in the regulatory capture problem. Cohen is not just “one of Wall Street’s top laywers”. He is the top bank lawyer. He’s a node through which all sorts of connections happen. Cohen is the eminece grise of financial services law and is an institution unto himself. Think of him as a sort of super-consiglieri or Mr. Wolf. There’s no one who quite plays the role of Cohen in the world of financial regulation, and he’s rightly greatly respected.

I don’t think of Cohen as an anti-regulatory ideologue (heck, regulation is how he earns a living), but he is deeply implicated in the regulatory capture problem because his strong suit is mediating between financial institutions and regulators. His job is to convinece regulators that they are on the same team as the banks and to get issues resolved quietly and out of the spotlight. Cohen, for example, was a drafter of the little noticed 1991 amendment to section 13(3) of the Federal Reserve Act that enabled the Fed to bailout non-banks like AIG and Goldman Sachs. Cohen’s skill in persuading regulators to advance the financial services’ industry’s agenda is part of why Cohen is so respected and valued. But it also means that for him to admit that there’s a capture problem of any sort would be to admit that financial institutions and regulators do not have aligned interests and to recognize that he’s an advocate for financial institution clients, whose interests are not those of the public. And that would undercut the very sort of cozy relationship between banks and regulators that he aims to foster. Cohen’s success is based in part on capture, so he’s the last person who’d want it to go away.

I would note that Cohen’s comments about capture seem focused on individual bank examiners. That’s misdirection. The examiners are really not where the capture problem lies. It hasn’t been the front line-level examination staff (does Cohen himself really still deal with individual examiners?), but the upper level of the financial regulatory bureaucracy, both political appointees and civil service, where the capture problem has been the most severe.

Levitin points out, with his remarks about bank examiners, that the Fed’s measures to combat the issue by focusing on the troops falls well short of what is necessary. But for the Fed to acknowledge the issue is still real progress.

Bill Black also weighed in. Key sections of his post:

Sometimes the fates conspire to bring together two stories that when considered together bring that lightbulb moment.  The first story, dated March 18, 2015, is from the Wall Street Journal.  It overwhelmingly conveys the opinion of Rodgin Cohen, the super-lawyer to the super-fraudulent bank CEOs.  He was a leader of the financial regulation wrecking crew that produced the criminogenic environments that drove our recurrent, intensifying financial crises.  As I will explain in a future column, Cohen basically has one speech, which he has repeated with minor variants for decades.  The latest Cohen variant claims that:

“[T]he regulatory environment today is the most tension-filled, confrontational and skeptical of any time in my professional career.

Cohen says the strained relations between government regulators and bank officials stems from ‘the myth of regulatory capture.’

‘The consequences of such as approach are likely to be less effective examinations, not more,’ he said. ‘Unless we deal with the canard of regulatory capture, we will inevitably be placing pressure on examiners to disprove this charge.’”

The second story is from “Yves Smith,” who created and runs the blog NakedCapitalism.  It is actually two stories at this point.  Her first article on March 17, 2015 explained how Andrew Bowden, a senior SEC official, had displayed a classic case of regulatory capture at a March 5, 2015 conference at Stanford.  Stanford Law School posted the video of the conference showing Bowden as a literal cheerleader for the Private Equity business he is supposed to regulate.  I wrote to point out as a former financial regulator why I would have immediately asked for the resignation of any of my staff that even remotely came close to Bowden’s disgraceful and dishonest behavior.

Cohen’s claim that regulatory capture was a “myth” and a “canard” was demolished the day before the column quoting his views ran in the WSJ.  But Stanford has now further refuted Cohen’s views by trying to make the evidence of obvious regulatory capture disappear.  Stanford has removed the public’s ability to view the video of Bowden in his figurative pom-poms and short skirt.

The video is also embarrassing to the Stanford professor who ran the conference and failed to disclose his conflict of interest and to the other SEC officials in attendance who failed to stop or even criticize Bowden’s obsequious cheerleader routine…

“Yves Smith,” fortunately, attracts readers who are “skeptical” of the financial industry, including Stanford professors who are on the board of directors of major financial firms yet feel no need to disclose that fact at such conferences.  “Yves Smith’s” updated column explain why this skepticism led a reader to copy the video when Stanford Law School initially made it public.  Stanford’s efforts to “disappear” the incriminating video failed because of this skepticism.

Stanford supports Cohen’s effort to rewrite history by writing regulatory capture out of history.  But Stanford’s video exposed that it is Cohen who is the myth-maker.  Remember Cohen’s use of the word “canard.”  The origins of that word in old French were the word for “duck” and “quack.”  Bowden walks like a cheerleader, looks like a cheerleader, and quacks like a cheerleader – he is a cheerleader.

To clarify the Black post: while Richard Smith, who made sure to copy the Stanford video, is technically a reader, he’s been a mainstay of the site since 2009, playing an integral role in researching and editing ECONNED, in delving deep into key topics, like Basel III, and more recently, hunting down internatinoal scammers and money launderers. But the general point, which Black underscored by e-mail, stands:

“Skeptical” is exactly the word I used in training our staff. Our job is to remain professionally skeptical — so that others can trust. [Cohen] wants the regulators and bankers to resume being BFFs. That worked well.

One could be even more cynical. Cohen is played a critical role in facilitating the crisis, yet emerged unscathed and arguably better off. He was such a central actor during the crisis that the government, in the AIG bailout trial, has tried blaming the way the government flagrantly ignored the limits on what it could do in Section 13 (3) loans on the need to make sure that Cohen, who advised AIG, wouldn’t upset the apple cart later. And as one can infer from the Wall Street Journal story, he continues to be a mainstay in working to forestall stricter rules and oversight, which would reduce bank profit (in an overfinancialized economy, the only way to reduce risk long term is to shrink the size of the sector and regulate it like a utility). But until the efforts to patch up a failed status quo ante break down catastrophically, the position of Cohen and his ilk remain secure.

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  1. sd

    My guess is that Mr. Cohen has had a cancer scare and now wishes to airbrush away his legacy as the man who helped destroy capitalism in the United States.

  2. hidflect

    How did I know it was the WSJ before I even looked at the link? What a festering rag it is. Bloomberg beats it to death with reporting.

    1. Strangely Enough

      Even when WSJ had great reporting staff (pre-Murdoch), the editorial staff was certiable. That never seems to change…

  3. Generalfeldmarschall von Hindenburg

    Sullivan and Cromwell? Isn’t that the bastion of Mordor that Allen Dulles rode forth from?

    1. RUKidding

      Hat tip for various reasons!

      Yes, THAT Sullivan & Cromwell, ye olde white shoe NYC law firm. When I was a youngster just entering the legal prof (not as an attorney), we were taught to specifically venerate Sullivan & Cromwell. As time has passed, the scales rapidly dropped from my eyes.

      White shoe law firm just means Crooks who were born into the upper caste of really rich Crooks who can pretend that they’re better than the Tony Soprano-type of crooks. They can pay to outsource the really dirty & wet work (which Tony Soprano often had to do himself) so that they don’t have to get their high falutin hands dirty. ptoui.

  4. alex morfesis

    super capture system / legal aid society gives him (and her) an award (it takes a village or at least a household)

    when I was working on making lenders comply with the Community Reinvestment Act in Chicago, I would regularly ask where your funding sources are coming from and who sits on your board…many were upset that I would not work with them….it was shocking to see so many well intended individuals wrap themselves around their rapist…and those who did understand had invested so much and had allowed themselves to fall into the 13 weeks and dry syndrome…and refused to create a non funding cycle source of capital…and ended up becoming just one of the 4:59 club…much like law enforcement officers who end up spending too much time at a bar to forget how the job they are doing is not what they imagined…

    for those who do not know, most funding is controlled by foundations and government enterprises who make sure you are always one week away from being shut down…sorta like a troika for the non profit world…

    u vill obay…(or is that willow bay…or whatever her name was on cnn…)…

  5. Yata

    “We’re the regulator of the industry. We aren’t the trade association and we’re not its promoter. That’s how they got into trouble the last time. They had a regulator who was a promoter.”

    ~ Director T. Timothy Ryan, OTS ~

    1. JTMcPhee

      Let’s put this in context: Ryan was for a time (between gigs as lawyer and executive amongst the thieves) the director of the Office of Thrift Supervision, who apparently did some public good (with a lot of caveats) in “fixing” the savings and loan debacle/creative destruction of the 80s/90s, of which it was humorously written,

      Years later, the extraordinary cost of the 1980s S&L crisis still astounds many taxpayers, depositors, and policymakers. The cost of bailing out the Federal Savings and Loan Insurance Corporation (FSLIC), which insured the deposits in failed S&Ls, may eventually exceed $160 billion. At the end of 2004, the direct cost of the S&L crisis to taxpayers was $124 billion, according to financial statements published by the Federal Deposit Insurance Corporation (FDIC), the successor to the FSLIC. Additionally, healthy S&Ls as well as commercial banks have been taxed approximately another $30 billion to pay for S&L cleanup costs. Finally, the federal courts are still resolving the so-called goodwill cases stemming from regulatorily inspired mergers of failing S&Ls into healthy S&Ls in the early 1980s (discussed below). Resolving these cases will probably cost taxpayers another $5–$10 billion.

      What’s that come to, $600 billion from “the taxpayers?” Effing chump change compared to the most recent and continuing “bail-overs” and “bail-intos.” The scum that pulled the S&L scam did not “get into trouble.” They, like the recent and current crop of banksters, “got away with murder.” Very much a very intentional crime, with mens rea all around.

      It is written of Mr. Ryan, recently, as follows:

      BOSTON, Dec.1, 2014 /PRNewswire/ — Santander Holdings USA, Inc., announced today the appointment of T. Timothy Ryan, Jr. as non-executive Chairman of the Board of Directors of Santander Holdings USA, Inc. (SHUSA) and of Santander Bank, N.A.

      Mr. Ryan, formerly Vice Chairman for Regulatory Affairs of JPMorgan Chase & Co. Inc., succeeds Jerry Grundhofer, who served as Chairman of both boards for the past three years.

      Santander Group Executive Chairman Ana Botin said, “Tim’s many years of experience as a regulator, lawyer and banker at JPMorgan Chase make him the right choice to lead the Santander Holdings USA and Santander Bank boards.

      “We are confident that his deep understanding of the local banking market, regulatory environment and financial services industry will be invaluable as we build our U.S. business. Tim’s charge is to lead our U.S. business oversight as we strengthen SHUSA’s governance, structure, and control functions and to guide Santander Bank’s retail and commercial banking business.”

      Set a former regulator to catch (capture) a regulator?

      1. Yata

        It’s simply a stand-alone cut and paste quote attributed to Mr. Ryan not an excoriation of his efforts or accomplishments while at the OTS.
        The statement appeared profound it that it not only contrasts certain statements made in the blog piece, but when you consider the history of the sympiotic relationship between financial regulators and their clients.

      2. William K. Black

        Since I worked for Ryan I can provide some insights. First, the total cost to Treasury (PV $1993) came in under $150B. Second, Ryan wasn’t appointed until after the vast majority of the major frauds had been closed, so he’s not responsible for the losses. Third, you’re relying on a column by Bert Ely, an ideologue. Given your (accurate) take that the S&L losses were primarily due to “control fraud,” it is odd that you are relying on the greatest fraud denier and apologist of the S&L debacle. Fourth, Ryan was given the mission by Bush of going after the worst frauds and (figuratively) putting their heads on pikes. Ryan hired Harris Weinstein (Covington — yes, the same firm as Holder and Breuer), the most effective litigator he knew. Under Weinstein, who pushed aside the former (non) enforcement head (I referred to the office as “the land of the invertebrates), we were allowed, indeed encouraged, to take vigorous enforcement actions against the most elite defendants. We more than tripled enforcement actions under Ryan and those actions were far more likely to be serious actions against elite defendants. We also made many thousands of criminal referrals and obtained roughly half of the over 1,000 felony convictions in cases designated as “major” by the DOJ under Ryan. So, the S&L crooks were vastly less likely to “get away with murder” than their modern imitators. Fifth, Ryan effectively ended his federal career by (a) bringing an enforcement action against N. Bush and (b) making an ethics referral when the the White House (via the FDIC’s general counsel) tried to get us to assign the enforcement action to the FDIC (where it would have been dropped). Mrs. Bush has a long memory and she was not amused by Ryan successfully obtaining an enforcement action against her son while her husband was President of the United States.

        You are certainly correct that with his ability to be employed in the federal government gone Ryan cashed in by taking several powerful and lucrative positions in the finance industry where he zealously represented the interests of financial CEOs (which are often contrary to the interests of the firms and their stakeholders).

        Oh, and Tim Ryan is Meg’s first cousin.

        Bill Black

        1. Yata

          Thank you for your time and effort here, Professor Black. Not sure if you’ve had the time to pick up a copy of Sheila Bair’s Bull By The Horns, but she lays out a fantastic first hand account of the unfolding ’08 crisis, as it related to her position as the head of the FDIC, and the interaction with other regulatory agencies, and their clients.

        2. Demeter

          Yes! Thank you, sir, for your tireless and continuing efforts to bring some sanity to these insane times. I’d hate to think where the US would be without your intervention in the march to fascism.

  6. MaroonBulldog

    If Rodgin Cohen had something intelligent and credible to say about regulatory capture, he would have said it, instead of what he did say. But his problem is that no intelligent or credible statement on the subject could possibly support the case he thinks he has to make. So instead he makes statements to confuse and confound the issue. They only serve to make him sound silly.

  7. MaroonBulldog

    The theory of “regulatory capture” can’t be a “myth” when there is so much evidence to support it. A myth is a widely believed theory for which there is no supporting evidence, other than the fact of belief itself. Sorry, Rodgin, but this is just name-calling.

  8. sgt_doom

    The bankers own the world.” — Josiah Stamp, former governor of the Bank of England

    Those comments by the shyster aren’t even worthy of response, so allow me to repeat some more honest and relevant comments:

    “Banking was conceived in iniquity and born in sin. The bankers own the world. Take it away from them, but leave them the power to create money and control over that money, and they will create that money right back again. Take this power away from bankers and all great fortunes will disappear, and they ought to disappear, for this then would be a happier, better world to live in … But if you want to continue to be slaves to the banker and pay the cost of your own enslavement, then let the bankers continue to create money and control credit.” — same dood, Josiah Stamp

  9. Phil

    Eric Holder, who worked for too-big-to-fail banks prior to joining the Obama Administration, failed to put even ONE senior too-big-to-fail banking official in jail. Too big to fail, indeed! regulatory capture?

    Here’s an amusing (but sadly true, in terms of its object lesson) piece from a lampooning website called “The Daily Currant”. Sadly, most people looking at this piece would probably think the reporting is true, and not at all out-of-the-ordinary, given the current greasing-of-palms that goes on all the time between regulators and the supposed-to-be-regulated

  10. MaroonBulldog

    As a lawyer, Rodgin Cohen is paid to stand up and speak in the public forum, on behalf of clients who can’t or shouldn’t speak up for themselves, and defend their interests. If the bankers themselves got up to say that regulatory capture is a myth, of course they would be laughed to scorn. That’s why Rodgin Cohen has to be the one to say it.

  11. RBHoughton

    I am constantly amazed at the mental dexterity and inventiveness of the army of professionals that fight the good fight for great capitalists. In a more straight-forward world Rodgin would get a reward – a get out of gaol free card perhaps.

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