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.