SEC’s Andrew Bowden Regulatory Capture Scandal Hits the Major Leagues with Los Angeles Times Column

By Lambert Strether of Corrente.

In yet another confirmation that blogging is not dead just because Andrew Sullivan got tired of doing it, Los Angeles Times columnist Michael Hiltzik picks up the Andrew Bowden story that Yves broke. Quoting Hiltziks’ regular Business section column, “The Economy Hub”:

In a March 3 speech in New York, [Fed chair Janet Yellen] mentioned the risks of regulatory capture as including “tangible conflicts of interest — for example, the expectation government officials might have of future rewards from the industry they oversee,” as well as conflicts that arise “when close contact and familiarity between individuals leads those enforcing the rules to sympathize with those they oversee.”

As for “close contact and familiarity” between individuals and their regulated businesses, one need look no further than a March 5 appearance at a Stanford conference by Andrew Bowden, the SEC’s director of examinations. Financial blogger Yves Smith of Naked Capitalism, a former investment banker and management consultant, writes that Bowden “reveals himself to be captured to an embarrassing degree. His remarks about the industry aren’t merely fawning…. Bowden comes uncomfortably close to the line of offering to play the revolving door game at an unheard-of level of crassness, putting his son, and by implication himself, into the job market at an industry conference.”

Those are harsh words, but justified. Bowden called the asset management business — which falls within the SEC’s jurisdiction — “the greatest business you could possibly be in. You’re helping your clients.” He continued on the subject of the private equity business, “where we have seen some misconduct and things like that, ’cause I always think like, to my simple mind, that the people in private equity, they’re the greatest, they’re actually adding value to their clients, they’re getting paid really really well, you know, if I was in that position, the one thing I would think to myself as I skipped to work was like just ‘Let’s not mess it up. You know, this is the greatest thing there, I’m helping people, I’m doing OK myself.'”

[“Paragraph!” –lambert] Then he said: “I tell my son, I have a teenaged son, I tell him, ‘Cole, you want to be in private equity. That’s where to go, that’s a great business, that’s a really good business. That’ll be good for you.”

[“Paragraph!”]At that point a questioner interrupted to say: “I’d love to hire your son, by the way. That’s a deal.”

See Smith’s post here for a video of the remarks. At the minimum, they’re “cringe-making coming from a regulator,” Smith says.

Former regulator William K. Black, who brought many wrongdoers in the savings-and-loan scandal to account, wrote that he “would have asked for the resignation of any of my staff who made remarks even remotely like Bowden’s remarks. As financial regulators, particularly if we have the disadvantage of coming from the industry, we maintain at all times a professional distance from those we regulate. The remarks about his son are so beyond the pale that they demonstrate he is incapable of even pretending to maintain such a professional distance.”


Reports of the Death of Blogging Greatly Exaggerated

Several reactions to Hiltzik’s piece.

First, it’s great to see Naked Capitalism‘s reporting not merely mentioned but linked to and extensively quoted from by a mainstream columnist in a top-rank newspaper outside the New York area. (Yves’s post was reprinted by Truthout and Bill Moyers, and amplified by International Business Times, but the Los Angeles Times is of a different scale in both circulation and clout.) So, on those grounds alone, happy dance, victory lap, Garçon! More champagne!

It’s also great to see Hiltzik give Bill Black’s follow-up at New Economic Perspectives a link and a quote as well; both NC and NEP in essence put the “political” back into “political economy,” but by taking a systemic, rather than a partisan, perspective, and yet still (as with the Andrew Bowden) using story hooks. It may be too much to call these blogs — as well as many of the blogs on NC’s and NEP’s blogrolls — a school of thought, but certainly their general approach is different from “pure” economics blogs, but with no loss in rigor. So one can only hope that Hiltzik continues to keep this — dare I say — ecosystem of blogs on his reading list.

Third, Hiltzik frames the Bowden affair in terms of Janet Yellen’s remarks on regulatory capture, as we saw above. Yellen’s picture is in the header of the article, after all, and:

Yellen said the Fed is constantly on its guard against regulatory capture. She also attributed the financial crisis to breakdowns in regulation, some of which plainly fell into the category of “capture,” including “the expansion of a largely unregulated ‘shadow banking system’ rivaling the traditional banking sector in size and the failure of “checks and balances that were widely expected to prevent excessive risk-taking by large financial firms — regulatory oversight and market discipline.”

So it will be interesting to find out if the SEC’s Mary Jo White agrees, or disagrees, with Janet Yellen on regulatory capture in the financial industry. One obvious way for White to signal her agreement would be for her to ask for Bowden’s resignation, as Black suggests.

Fourth and finally, there’s an aspect to the Bowden scandal that Hiltzik does not address, and that I would like to reinforce. Yves wrote:

Moreover, Bowden’s belief in the industry’s “adding value” and “helping people” is based on having taken a very big swill of industry Kool-Aid. He twice parrots the position that private equity firms are a boon to their clients and the economy overall. He might want to make more study of the industry, or even reread his speech from last May, before acting as a PR agent.

The most extensive, careful study of the private equity industry, Eileen Appelbaum’s and Rosemary Batt’s Private Equity at Work, based on a bending-over-backwards-to-be-fair reading of academic research and numerous case studies, finds pervasive problems with the private equity model, the biggest being that it extracts from creditors, taxpayers, pension funds and employees. Their book also, contrary to Bowden, cites considerable academic evidence that private equity does not deliver returns adequate to cover for its risks. That’s before you get to the fact that it uses a valuation method, IRR, which is widely criticized as unduly flattering.

Appelbaum’s and Batt’s reservations were confirmed by the CalPERS’s panelist Sarah Corr earlier in the Q&A, who pointed out that CalPERS has cut its allocation to private equity. That is apparently the result of private equity failing to meet CalPERS’ benchmarks over the last one, three, five, and ten year periods. If CalPERS, which can negotiate the best terms and has better deal access to funds than anyone, can’t get great results out of private equity, how can other investors expect to do better?

The form of capture we’re looking at here goes far beyond — and dangerously beyond — the Third World-ish story hook of a guy trying to get his son on the payroll (“That’s a deal”). What Yves colorfully calls “Kool-Aid,” Willem Buiter, in the classic paper (PDF) he delivered to the [lemon sucking-faced] Fed conference at Jackson Hole in 2008, called “cognitive regulatory capture”

This socialisation into a partial and often highly distorted perception of reality is unhealthy and dangerous. It can be called cognitive regulatory capture (or cognitive state capture), because it is not achieved by special interests buying, blackmailing or bribing their way towards control of the legislature, the executive, the legislature or some important regulator or agency, like the Fed, but instead through those in charge of the relevant state entity internalising, as if by osmosis, the objectives, interests and perception of reality of the vested interest they are meant to regulate and supervise in the public interest.

(“Public interest.” How quaint.) If Bowden had not allowed his internalized boyish enthusiasm for private equity to carry him away to say “I tell my son…”, and he had stopped with his highly distorted perception that “they’re the greatest, they’re actually adding value to their clients,” would he not be just as or even more dangerous to the public interest in effective, forceful regulation? I think so; Bowden’s cognitive capture would be as complete and “cringe-making” in either case. Perhaps Hiltzik will follow up on this additional perspective.

Things You Can Do

Readers, here are a few things you can do, right now, to keep this story in the public eye.

First, you can write Representative Maxine Waters in her capacity as Ranking Member of the Committee on Financial Services, especially if you live in her district (and be sure to say so if you do). As the Representative of the 35th congressional district in Los Angeles, Waters probably reads the Times, so it’s likely she or a staffer has seen Hiltzik’s story.

You might ask Waters to find out, from the SEC, whether Bowden’s seeming request for a job for his son is at odds with the SEC’s Standards of Conduct, including but not limited to “Subpart E – Impartiality in Performing Official Duties,” and “Subpart G – Misuse of Position.” From Subpart G:

A prohibition against employees using public office for their own private gain for the private gain of friends, relatives, or persons with whom they are affiliated in a non-Government capacity, or for the endorsement or any product, service, or enterprise

The job-for-his-son matter aside, Bowden’s remarks certainly look like an “endorsement” to me (“[Y]ou want to be in private equity. That’s where to go, that’s a great business”).

You might also ask Waters to look into whether Bowden’s claim that private equity delivers returns adequate to cover for its risks is true; experts say no. If he’s wrong, what does that say about the SEC’s capacity to regulate the industry?

Here is how to get in touch with Representative Waters. Physical mail is better than calling.

Congresswoman Maxine Waters
2221 Rayburn House Office Building
Washington, DC 20515
Phone: (202) 225-2201
Fax: (202) 225-7854

Calling is better than email, and Waters does not expose an email address, but here is her contact form.

Second, you can write to the Dean of Stanford Law School, expressing your concern over events related to the conference that Stanford hosted on March 5, “Emerging Regulatory Issues in Private Equity, Venture Capital, & Capital Formation in Silicon Valley,” which you read about in the Los Angeles Times.

You might mention that the video recording of the “Regulatory Issues” conference shows that the moderator, Joseph Grundfest, did not disclose his industry ties, and ask — and I’m genuinely asking here — whether his failure to disclose conforms to Stanford’s “Staff Policy on Conflict of Commitment and Interest.” (See especially 2(f) on “business relationships”; Grundfest is on private equity giant KKR’s board, and KKR has “a business relationship with the University,” having invested in Highwire Press, an “auxiliary unit of Stanford University libraries.”)

You might also mention that the YouTube documenting the conference, and Bowden’s gaffe, has been taken down — although, fortunately, it has been preserved by an alert viewer — and ask when it’s going to go back up, what condition it will be in when it does, and whether it will continue to be in the public domain.

M. Elizabeth Magill is the Dean of Stanford Law School. Here is how to get in touch with Dean Magill:

Dean’s Office
Stanford Law School
Neukom Building, Room 305
559 Nathan Abbott Way
Stanford, CA
tel: 650 723.4455
fax: 650 723.4669

As before, physical letters have more impact than phone calls, and phone calls more than email.

Third, for those of you who are on the twitter, you can tweet Representative Maxine Waters @MaxineWaters (13). Twitter is useful not only because it’s fun and hip, but because journalists use it and track stories with it.

You’ll have to write your own miserably inadequate 140 characters — “Should an SEC regulator ask private equity to give his son a job?” (66) — but for your convenience here are shortened URLs of both Hiltzik’s piece and Yves’s original story:

  • Hiltzik: (21)
  • Yves: (21)

If you have space, you might add @hiltzikm (9) to your tweet, just so he knows his article rattled some cages. Hmm, 13 + 21 + 21 + 66 + 9 + 4 for spaces = 134 of 140. Heck, here’s a template:

@MaxineWaters @hiltzikm [Make up your own pithy Andrew Bowden-related question so we don’t look like we’re trolling!]

Fourth, you might write a Letter to the Editor, especially if you live in the Los Angeles area. Letters to the Editor may seem old-fashioned, but Congressional staffers do pay attention to them, because they’re vetted by the newspaper’s editors and read by influencers. Consider mentioning the nepotism and cognitive regulatory capture aspects of Bowden’s talk, as above, but if you have a private pension or any investments, you might mention a concern that lax financial regulators could vaporize your retirement money again, as in the great financial crash of 2008.

Finally, readers, if you follow up this story through any of the above channels, do feel free to say so in comments, and post any responses you get. Thank you!


Pop the cork on the champers, thank Yves, and then think what you can do to keep this story spreading!

NOTE I’m not recommending contacting the SEC because Yves would be the one to make that call. My object is to spread the story. Let the SEC hear about the story indirectly from several angles, say I. Nor do I have any knowledge of the SEC or its workings, so I can’t begin to make a recommendation about who to contact or what to say.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. down2long

    Thanks Lambert for the much deserved cheer-leading. For what it’s worth, here’s my tweet from @DavidVanChaney: SEC Regulator to Private Equity Pals at Stanford Conferene:Hire my son @MaxineWaters @hiltzikm

    Wow. I just realized there’s a typo. I’ll get that fixed >;^}>~

  2. Vatch

    “physical letters have more impact than phone calls, and phone calls more than email.”

    This is true. Be aware, though, that if a physical letter is sent to a Congressional office, it can be delayed for up to two weeks before it is delivered. During that period of time, the letter and its envelope will undergo a security scan for anthrax powder and other nastiness. So if a vote is imminent, a physical letter won’t suffice, and a phone call or contact via the web comment form is required.

    The good news is that I don’t think there is an imminent deadline in this case, so a physical letter will be quite valuable. In addition to Rep. Waters, one may contact one’s own Representative. The general physical addresses are:

    The Honorable Representative XXXXXX
    U.S. House of Representatives
    Washington, DC 20515


    The Honorable Senator YYYYYY
    U.S. Senate
    Washington, DC 20510

    Note the difference between the Senate and House zip codes.

    1. TheCatSaid

      Do we really have to call them “Honorable”, if we don’t think they are?

      Thanks, Vatch & Lambert, for the detailed contact info & suggestions.

  3. tawal

    I’m more concerned that our government allows people who by their own admission are simple minded and gush inanities like teenagers in positions of authority.

    1. Yves Smith

      Yes, in fact (and I may post on this) someone who says he know Bowden said that Bowden didn’t make his remarks to curry revolving-door type favor, that he genuinely believes that he and the SEC can rehabilitate private equity. The naivete of that notion is simply stunning. And even if that is your aim, gushing about how wonderful the industry is does not seem to be the way to go about doing that.

      1. Ishmael

        As we talk about returns on private equity just what would those returns have been if the Federal Reserve not performed QE 1, 2 and 3 as well as Twist. I have thought for a long time that the biggest recipients of QE were the private equity firms, many of which had purchased at the top. If QE had not taken place most of those private equity firms would be pushing up daisies.

        With regard to the rehabilitation of an industry. Ah, does the SEC walk around thinking their responsibility is to walk around and rehabilitate various parties that break the law. Having long experience with the SEC, they use to believe you operate outside the law we are going to put you out of business; however, for the last 18 years or so the goal has been to cuddle the biggest violators and put minor players like Martha Stewart (not that I am a fan) into prison.

    2. sgt_doom

      Upon reading Bowden’s remarks, my first thought and hope is that he isn’t paid even a fraction of the minimum wage?

      Holy Mother of Godzilla! Nobody can be that insanely stupid? Or evilly dense? So Peter G. Peterson and Dan Quayle (privateers past and present) are saints of the highest realm?

  4. Blurtman

    You can be an industry stooge and get a nice write-up like this:

    During his tenure at the SEC, Chairman Cox made vigorous enforcement of the securities laws the agency’s top priority, bringing ground breaking cases against a variety of market abuses…..

    1. craazyboy

      Dispose of you chewing gum in the proper receptacle – not on the stock market floor.
      Put the seat down!
      The high speed cable zone is for Loading and Unloading Only.

  5. Carla

    I tweeted this: @MaxineWaters @hiltzikm Should an SEC regulator endorse private equity & ask for favors?

    and got this in return:
    Favorited by
    Vardis Vardis @Vardis_Partners
    Executive Search firm providing Private Equity firms support on Chairman, CEO, C-Suite appointments & pre-deal services in US, Europe & Asia
    See what else @Vardis_Partners is favoriting.

  6. lightningclap

    One doesn’t often see even Black’s NAME mentioned in the MSM either! I have to say, though, NC and related “ecosystem” belong in a different category than the general term “blogs”. Much of what I read comes from actual insiders, former employees of Wall St. or the USG who are in their own way whistleblowers, shining a bright light on the dark corners. Excellent work, 24/7!!

    1. participant-observer-observed

      Yes, NC is more of a think-tank than a blog on most days!

      Congrats to Yves & co!

  7. winstonsmith

    For what it’s worth, I posted both Yves’ initial article and the International Business Times story on the /r/politics and /r/news sections of reddit last week, but all four of the posts were removed by the moderators without explanation. Unfortunately, it’s not unusual for that to happen even if you abide by their many restrictions. The politics moderators may claim an article about a regulator is not politics, and the news moderators may reject it for being analysis/opinion. It’s somewhat random.

    1. hunkerdown

      Random, or partisan? Reddit is known to be well-curated by TPTB.

      But woohoo Yves, Lambert, Bill, Richard and whoever else I forgot. Drink deep, never thirst.

      1. winstonsmith

        It seems random to me in the sense that sometimes anti-corruption submissions get deleted and sometimes they don’t (I think someone else on a different day might have had a different experience), but it does seem to be getting more difficult to make a successful submission in that vein.

  8. Marko

    Yves Smith the corruption fracker : Injecting high-pressure sunlight into the deep and plentiful ( though invisible to most ) reserves of regulatory capture.

    Keep it up , Yves & Co. A few more big strikes like this LA Times piece and , with luck , we might get some foundation-shifting earthquakes.

  9. nothing but the truth

    there’s nothing unethical in his remarks. they do seem off color but that’s all – the nature of the revolving door. he is sending some not too subtle signals to the to future employers. i guess that is part of the job description nowadays – prepare a feathered nest at the next gig. Most big politicians (Blair etc) now work for Goldman, at least “consult” for.

    he is talking about doing God’s Work. This is considered normal stuff these days.

    1. Yves Smith

      Please reread Lambert’s post. Bowden’s praise of private equity returns, and his comments regarding their supposedly superior results are clear cut violations of SEC ethics policies. And even though it is almost certain that Bowden thought he was presenting his words about wanting his son to work in PE as a light-hearted anecdote, it is nevertheless clear, that given his fawning level of admiration for the industry, that he really would like his son to work in PE. For a regulator to say that in front of firms he regulates is tantamount to seeking a bribe. You can’t unsay remarks like that.

      I’m sorry you are so ethically color blind. All the people I have been told about this incident or asked to look at it, and I asked only sophisticated, experienced people, rated it a 10 on a one to 10 scale of impropriety. The lone exception, predictably, was someone who had worked in PE>.

  10. Paul Tioxon

    The work to uncover the lousy, conflict of interest ridden Private Equity industry with its fee first, clients be damned attitude is paying off in many areas. Especially with the newly elected PA Gov Wolf, who has to face state pension fund issues. Following the example of Montgomery County Commissioners who opted for low fee Vanguard mutual funds and ousting high fee money managers with Private Equity placements of public pension money, the entire state’s pension funds may be up for review in order to save the annual $600 Million in fees paid to private money managers, with less than stellar results. In a decade, well over $6Billion could have been injected into the pensions in fees alone, not counting compounded returns on retained fees. That alone would go a long way on shoring up the pension funding. The private equity money managers are not to be trusted in and of themselves and the regulatory oversight is no longer any guarantee of safety from long standing fraud, conflicts of interests and misrepresentation of expectations of return on investments paid for with high fees. The entire industry should be ring fenced by regulatory bodies for the sake of protecting public pension funds on a local, state and national level.
    From the above linked article:
    “In his budget proposal, Wolf calls for “pension investment reforms to significantly reduce excessive management fees and overreliance on high risk investment strategies,” in favor of “less costly passive investment approaches where appropriate.”

    “Montgomery County is the star example,” Randy Albright, Wolf’s budget secretary, told me. In 2013, the county started firing higher-fee “active” managers and buying Vanguard stock, bond, and real estate index funds.

    How’s that going? The county commissioners chairman, Josh Shapiro, cheerfully told me on March 3 that Montgomery County’s $500 million pension system saw its investments return 7.7 percent for 2014, beating its 7.5 percent target.

    By contrast, on March 11, citing “a difficult second half of the year,” Tom Brier, chief investment officer for the $27 billion-asset SERS, reported its investments returned only 6.4 percent in 2014, below the system’s 7.5 percent target.”

  11. Lambert Strether

    Anybody up for more tweets? (I mean, after you write and send your letters?) I did make it absurdly easy…..

  12. Kokuanani

    Bravo for this work, Yves.

    As a former Congressional staffer, I’d like to note that incoming letters are usually sorted by subject [and whether the writer is a resident of the member’s district], but they DO keep count. Your most effective correspondence wiil be to your own House member and Senators; ask your friends & relatives who are similarly inclined to write.

    However, when there’s an issue as “big” as this, I’m sure there will be an effect of your correspondence to Waters. Check out who else is on the committee; write to them too.

    Finally, anyone who’s a Stanford grad, and especially a Stanford Law grad, ought to write a letter that burns up the paper. Direct it to the Law School dean, with a copy to President Hennessy.

    Again, thanks Yves and Lambert.

  13. Nat Scientist

    It might be useful to remember that it is closer to winning when they are fighting with you (in court)rather than laughing and approval and busy with disabling and digestion followed by consumption of the essential point and burping it up as a sideshow. Or in the words of Jay-Z “.. with the same sword they knight you, they gonna’ good-night you.”
    Good Bless Danny Schechter, the News Disssector whose spirit and joy of telling the real story, the media couldn’t contain.

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