It looks like private equity and its allies in academia are very keen to try to maintain the industry’s vaunted secrecy, even after the cat has clearly gotten out of the bag.
Two days ago, we wrote about a remarkable example of regulatory capture and potential corruption. SEC enforcement chief Andrew Bowden, before an industry audience at Stanford Law School, on a panel moderated by KKR board member, Stanford Law professor and former SEC commissioner Joseph Grundfest, made fawning remarks about the private equity industry. Bowden repeatedly called PE “the greatest,” and made clear that he was so awestruck by its profits and seemingly attractive investor returns that he was urging his teenaged son to seek his fortunes there. This was troubling not simply because Bowden, as the SEC’s exam chief, looked to be soliciting, on a plausibly deniable basis, employment for his child from the firms he supervises. Bowden had described widespread lawbreaking in private equity in an unusually blunt and detailed speech last May. But almost immediately, he began walking his remarks back at conferences with the industry and in interviews with private equity publications. We’d charitably assumed the change in posture was due to outside pressure, but it may actually be due in large measure to Bowden’s unduly high regard for the industry, which appears to have tarnished his judgment, badly.
Stanford Law had posed the conference video on line, and for viewer convenience, we put up a key section as a separate clip:
Our post created a stir. International Business Times reported on Bowden’s remarks, raising concerns about “chummy relationships” between regulators and their charges. Financial services industry stalwart Matt Levine at Bloomberg tried offering a defense of Bowden, and then threw up his hands, declaring, “Okay fine I guess that is still pretty ridiculous.” Former bank regulator Bill Black has called on SEC chairman Mary Jo White to demand Bowden’s resignation immediately, on the grounds of lack of professional distance from the industry and minimizing the seriousness of the violations he has found.
And money manager and former Bowden colleague Andrew Silton described another violation of regulatory conduct:
The most disturbing aspect of Mr. Bowden’s remarks is that he said that the PE industry adds value for its clients. Whether that statement is true or not (and I am strongly of the opinion that it is not), a regulator has no business expressing an opinion on the efficacy of an asset class or strategy. For decades, the SEC has consistently reminded investors that its review of a manager or an investment offering is not an endorsement on the merits…
In watching the video of Mr. Bowden’s comments, it appears to me that he’s trying to come across as a likeable guy in audience filled with industry professionals. Regulators aren’t supposed to be likeable or unlikeable. Their job is to hold industry accountable. With a few badly chosen words, Mr. Bowden has done damage to an agency that already leaves me wondering whether they have the wherewithal to take on powerful moneyed interests.
Notice that in that short segment, Bowden managed to do a twofer in terms of the potential investors to which he recommended private equity. Bowden said, “…they’re the greatest, they’re actually adding value to their clients.” In this context, “clients” means investors in the funds the private equity general partners manage. Thus Bowden is putting the SEC’s imprimatur on private equity as an investment for investors like public and private pension funds, sovereign wealth funds, endowments, foundations, and wealthy individuals. Moreover, by implication, he is also on board with the efforts of the private equity industry to offer products for much smaller and almost certainly less sophisticated retail investors.
Second, Bowden’s enthusiasm for the private equity industry’s profit margins amounts to a recommendation of the private equity firms that are public companies, such as KKR and Blackstone.
In an unusually defensive measure, Stanford Law School has effectively taken the video down from YouTube by restricting access to only those have been given permission. It’s hard to fathom the logic, given that we have published the key section. Do Bowden and his industry allies plan to maintain that we’ve somehow unfairly taken Bowden’s remarks out of context? Or do they not want to enable viewers to contrast Bowden’s amped up discussion of private equity as a road to riches with his far more measured remarks in the rest of the conference?
Fortunately, our Richard Smith, based on his considerable experience with scammers removing incriminating evidence from the Internet, had the presence of mind to download the entire presentation. NC has restored it to YouTube, and, unless Stanford Law School’s next tacky goof is to get cute with DMCA requests, you will always be able see it here:
Bowden’s grovelling, in its full context, is at around 1:55:20.
One has to wonder: what sort of academic institution hides the record of a session, initially open to the public, posted on the Internet, only after it is seen to show a public official stepping well outside the bounds of proper conduct? In this case, apparently, one that cares more about not annoying well-heeled backers than about intellectual integrity. I hope and trust that any readers of this site that are Stanford alumni will call the dean of the university and law school and demand an explanation.
And let’s consider another irony: Stanford’s unofficial motto, on its university seal, is Die Luft der Freiheit weht. That translates as “the wind of freedom blows,” a quote from 16th century writer Ulrich von Hutten. In another bit of synchronicity, Richard Smith once studied Hutten’s best-known work, Epistolæ Obscurorum Virorum, a text that introduced the word “obscurantism” to the English language. Hutten was one of several contributors to the work, an assemblage of spoof letters that exposed the moral and intellectual bankruptcy of 16th century churchmen, just prior to the Reformation. And now we’ve got an unexpected indication of Stanford’s betrayal of its own high precepts: professing freedom and openness, via their motto, but practicing secrecy and obscurantism.
This is, sadly, par for the course at Stanford. Stanford has become heavily enmeshed in the financialized startup culture and is dependent on it. I recommend reading “The End of Stanford” at the New Yorker. While it is mostly an anecdote it highlights the blurred lines between the university and the financial culture around it and the conflicts of interest that come with that dependence.
Stanford is deeply enmeshed is any activity that enriches it’s bottom line. I would like to say this is not the norm, but frankly every University aspires to be Stanford. And frankly, Stanford has some catching up to do if they want to get to the ruination caused by the likes of Harvard. I don’t need to detail Harvard’s numerous transgressions that do disservice to their special treatment as a non-profit.
Why “sadly”? Like if they changed their underwear more then once a week they wouldn’t smell so much? The romance of the private college is as repulsive as the powerball of the Ivy League. I used to get appeals from a private college that I once attended. And I sent them some money a couple of times, thinking, yeah they were really OK and they should be supported so that they can continue serving the … serving the 1%! Who else can afford tens of thousands yearly in tuition and board! So their kids can hang out for 4 more years on a campus that basically is modelled on the country club ideal. The answer is free public education from birth to post-grad, funded from income, not property tax, and a 90% leverage on all private equity profits and bonuses.
You’ll find PLENTY of corruption in the public colleges at present also. We really need to GIVE UP the romance of academia period! Wasn’t UC Davis taking Monsanto money? And the whole UC system is now run by Janet Napolitano! What more can anyone say?
Give up on academia as an ideal for the intellectual hope of the culture pretty much. But it’s about all that exists as far as research or learning institutions at present, and job training so as well alas.
Like all learning is remembering? No need for more or less objective qualification? I don’t think so. My point is that the individual benefits secondarily from education. The primary benefit is to the common good. It’s the WE first followed by the ME. Libertarian individualism functions neither as a form of government nor as justification for putting yourself into the hole for 100k. Public universities as complex organizations are not perfect and they aren’t cheap and the taxpayer should fund them richly as a top social and democratic priority.
Reporting like this makes Naked Capitalism one of the few blogs deserving of reader support and national attention. Nothing is more important than outing what happens behind the closed doors of the financial class.
…..Or increasingly,right out in the open.
An actual regulator might find those large profit margins worthy of a second look…….
This brought to mind an article I was reading on Slate yesterday about anti-vaxxers, mistrust of authority, etc. It seems there is no end to the way that money has steamrolled ethics. I wonder if this is one of the other costs of inequality that no one brings up? I mean, if the top steadily pulls away, and people realize that a big part of that are these revolving and closed door shady dealings, wouldn’t it tend to not only breed mistrust in institutions (here, govt and academia being shown as two of the primary perpetrators) but also debase ethics generally, and make the little guy throw in the towel? I personally wouldn’t bring myself to this, but it seems on a theoretical basis to be plausible.
I think more than plausible. At some point trust horizons collapse. As conservative a man as Francis Fukuyama has just published a book saying that lobbyists, lawyers, and the courts have made the US government completely incapable of performing the necessary tasks it needs to perform:
What real expert would want to work for the Federal Government today? What scientist, what historian, what forest ranger for goodness sake would want to put up with the meddling, the political pressure, the re-writing of reports and the editing of reality? Every damned thing the government does (with the exception of spying on us and making foreign and financial policy–things the Power Elite actually care about) is policed to death by interested parties trying to game the system. When a government that extracts as much out of its average citizen as the US government does can no longer prevent disease outbreaks or educate children or fund infrastructure or plan for natural disasters and swiftly aid in their amelioration it rapidly loses the confidence and trust of the citizenry. In as atomized a society as this one, where we have no blood ties but only the ties that come from a shared political heritage, this is ominous indeed.
Well done. The entertainment value alone of episodes like this make the site well worth the donation. Thanks for the reminder, I just made my annual donation to the tip jar.
Thanks. Justifying the blog’s existence (not that that was needed) once again.
This is a very partial answer to a major societal problem: the collapse of the newspapers and therefore of investigative journalism. How is such work going to be supported? I know it’s a long way from your original focus on finance (or is it? Money is the biggest single hurdle.), but I hope you’ll be involved in efforts to build new institutions for reporting. You’ve certainly built an important piece of the puzzle.
OT, but I’ll toss Stanford under the bus any chance I get-
“For the inventors, it makes sense to take a risk on a place such as California, where they have more freedom. “If the job they relocate for doesn’t work out, then they can walk across the street because there are no non-competes.””
Not if you were working for Steve Jobs-
In Silicon Valley, you don’t sign a non-compete clause, your boss does.
Looks like all that lovely ad copy about Freiheitsluft was just a bunch of hot air.
Proposed new motto, on behalf the arrogant a-holes running Stanford and its various oligarchy-buttkissing ‘academic’ departments and think tanks:
Unsere Versprechen Sind ein Heißer Furz Wert
(Even less, since at least a hot fart provides some relief, but I shan’t quibble.) In the spirit of ‘the sharing economy’, I permit Stanford to use the above neo-motto for free, in perpetuity.
I think this is being blown out of the water. The comment about hiring his son was clearly tongue in cheek and politically incorrect given the audience, which is why it was funny. Don’t confuse banter with corruption. I will get my pitchfork out when his son actually goes work for a PE group. Instead of a donation, where should I send the fainting couch?
I suggest you read our original post, or look at the matter of Bowden’s fawning over industry profit margins, which as we discuss in this very post, is a clear violation of well established SEC policy regarding recommending investment strategies and firms and his repeated comments that the industry is “the greatest”. Or better yet, look at former regulator Bill Black’s assessement, who said he would demand Bowden’s immediate resignation based on his remarks.
I can’t help correct your moral and regulatory color-blindness, but everyone, ironically save those who have been in PE, who has any financial services industry, regulatory, or political experience, rates the clip as a 10 on a 1 to 10 scale of impropriety.
I also must note that you have never before commented on this site. While I appreciate the effort you made to drag that fainting couch of yours into the thread from such a distance, our long experience as moderators tells us that first-time commenters rarely put in such a level of effort without a reason that has little to do with the topic of the post.
This is a fair assessment of Walter’s lame defense attempt. Most telling is his dismissal of Bowden’s most egregious solicitation as a joke, when it is clear in the context, before and after, that he’s opening the bidding process for his influence. The fraternity winking and nodding doesn’t disguise the naked prostitution here, and the more compelling contextual proofs are the years of the SEC’s conspicuous lack of enforcement beyond token fines during the longest run of fraud, larceny, and racketeering ever. Bowden looks like one of the pitiable vacuous characters in The Wolf of Wall Street, beyond shameless.
Great reporting, Yves! Excellent excavation! Erudition! No mixing of metaphors!
Evidently, Walter needs to have this particular piece of Victorian furniture brought to his home theatre for a spell, so he may feign ‘being blown’ ‘tongue in cheek’ before fetching his pitchfork instead of his purse.
In the past, I did analysis and private consulting for a few PE firms that like to buy in an enterprise sector that I’m familiar with.
Watching what these PE firms do was very disheartening. The BIG lesson I learned from that experience is that when doing business with any business that is private equity owned, you have to have your paranoid antennae way up, because the PE firms will always paint of pretty picture about how they want to “expand”, “grow”, “re-invest”, “venture on to new paths”, etc. etc., but the bottom line is that the companies they own almost *never* grow in a way that ends up profiting anyone but the PE investors.
My rule of thumb now is that if a company is PE owned, I will not pursue anything more than short-term ventures with them; even near-long-term is dicey. PE is populated by sharks, just like most of the higher-flying financial sectors (e.g. hedge funds).
btw, I know Stanford very, very well; it’s become this self-prepossessing “precious” place that loves to dole out paternalism and act on hubris. There are lots of good people at Stanford, but the aura of the place has changed, dramatically.
One day, as the rather low barriers to entry of 1) access to talent and 2) networked cash are overcome in other regions, Stanford and Silicon Valley are going to ossify, because I really don’t see much of real innovation happening there. That may sound strange, but there is a kind of “on-automatic” feeling about the whole region; people here think the trajectory is all up. Black Swans await.
Right, right, that’s obvious. Which would be why Stanford had the YouTube taken down.
Very sadly, one of my greatest badges of honor is having been involuntarily terminated by Stanford University (in 1992). In disputed substance, I was pretextually laid off for refusing to withdraw professional opinions that it was my job to provide — forecasting and reporting cost overruns in central and administrative computing. In my last month, I received four separate invitations to welcome new hires into the department that was laying me off–ouch!
Throughout seven years of grievance procedure and wrongful termination litigation, I was run into the ground by an organizational underbelly as vicious and dirty as it was arrogant. One of my first discoveries was that, contrary to the mindset of most academics, the university is absolutely not run not by its so-called Senate. Administration has the first and last say in matters that matter, such as compliance and law. I could say that I won an appeal (and ultimately a settlement) against Stanford University. But the fact is that the university auto-outsourced the grievance to a crony arbitrator, and then the litigation to McCutcheon, forever forking out grossly excessive costs. There was a plethora of filings and appeals. My deposition alone took two weeks, and I took more than I gave.
Stanford Law School has its sorry side–a decade ago its head embarrassingly failed the California bar exam. But how can I not miss such a perfectly-appointed and connected intellectual paradise as Stanford? Sigh.
This is not the Stanford of Donald Knuth, I guess. A shame.
M. Elizabeth Magill is the Dean of Stanford Law School. Here is the contact information:
Interestingly, Dean Magill is an expert in administrative law. So it would be interesting to know whether she shares to views of Bowden and his apologists on regulatory capture, or not. It would also be interesting to know whether she approves of the suppression of the YouTube.
Excellent reporting on this. Thanks, Yves.