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.