False Arrest: Does the Revolving Door Make Wall Street Reform Impossible?

Wall Street reform.

Three words that our political leaders use to reassure us that everything will be fine now, that the average American may have been fleeced before but they will not be cheated by the banking industry again, that safeguards will be put into place to prevent the type of market abuse and financial chicanery that led to the meltdown in 2008. Most recently, the aggressive pursuit of JPMorgan Chase and pending arrests in the London Whale mess are supposed to indicate that finally our leaders are serious about bringing the 'Street' to heel.

And yet... not much has really changed or will change in the near future. The current prosecutions are relatively tiny gestures that will have little or no impact on a multi-billion dollar leviathan like JPMorgan Chase (or its Teflon CEO, Jamie Dimon), and seem more like window dressing than a purposeful agenda on the part of our government. The band will keep playing, and Wall Street will dictate the tune as usual.

The reason for this is the notorious revolving door between Wall Street and Washington, in both directions.

On the way in, it is conventional wisdom that positions in Treasury, the SEC, and other agencies tasked with financial regulatory oversight are best filled by people who have worked on Wall Street since they already know the ins and outs of the industry. The problem, however, is that such people have often made their own careers and money through the same practices that Washington wants to restrict, which creates a big conflict of interest. It is a bit like asking a doctor to approve of greater malpractice litigation.

The most egregious example of this conflict is Robert Rubin, who was a partner at Goldman Sachs before becoming Assistant to the President for Economic Policy in 1993 and then Treasury Secretary in 1995. Throughout his time in government, Rubin remained an outspoken critic of financial regulations and oversaw the repeal of the Glass-Steagall Act of 1933, which mandated the separation of commercial and investment banking. The repeal of Glass-Steagall was a seminal moment that brought down the fire walls that had long protected the financial industry from itself, and is widely regarded to have contributed to the explosion of risk on Wall Street. Rubin was also one of the people who stubbornly resisted government oversight of the derivatives market, which was practically a free-for-all at the time and the unraveling of which led to the subprime mortgage crisis of 2008.

A more subtle example is Hank Paulson, the former head of Goldman Sachs who was Treasury Secretary through the financial crisis. Personally, I feel Paulson did the best job he could given the scope and urgency of the problem, but that does not change the fact that the net result was a bailout of Wall Street and surprisingly lax conditions placed on the companies that received the bailout (most of whom went back to their old risk-taking ways as soon as the markets settled). Let's not forget too that Paulson was a staunch deregulator prior to the financial crisis, and that the government did very little to actually punish the banks who put us into the whole mess.

Of course, there are plenty of career government servants who are also staunch opponents of financial regulation, so this phenomenon is not limited to former bankers. However, here too the close personal ties between such Washington players and Wall Street is a hurdle to enacting meaningful reform, not least of all because many of them intend to go into the private sector once they leave public service.

Which brings us to the other side of the revolving door -- the way out. The list seems endless. Former Treasury Secretary Robert Rubin joined the Board of Citigroup after leaving government, former Treasury Secretary Larry Summers joined the hedge fund D.E. Shaw in 2006 for a lucrative stint, former SEC Chair Mary Schapiro, criticized for her close ties to the financial sector while at the Commission, joined Promontory Financial, a company whose clients include some of the largest banks and other financial institutions (not to mention other former officials like Patrick Parkinson, a top banking regulator at the Federal Reserve), Robert Khuzami, the former head of the SEC's enforcement division, has joined Kirkland & Ellis, a law firm that represents major corporations and banks, and so on.

This begs the question of just how tough and impartial such people can be in regulating Wall Street when their own retirement plan depends on that very industry?

And neither is today any better than yesterday. The new head of the SEC, Mary Jo White, is a former partner from the powerful law firm of Debevoise & Plimpton, some of whose biggest clients are predictably banks, the new Treasury Secretary, Jack Lew, is a former COO of Citigroup (who had a bizarre clause in his Citigroup contract that paid him off handsomely if he secured a plum job in government, raising plenty of eyebrows), and Larry Summers is in the running for Chairman of the Federal Reserve despite his disastrous track record in deregulating Wall Street.

Where these people will go after government is hard to predict, but the odds are pretty high that they will return to their corporate, and highly profitable, roots.

What makes this particularly egregious is that Dodd-Frank is currently under heavy fire by the banking industry and that the architects of the watered-down version of the bill are not our political leaders but the banking lobbies. Taken in context then, the revolving door might seem innocuous but in reality is devastating for our nation. It creates an automatic conflict of interest that compromises the integrity of our government and makes true Wall Street reform impossible.

SANJAY SANGHOEE is a political and business commentator. He has worked at leading investment banks and hedge funds, has appeared on CNBC's 'Closing Bell' and HuffPost Live on business topics, and is the author of two thriller novels. For more information, please visit www.sanghoee.com