It spins both ways -- the revolving door between private sector employment on Wall Street and government service in Washington -- allowing government regulators to seek lucrative private sector employment with the financial firms they regulate ("revolving door") and permitting senior executives from banks and financial firms to move into the governmental agencies that oversee those businesses ("reverse revolving door"). In many cases, artful Revolvers will exploit both, going from bank executive to bank regulator and back to bank executive, accompanied with an exponential boost in salary.
The revolving door phenomenon is particularly acute in the financial services sector. Statistics published by the Federal Reserve Bank of New York show a dramatic rise in the movement of financial executives into positions as financial regulators, and regulators into private sector financial firms, growing threefold over the last decade. Accordingly, the tenure of financial regulators has dropped, with 88 percent of regulators in 1988 spending three or more years on the job, down to 64 percent today.
This begs the question: who's in charge of our nation's financial health?
The nation has only now recovered, albeit very fragilely, from the financial meltdown of 2007-2010, when many Americans lost their retirement savings, jobs and even homes. The meltdown was avoidable. As the Financial Crisis Inquiry Commission concluded, it was caused by "widespread failures in financial regulation and supervision" and "dramatic failures of corporate governance and risk management" by many financial firms and banks.
Welcome to the pernicious problem of the revolving door. Financial firms and banks exert increasing control over the governmental agencies that oversee them both by stacking the agencies with their own senior employees and by dangling prospects of lucrative employment for favored regulators once they leave government service.
In an effort to fortify the financial industry, Congress passed the Dodd-Frank legislation mandating sweeping safety standards for financial institutions. But implementing these standards has been excruciatingly slow, and many of the new standards have been rolled back entirely, as regulatory agencies hem and haw and debate endlessly. The Securities and Exchange Commission (SEC), for example, with most of its five board members coming directly from the financial services sector, has fallen years behind in its rulemaking agenda.
Enforcement of existing rules has also languished. Carmen Segarra, a bank examiner with the Federal Reserve, uncovered potential conflicts of interest by Goldman Sachs and reported it to her supervisor. The result? The Fed supervisor ordered Segarra to change her report alleging the wrong-doing, and when she refused, she was fired. The supervisor let Goldman Sachs slide and moved on to become chief compliance officer for GE Capital.
There is little doubt the Big Banks are again well on their way toward capturing the financial regulatory agencies through revolving door abuses. A number of the biggest Wall Street banks, including Goldman Sachs, JPMorgan, and Citigroup, even provide special financial rewards, or "golden parachutes," to senior company executives specifically for taking a high-level position with a government regulatory agency.
Regulatory capture can be prevented -- or, at least, the worst of its consequences arrested. It is extraordinarily difficult to avoid conflicts of interest in financial regulatory agencies. Effective regulatory agencies are strengthened by regulators with hands-on knowledge of the industry they oversee and "know where all the bodies are buried." But the inherent conflicts of interest can be managed to rein in potentially self-serving purposes.
On his first day of stepping into the White House, President Obama issued Executive Order 13490 curbing revolving door abuses for presidential appointees. Appointees sign an ethics pledge stating that they will not take any official actions that directly and substantially affect a former employer or client within the last two years, and promise not to lobby the Obama Administration when they leave government service.
Sen. Tammy Baldwin (D-WI) and Rep. Elijah Cummings (D-MD) have taken this framework for regulating revolving door abuses and apply it to the financial services sector in their proposed "Financial Services Conflict of Interest Act." The legislation would end the golden parachute; prohibit financial regulators from taking official actions benefiting their former employers or clients within the last two years; prevent procurement officers from taking private sector employment with a company they awarded a government contract; restrict former financial regulators from lobbying the federal government for two years after leaving government service; and ban bank examiners and their supervisors from taking jobs with the banks they oversaw. Public Citizen has published a report documenting the revolving door problems in the financial services sector and how this legislation would address these problems.
These are precisely the kind of revolving door reforms that are so desperately needed to curb conflicts of interest within the financial services sector and to promote the integrity of financial services regulatory agencies. Our nation has finally climbed out of a devastating financial crisis. Unless we establish effective safeguards against regulatory capture, we could very well plunge over the brink once again.