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The A-B-Cs of Regulatory Capture

Lately I’ve had people question me about my comments that the SEC is hopelessly in the pocket of the Wall Street firms.  They concede that the SEC seems reluctant to bring enforcement action against actual executives, despite quite a lot of damning evidence in the 2008-9 debacle and at Wells Fargo, and they admit that the SEC regulatory initiatives (see: Reg BI, known in some circles as ‘Reg BS’) are strangely Wall-Street-friendly. 

But how, exactly, do you “capture” a government regulatory organization and its staff?  Are there actual bribes involved?

To help understand how it’s possible to exert great influence over the regulators, let me introduce Fred, who is an attorney working at a desk in a crowded windowless office at the SEC headquarters building on F Street in Washington, D.C. —a five-block walk from the Capitol Building.  Fred is an idealist, and he is instantly suspicious of the agenda of Wall Street attorneys who routinely visit the offices.  He and his wife Mary live in a modest apartment in Chevy Chase, MD. 

Sitting at the desk next to Fred’s is Joe, a good guy, fellow attorney and idealist, who sometimes works with him on cases.  Fred and Joe spend many frustrating hours on enforcement matters that always seem to nab little fish for things like insider trading, and bucket shops that are made to be shut down at the first sign of regulatory attention. Whenever they come up with a case against a senior Wall Street executive, the company responds with an offer to neither admit nor deny guilt, make restitution and promise never to do such terrible things again—and both Fred and Joe are frequently frustrated that their administrators are willing to accept these compromises.

After years of long hours, Fred and Joe are both moved into administrative roles.  Finally, Fred thinks to himself, he’ll have a chance to not make those deals that have so plagued his life.

Before long, a case lands on his desk, and he plunges into it eagerly, assigns some investigative work, and sometime during this process, Joe is no longer around.  Instead, the desk is now occupied by Sam, who has moved up the ranks.

I should mention that Fred’s spouse, Mary, is not totally happy with the living conditions that one can afford on a $180,000 salary in one of the most expensive areas of the country.  The couple has a baby on the way, and she’s interested in leaving the workforce for a few years to raise the child to school age.  Mary wonders if Fred’s formidable talents and work ethic might be better-appreciated at another employer.  Lately, she has been wondering this aloud every few days.

As luck would have it, one warm weekend, Fred and Mary are invited to the housewarming of Joe and his wife Candace’s new home in the Georgetown area.  They admire the beautiful white pillars, enjoy the clicking sound their shoes make on the marble floors in the entranceway, and Fred has a chance to catch up with Joe over a beer out by the swimming pool in back.  The conversation goes something like this:

It’s a nice place.

Yes, we love it.

I imagine there’s a pretty big mortgage payment on a place like this.

Oh no; we actually paid cash.

Seriously?  Where are you working nowadays?

At that big Wall Street firm.

Oh. You’ve joined the enemy.

Joe laughs.  Yeah, that’s how I felt when they first made me the offer.  But let me tell you; we do more and better regulatory work on the inside than anything you and I ever did at the SEC.  You wouldn’t believe the things I’ve prevented, fixed, changed, the bad actors I’ve weeded out.  It’s pretty satisfying work.

So you’re still an idealist.

Just like you.  I’ve actually mentioned your name to the company.  You and I have a lot in common, is what I told them; I think you’re a terrific lawyer with a nose for trouble and a desire to prevent it.  You know that, right?

I suppose.  But I’m not interested—

That’s not what I wanted to talk to you about.  You’ve got a case on your desk right now that pertains to my company.  I understand it’s pretty bad.

Actually worse than bad.  Like: drinking-the-blood-of-the-victims kind of bad.

That’s what I mean.  I’d like to come out to the offices and talk about how we can make amends, and if we work together, you can help me draft some regulations that we can apply internally to make sure nobody even thinks about doing something like that again.

You’re welcome to stop by, but I happen to think this is an enforcement case.

I think you and I can craft something short of that that will slap the company on the side of the head pretty hard.  But I have to tell you, I also love the idea of having you to work alongside me.  The pay is pretty damn good, the work is really rewarding—a lot more than what you’re doing now.  But I don’t think I can recommend somebody who makes life more difficult for his future employer, if you know what I mean.

Fred says nothing.  He takes Joe’s business card.  In the weeks ahead, the offer sits on his mind, and when Joe comes in with an unexpectedly broad settlement offer, he can see how it will prevent this particular type of consumer abuse from happening again.  A year later, after a decent interval, Fred moves into a beautiful new office at the Wall Street firm’s building on K Street, and the family is out looking for houses.  Once the place is decently furnished, Fred invites Joe and some friends to the house warming.

Joe admires the foyer and living area, and they head out to the swimming pool.

By the way, he says, I believe you know Sam.  Am I right?

Fred waves at Sam, on the other side of the pool, and Sam waves back.  Sure.  We sat next to each other for more than two years.  That’s him over there.  Good guy.

You’re friends?

I would consider us that; yes.

I thought that might be the case.  What do you think about him working at our firm?

Fred considers.  I hadn’t really thought about it.

Think about it.  And meanwhile, I was going to fill you in, but there wasn’t much time.  He has a case on his desk that our firm has an interest in.  I’ll give you the details on Monday when we get back to the office. 


We’re prepared to make some very generous concessions, Joe says. Would you be willing to go over and talk to him about the case?