End Washington-Wall St revolving door

December 16, 2010

The revolving door between government and Wall Street is wrong, antithetical to both democracy and capitalism and ought to be stopped.

For the second time in two weeks a high-ranking recent U.S. public servant has traded a position of influence in the corridors of power for a massive paycheck working for an institution that owes its very existence to government largess.

This time it is Theo Lubke, who has transitioned smoothly from heading the New York Federal Reserve Bank’s derivative regulation effort to working for Goldman Sachs, where he can be expected to, well, help it do well out of regulation, current and future.

Last week it was Peter Orszag, who until July was the Obama administration’s Director of the Office of Management and Budget, joining Citigroup’s investment banking unit as a vice chairman. Several days before that Citi hired George W. Bush’s Commerce Secretary, Carlos Gutierrez, as vice chairman for its institutional clients group.

To be clear, none of the parties is doing anything illegal and there is no suggestion that any of them wittingly acted against the public interest while in government service.

That, however, is a very low standard and far from an argument for a system in which regulators and high-ranking political appointees oversee the financial industry while at the same time having a near guarantee of being in line to be made rich by it a short time after leaving office.

It would take an angel to stand aloof from that kind of money, especially after having rubbed shoulders for years with their better paid, better shod but not better qualified peers in banking.

Money gives people a warm fuzzy feeling, and so does the prospect of it; it is little wonder that financial regulation has been so loose and so poorly enforced.

And please, don’t tell me that the right to go and make a fortune in finance afterwards is the price a people must pay for the services of the most able policymakers. Larry Summers is a genius and Bob Rubin evidently the wonder of the world, but having them at the center of banking and regulation has hardly been a boon for either taxpayers or investors these past 15 years.

The United States would have been far better off, as it was until the 1980s, with a set of regulations so tight it could be administered by plodders and a banking industry peopled by able but unimaginative types making a decent living.

That, of course, would lower the rewards on offer in banking, both in terms of the money banks could produce and their motivation to offer it. And don’t believe that simple banking can be equated to simple medicine or technology; on the evidence growing complexity in financial services has hurt clients, shareholders and taxpayers, leaving the sole certain winner bank employees. Future bankers in public service have done rather well out of it too, you could say.


The Orszag-Citigroup marriage is particularly striking, given that he was in the inner circle of an administration that made the controversial decision to keep the bank alive despite ample evidence that it richly deserved to fail. If that does not give you a queasy feeling, and on the evidence it did not for Orszag, consider that Citigroup is now the lucky owner of too-big-to-fail status, giving it an unfair advantage over smaller competitors who haven’t convinced those in power that they are indispensable.

Hanging on to the too-big-to-fail brass ring is arguably job 1 for Citigroup going forward and having someone with Orszag’s experience and, er, contacts is obviously useful. Gutierrez can be viewed as an insurance policy against the fickle winds of political fortune.

As for the Lubke-Goldman nuptials, the attractions and dowry are pretty much the same. While Lubke can’t claim credit for seeing Goldman through its rough patch during the crisis, he was, as head of the New York Fed’s Financial Infrastructure Department instrumental in derivative regulation reform efforts. He is reported to have pushed for on-exchange trading, a policy that is almost certainly against Goldman’s best interest, it must be said. As a former top Fed official he will be banned from any Fed-Goldman meetings or from contacting his former colleagues on matters in the area he once worked, according to Bloomberg News.

That is something, but not nearly enough.

It is all quite a contrast with Kansas City Fed President Thomas Hoenig, who asked by the New York Times about his plans after his coming retirement, said:

“I can tell you one thing. I’ll never work for a too-big-to-fail bank.”

Hoenig, cussed as he is, is a bit of an angel, and so may be Lubke, Orszag and Gutierrez, but depending on angels is a lousy policy.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

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Saft consistently writes front page material.

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