Three years ago Governor Andrew Cuomo appointed Ben Lawsky, one of his longtime top lieutenants, to run a new agency, the Department of Financial Services, which was charged with regulating banking and insurance companies doing business in New York. DFS investigators aggressively pursued cases of money laundering and fraud, and Lawsky backed them up with a muscular threat that he might revoke the state licenses of wayward financial institutions. He’s collected $6 billion in settlements for the state budget, and successfully pressed for the firing of more than three dozen executives, at firms including Barclays and BNP Paribas.
That record has brought Lawsky glowing press coverage, as well as criticism from financial-industry players — who complain that Lawsky is a headline-seeking political operative — and from Bitcoin boosters, who say he’s stifling innovation with unnecessary and costly regulations. Next week, Lawsky leaves his job as DFS superintendent to launch his own consulting business — though he’s adamant he won’t be the latest regulator spinning through the public-private sector revolving door.
Seven years after lax regulation helped bring on a financial collapse, is the government doing any better at monitoring Wall Street?
Well, I think we’re better off in the following sense. Post-financial crisis, you had this huge political moment where, especially federally, so much legislation got passed. Dodd-Frank has gone a long way to making it far less likely that the exact same type of crisis will happen again. There is so much focus now on how you would wind down a large systemic institution and do it in a way that it wouldn’t cripple the overall system. Also, on the state level, this agency got created.
The other day, Senator Elizabeth Warren ripped into Janet Yellen, saying that the “living will” that has been created to wind down JP Morgan in the event of a crisis is totally inadequate. Was Warren right?
Does it still need to be improved? Absolutely. The problem is, some of these institutions are just so incredibly complex that it gets very hard to regulate, and that’s what scares me. I think more about complexity. If you can’t explain to a reasonably intelligent person what you’re doing in terms of new products and new services as an institution, that worries me.
From ’08 until now, has that level of complexity and regulatability gone up or down?
In many places, it’s gotten better, but there’s still a lot of complexity out there. We regulate AIG. AIG’s org chart, pre-financial crisis, you’d have to put up on the wall and it would go all around the room. Now you could fit it on this table — but this is a big table we’re sitting at. We have a whole big team that works on AIG, to really be able to regulate them adequately. I constantly worry, Do we have enough understanding of all the things they’re doing?
What’s the greatest risk to the financial system right now? A big jump in interest rates? Some trading technology or speculative instrument we don’t understand?
The problem is we react and try to fix things going forward based on previous experience. But the next thing is always a little different. The thing that really worries me right now is cybersecurity. We’re seeing more and more of these hacks. It is an incredibly difficult issue to deal with, not just for the financial sector, for our entire society. My hope is that it’s not going to take a really catastrophic cyberattack that causes a financial crisis.
How likely is that right now?
Look, we just had one announced yesterday, this Chinese thing, which is millions and millions of people [whose data was stolen], and they’ve hacked the federal government. So the chances are 100 percent that it’s going to keep happening. I’ve had trouble ball-parking the chances of something really systemic happening.
Above or below 50 percent?
I think below. But Phil Reitinger, who is on the governor’s cybersecurity advisory board with me, says what he worries about is an attack that shuts down power on the Eastern Seaboard and then a day later shuts down a bank or an exchange, and then everyone gets into a panic.
What’s the state of the art in cheating in the financial industry now?
We worked on LIBOR and the fixing of foreign exchange rates to gain an advantage. People were making huge sums of money at the expense of their clients. I mean, it was just flat-out fraud. Depending on the firm, a lot of the trading, in some of the cases 60, 70, 80 percent takes place over these electronic trading platforms, the FX trading. We’re going to have more action in that area.
Where we’re keeping our eye right now is on the leveraged lending that banks are doing. The more stable the system is becoming the more banks are willing to enter into these syndicated leveraged loans, and then over time it’s just like before the financial crisis. It’s not nearly at that level, but the lending standards are coming down and they’re more and more willing to lend to people or lend to businesses where their standards about who they’re likely to get paid back by are coming down, and in a very low interest rate environment, which we’ve been in for a sustained period of time, you’re seeing a real search for yield.
Were there cases where you were perversely impressed by how ingenious or brazen the cheating was?
I was actually surprised the most by how overt and obvious the schemes were once we found out about them. There were a number of these sanctions cases where groups inside the bank put out manuals — manuals, about how to set up their systems and how to train their people to avoid filters that would generate red flags for us to see. That was what surprised me, the obviousness of it. Even with the LIBOR and the FX trading, just the overt going to chat rooms and just fixing the prices. This willingness to just flout the rules, regardless.
So isn’t it going to take major Wall Street figures going to jail to change behavior?
I don’t think we’re there yet. We’ll see. I think there have been some consequences for individuals now and it’ll be interesting to see if that’s going to cause some people to think twice. If you really want to stop people from committing crimes, you need to create an atmosphere of deterrence. If the bad conduct is being committed by individuals, you need to figure out ways to deter the conduct of those individuals.
Which violations appalled you the most? The ones involving violating sanctions against doing business with countries accused of abetting terrorism?
Yes, the sanctions cases — Standard Chartered, Bank of Tokyo-Mitsubishi, RBS, Commerzbank. I was sworn in as a prosecutor in the Southern District two months after 9/11. Tracking the money trail was so essential because the terrorists that can really hurt us are the ones that have money and can move it around. I came into this job and I was horrified that for the five to ten years after 9/11, people inside of banks were making overt, clear efforts to avoid generating red flags that would have gone to the Joint Terrorism Task Force.
Is ISIS good at money laundering?
To be determined. We’re worried about that and so are the Feds, and we’ve been trying to assist them, but I think that’s very important.
You’ve recently devoted a lot of time to creating licensing rules for Bitcoin. To oversimplify, Bitcoin is an innovative way for people to pay one another with digital currency. So what’s wrong with that?
We wanted to come up with regulations that basically accomplished all the basics of what we do for a normal money transmitter like Western Union. So what are those? Enough consumer protection so people know what they’re getting into, enough anti-money-laundering rules to make sure this can’t be used to launder massive amounts of cash. And so we wanted to create enough flexibility where they meet all the basic requirements but we don’t put the industry out of business. Sounds easy, but it’s very hard.
Fred Wilson, the venture capitalist, has said you might drive the Bitcoin industry out of New York. Is he wrong?
My hope is that companies who make the effort to put all their protections in place for consumers and anti-money-laundering and capital requirements, and get licensed in New York, my hope is that they will gain a competitive advantage, that customers who are sort of new to digital currencies are going to feel a lot more comfortable with the companies who are well regulated, who have the stamp of approval from the state,
The guy who supposedly invented Bitcoin, Satoshi Nakamoto — does he exist?
I have no idea. I haven’t met him.
DFS began with a political controversy: Governor Cuomo wanted to take Martin Act investigative powers away from the state attorney general’s office and give them to you. Did those weapons turn out to be unnecessary?
I don’t think we missed having them. They would have allowed us to go into entirely different areas related to securities. It was probably good that we didn’t have it because it allowed us to focus in the areas where we did have jurisdiction, and [having those additional powers] might have spread us a little too thin and we might have been less effective.
And you’ve scored bigger than the AG on financial cases anyway.
Well … I don’t think of it that way. We have a lot of interaction with them. They have criminal jurisdiction on some cases where we do not, so sometimes we’ll develop information about a mortgage fraud or an insurance fraud and we’ll work with them and they’ll bring the cases, and that’s been good.
I’ve always been of the attitude in sports and in life that if everyone is playing in center field and in right field but left field’s open, I’ll run out to left field. I think the attorney general’s office is becoming more and more active in a number of areas. They were obviously very active on the housing and mortgage crisis stuff.
You are going to open your own legal and consulting firm. Other regulators have cashed in on their knowledge of how government works. Is it important to you to not be one more public servant walking through the revolving door to private gain?
Sometimes a door is just a door. I’m going through the door. Nothing’s revolving, and I’m going to be really careful not to go anywhere near the lines. I can’t work on any matter that’s come before the department basically in the last four years, for life. I have a lifetime ban. I also have a ban on doing any work for anyone who might be appearing before DFS and any work in relation to their appearance before the DFS for two years. So ask me that question in two years.
Are you taking any souvenirs with you? Maybe that Village Voice cover illustration of you in a cowboy outfit, “Johnny Lawsky,” the sheriff of Wall Street?
I feel like everyone’s a sheriff, you know? On any particular day, Preet’s a sheriff, Schneiderman is a sheriff, the SEC is a sheriff. It’s an out-of-body experience to see myself in some of these Photoshop things.
Like the online image of you sitting in the Game of Thrones chair, with the caption, “Hail King Lawsky.”
I found them all bizarre. But I do have the Johnny Lawsky cover framed. That was a neat cover, because of the art. But call me Ben. Ben is fine.