Lawyer’s E-mails Set New High Score in ‘Capture the Regulator’ Game

SEC chairman Mary Schapiro (or, as Annette Nazareth calls her, M-Schap) Photo: SAUL LOEB/AFP/GettyImages

Regulatory capture — the systematic undermining and co-opting of the financial sector’s watchdogs by those financial firms being watched — is one of those issues that should come up a lot but almost never does. At the Democratic Convention this week, you’ll hear everything about private equity’s business model, Dodd-Frank reform, and the aftermath of the financial crisis, but I’ll don a tutu for a homepage photo, à la Adrian Chen, if the phrase “revolving door” is brought to the convention floor in any substantive way.

Which is a shame, because the cozy relationships that exist between Wall Street firms and the government agencies who regulate them is at the core of why Wall Street seems to be winning every battle.

Bloomberg today released a massive story that shows this coziness in action. Through a FOIA request, Bloomberg got hold of a trove of e-mails between SEC officials and Annette Nazareth, a former SEC enforcement chief who now works at Davis Polk, representing clients like Credit Suisse and Goldman Sachs.

Nazareth’s career path is well worn, but the knowing, insider-y way she spoke to SEC officials, including chairman Mary Schapiro and then-general-counsel David Becker, should raise some eyebrows:

Rather than making specific policy requests, Nazareth’s messages asked for meetings, offered her firm’s products and opined on the debate in Congress. She told Becker the prospect of a consumer finance protection agency made her “feel ill” and that she’d asked Sifma, the Wall Street trade group, to “trash” a proposal for an investor advocacy office at the SEC.

Nazareth’s e-mails show her offering her firm’s services to the SEC in various ways — selling them a Davis Polk web product, helping them parse a block of Dodd-Frank text — and then there’s this:

In one note, Nazareth jokingly told Becker, “We expect Greenspan to lead us in a sing-along,” referring to former Fed Chairman Alan Greenspan. When Becker gave his regrets for her 2010 party he noted that, “In truth, I enjoy your holiday parties very much, not to mention seeing the host and hostess. It’s the only place I get to see famous economists.”

In addition to telling us how cool Nazareth’s Christmas parties are, Bloomberg’s story also cuts to the heart of a dangerous and false idea that has been catching on among regulatory types in recent weeks: namely, that the revolving door isn’t that bad.

An academic study released last month seemed to set this camp in motion. The study showed, via examinations of the records of a number of revolving-door enforcement lawyers, that lawyers who left the SEC’s enforcement division to join private law firms tended to be  tougher, not easier, on Wall Street firms than their peers.

The study seemed to disprove the whole “captured regulators” trope, and the cheers from the SEC and the white-shoe law firms of New York were appropriately loud. Robert Khuzami, the SEC’s director of enforcement (and, as Deutsche Bank’s former general counsel for the Americas, a card-carrying member of the revolver crowd) crowed in Reuters about the “revolving door myth” and accused those who think the revolving door is problematic of spreading “unfounded cynicism about public institutions and public servants.”

But as Alison Frankel pointed out — in the post that inspired Khuzami’s wrath — looking at which cases the SEC has and hasn’t brought isn’t really the best way to assess capture risk. The bigger problem, in fact, is cultural capture risk — the many subtle ways in which the social overlap between Wall Street and Washington produces a sort of hive-mind approach to regulation and gives Wall Street an unfair advantage throughout the entire regulatory process. (Former senator Ted Kaufman referred to this group of like-minded bankers, lobbyists, lawyers, and watchdogs as “The Blob.”)

In Nazareth’s e-mails, you can’t necessarily see instances of overt capture. There are no smoking guns or tit-for-tat favor-currying. But what you can see are the contours of a friendship that, over time, can weaken a regulator’s ability to be unsparing in his or her day job. Nazareth is a Davis Polk attorney, paid millions of dollars by the nation’s largest banks and financial firms to help them water down Dodd-Frank and other financial regulation, whose tactics apparently include joking, cajoling, and making workaday small talk with a guy whose job it is to help write those rules. It’s the clearest real-life example we have of how the Blob works and how insidious its effects can be.

We don’t like these kinds of cozy relationships between journalists and the sources they cover, and we roundly criticize journalists who step over the line. But it’s even more dangerous when Wall Street lawyers and government regulators who are charged with clamping down on Wall Street seem to be just short of BFFs.

The revolving door won’t likely become a major issue in this presidential campaign — neither party really has a foot to stand on — but we shouldn’t forget that it’s there. And when we do look at it again — when the next high-level government official goes to work at Goldman or whatever — we should remember that Christmas party guest lists can be just as revealing as subpoenas.

Lawyer Plays ‘Capture the Regulator’