Who Waters Down Wall Street Regulation, Anyway?

Mark Wetjen, former garbage collector. Photo: CFTC

The familiar narrative about the Wall Street–Washington “revolving door” is that it is very, very, very bad. Having former bankers and white-collar defense lawyers go to D.C. to work as regulators, we are told, leads to lax policing of Wall Street and a permanently out-of-control financial sector. We hear this argument a lot, from both sides of the aisle, whenever someone with a corporate background is appointed to a prominent regulatory post. In fact, the badness of the revolving door may be the only issue of true bipartisan consensus in Washington.

Today’s New York Times, however, contains a pretty important counterpoint to all of that groaning.

The article is pretty arcane and a little dense, but here’s the gist: Basically, there was a proposed rule after the financial crisis that was supposed to make derivatives (those so-called “weapons of mass destruction” that wrecked the economy, etc etc) safer. The way derivatives would be made safer is that people/companies who bought them would be required to shop around for the best deal with at least five different banks. Regulators liked this idea — more competition, more transparency, less chance of banks ripping clients off and blowing stuff up — and banks hated it because, well, they’re banks.

The regulator in charge of approving this rule was the Commodity Futures Trading Commission, or the CFTC. There is not really much to know about the CFTC, except that it has five commissioners who vote on stuff, one of whom is a former Goldman Sachs executive, one of whom has flowing blond Fabio hair and talks about Tom Petty a lot, and one of whom is a former Harry Reid staffer from Iowa who once worked as a garbage collector and has no Wall Street experience at all.

The CFTC was supposed to approve the derivatives shop-around rule, but as the Times says, they instead “agreed to soften” it, by making buyers of derivatives shop at only two banks instead of five. That’s good for Wall Street and bad for everyone else. And since the new rule is easier on banks, you could reasonably assume that the CFTC’s Goldman Sachs Executive simply talked louder and more convincingly than Tom Petty Guy and Iowa Garbageman in the meetings where these things are decided.

Except, as the Times says, that is not what happened at all. In fact, the paper tells us, it was Iowa Garbageman who wanted to water down the rule, over the objections of Goldman Sachs Executive!

The deal over derivatives was forged from wrangling at the five-person commission, which was sharply divided. Gary Gensler, the agency’s Democratic chairman, championed the stricter proposal. But he met opposition from the Republican members on the commission, as well as Mark Wetjen, a Democratic commissioner who has sided with Wall Street on other rules.

Mr. Wetjen argued that five banks was an arbitrary requirement, according to the officials briefed on the matter. In advocating the two-bank plan, he also noted that the agency would not prevent companies from seeking additional price quotes. Other regulators have proposed weaker standards.

Mr. Gensler, eager to rein in derivatives trading but lacking an elusive third vote, accepted the deal.

The watering-down of Wall Street regulation is not a magical, hands-off process. It happens because individual regulators and politicians are swayed by the arguments of financial sector lobbyists, campaign donors, companies in their home districts, and other competing allegiances. And sometimes those individual regulators and politicians are former Wall Street bankers. But sometimes they are not, which is kind of my point.

Regulatory capture exists, sure, but there’s no evidence that people who come from the corporate world are worse at enforcing regulations than people with no corporate experience. (In fact, there is some evidence that the opposite is true.) I imagine that if you put 100 regulators of all backgrounds and experience levels in a room with 100 Wall Street lobbyists and let them talk for an hour, the lobbyists would have no greater success convincing the people who had once worked at Citigroup than the people who had been congressional staffers or accountants or Cosmo models before they came to Capitol Hill.

The revolving-door issue has always seemed to me more about optics than results — that is, it looks bad to have a bunch of former Goldman employees running Wall Street’s primary regulators, but there’s not a ton of empirical proof that it actually hurts those regulators’ ability to crack down on Wall Street.

Given the latest evidence of what actually does hurt regulations intended to crack down on Wall Street, maybe we should be more concerned about the corrupting influence of former Midwestern garbage collectors than the revolving door between Wall Street and Washington. Occupy Trash Heap!