Wednesday, January 2, 2013

Revolving door

The Wall Street Journal reveals a good way to make money in the new US economy: Work for agencies like the CFTC who get to write huge complex and vague rules for financial companies, with lots of discretion and supervision, then go work for the companies who have to comply with said rules.

A few tidbits from "Hot Commodities: CFTC Staffers" (which is a news story, not an editorial)
Dodd-Frank has prompted strong demand for staffers from the Commodity Futures Trading Commission. The law gave the agency broad new responsibilities to write rules for complex derivatives called swaps that had been largely unregulated. Many rules already are in place, while others will take effect next year. The new swaps rules have swept many more financial firms under the agency's jurisdiction, boosting demand for even midlevel staffers with just a few years' experience.

At least nine CFTC employees have decamped since June for firms in finance, law and accounting that are figuring out how to comply with the Dodd-Frank overhaul. Six of the staffers were directly involved in rule making and three were in enforcement.

Take, for instance, Julian Hammar of the CFTC's general counsel's office. Mr. Hammar recently left for the law firm Covington & Burling, where he will advise clients on the implementation of Dodd-Frank.

Carl Kennedy, a staffer to Commissioner Scott O'Malia, went to J.P. Morgan, and Adedayo Banwo, a lawyer in the agency's general counsel's office, joined Deutsche Bank.

A series of CFTC cases related to alleged rigging of the London interbank offered rate, or Libor, also has given the agency a higher profile, fueling private-sector demand for employees in its enforcement division. At least three people have recently left the division.

PricewaterhouseCoopers had no former CFTC employees on staff two years ago, but the firm has hired three in the past 18 months, including former Enforcement Chief Counsel Phyllis Cela, said Dan Ryan, chairman of the firm's financial regulatory practice.

"We've been working for mostly large banks with respect to helping them prepare for derivatives regulations," Mr. Ryan said. Ms. Cela advises clients on "what steps they should take now to avoid future enforcement actions," he said.
At the risk of belaboring the obvious, if rules are clear and simple, you don't need to hire the people who wrote them, and who have lots of buddies on the inside deciding what they mean, to survive.  And in the regulatory-capture department, good luck to new smaller companies who can't afford to hire their own personal rule-soothsayer with a good contacts list on his phone.

...critics of the revolving door between Washington and Wall Street say they worry ex-staffers could use their personal connections to pressure the agency into crafting rules favorable to their new employers.
No, you don't say?


  1. How do you make sure in practice that the rules are "clear and simple"? Who is the judge of clarity and simplicity? Clear and simple relative to what standard? It's a good idea in theory, but I am not sure it has any practical implications. Isn't it better to have very few rules but protect the economy via automatic stabilizers and social insurance programs?

  2. Clear and simple is when you don't have to hire ex staffers at huge salaries to "interpret" the rules they wrote and call their buddies still inside to get internal interpretations and enforcement to go your way. That's easy to tell!

    1. if all ambiguity is left out of the rules, they will be extremely easy to get around and thus be ineffective. If there is any ambiguity however, you will still need to hire ex staffers at huge salaries

    2. Professor, you very well know the reason why rules today are not clear and simple---if they were the super conservative federal courts would not enforce them.

      It is very easy to write a simple rule, for example: a bank shall exercise the highest degree of care in making a loan. Today's federal courts will not enforce such a rule.

      You also know that there are other regulatory regimes (Europe) that actually produce greater regulation with clear simple rules that our courts do not permit and those are policy or goal regulations, for example: "At least 99.5% of the banks loans, as measured by unpaid principal outstanding, shall always be performing, in accord with all terms and conditions on which the loan was originated." Or, "all terms and conditions of a loan shall be in writing."

      Last, you know, as regards finance regulation, that not all conditions can be anticipated so it is not possible to right clear, specific and narrow rules covering all conditions. Soros explained this at your beloved CATO and Richard Epstein had to agree.

      In sum, your entire argument is a red herring.

    3. Are you crazy, anonymous? How can a firm comply with a rule if it is ambiguous? And if the firm can't know it's in compliance, how can an enforcement action reasonably be brought against it for non-compliance.

      The purpose of ambiguity is not to create rules that cannot be circumvented because a.) all rules can be circumvented and b.) if nobody knows how to comply with a rule then they will by definition not be able to follow it. The purpose of ambiguity is to keep firms constantly out of compliance so that the SROs and the SEC can take action against a firm and (more importantly) fine firms whenever the regulators feel like it. FINRA is nothing more than a shake-down operation. Its examiners' bonuses are based on the amount they collect in fines from FINRA's member firms. A box left unchecked? Fine! An i left undotted? Fine! FINRA demands an OATS trail. It is provided. It comes back 18 months later and says the firm is doing it wrong. Then, it fines the firm for the 18 months it was out of compliance because it took FINRA 18 months to respond to the original OATS request.

      The the SROs and SEC spit out rules that are not only poorly thought-out but not thought-out at all. We then have to comply with them and we have to do so in real life and in detail. We ask specific questions in order to make sure that we understand and comply with the rules. The regulatory bodies then respond that they will not clarify. That's it. Literally "we will not clarify". A general rule such as Reg Sho rule 204 that left the entire industry confused and resulted in millions of dollars of fines for non-compliance of a rule nobody understood because the SEC refused to clarify anything because that would reduce the fines and opportunities to pursue vendettas against firms it doesn't like (it's a small world and plenty of us know and don't like each other. The unsuccessful traders often end up at the SRO where they proceed to avenge their failure.)

      One of the examiners from our SRO got chatty with me and expressed his frustration that politically connected firms can literally commit fraud (yes, as bad as that) and it goes nowhere. Enforcement is done in stages. At each stage, the firm can challenge the action. The examiner finds what looks to be obvious fraud and takes the next step. It never goes beyond the receipt of the first enforcement action because one call from (usually) someone at the SRO or the SEC kills it. It's good to have connections!

      for example: a bank shall exercise the highest degree of care in making a loan. Today's federal courts will not enforce such a rule.

      That is neither simple nor clear. That is, in fact, vague and uninformative. Legal language is precise for a reason. What constitutes "high degree"? How is "care" defined precisely? There's nothing to enforce - unless this bank didn't happen to have political connections.

      It is not possible to foresee changing circumstances. If government were so enabled, it would be better at central planning. However, I doubt VERY much that Richard Epstein EVER said that it is either impossible or imprudent for rule-makers to make rules less vague or to refuse to clarify what they meant when they wrote them so that a firm never has any idea if it is in compliance and must buy political power to avoid enforcement actions. Vague rules are vague on purpose and the purpose is that it suits the regulatory bodies.

    4. I find it amazing that those (usually on the political left) always call for more regulation, and more rules making in order to make sure that there is an equal playing field and the "rich and powerful" can't get away with breaking the rules.

      Yet the history of regulation, especially financial regulation is one of constant regulatory capture and nothing but cooperation between government and the Rich and Powerful.

      Not only will these new regulations do NOTHING to curb abuses they will only be a barrier to entry for smaller, more efficient players to enter into the market.

  3. Or you can just get one of your Covington & Burling boys appointed Attorney General of the United States.

    And speaking of revolving doors and Covington lawyers, how's Michael Chertoff doing?

  4. This sounds a lot like the accounting field where each of the Big Four have their standards gurus and constantly need to hire government insiders to maintain an edge. On the plus side it seems that complicated and ambiguous regulation has been a boon to accounting academics. It would be entertaining to see a policy appendix to a paper like "Variance Risk Premiums" (Carr & Wu 2009).

  5. "if rules are clear and simple, you don't need to hire the people"

    Professor, whats the point in having regulations that dont need lawyers with political connections to sell favors? Dont you know how these people think?
    On the contrary, the more contradictory and ambiguous the law the better.
    We must concede, though, that since big financial companies always get bailouts when they get into trouble, there should be regulations to limit their size. Dont you think?

    By the way, clear and simple means that any person without mental retardation can understand what the regulations mean. For example, look at this two rules and see which one is objective:
    1) You cant go faster than 80 Km/h on this street

    2) You cant go very fast, unless there is a strategic need for you to do so.

    1. there should be regulations to limit their size

      Has it ever occurred to you that their size is not independent of regulation? Regulation oh-so-helpfully eliminates so many of their competitors, allowing them to get too big to fail. You want to solve this with more regulation? they will find 1,115,236 ways to get around any such regulations within 25 minutes. I have a more simple idea: end the bailouts and get rid of regulation entirely.

      1) You cant go faster than 80 Km/h on this street

      There are some rules like that. For instance, you must, 100% of the time, accurately mark your trades as long sales and short sales (they don't care about buys because...anything to make the market go up!). That's very very clear. Trouble is, the technology to do so 100% of the time does not exist and no firm has ever in the history of the world ever been able to comply with this requirement in full. It's a "sprout wings and fly" regulation.

      Then they make stuff up. There's a rule that all employees of a Broker Dealer must submit to the firm for scrutiny on a monthly basis all account statements for accounts in which the employee has a beneficial interest. The compliance officer must then pry into these poor people's private financial lives, sign the reviewed documents and keep them on file. The examiner nabbed us for not dating the signatures - something not required by the actual rule. Surprise!

      None of this is expensive or anything. We don't have anything better to do, obviously. The financial markets are going to collapse if I am not aware that my secretary owns 100 shares of Disney stock! Meanwhile, nobody paid Madoff a visit because he donated a lot of money to keep Chuck Schumer in a senate seat and hair gel. Regulation is great.


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