Fordham Panel on Monday

By James Kwak

The Fordham Law School is holding a symposium on regulatory capture, with a vague emphasis on the financial sector, on Monday morning from 8 to noon, plus lunch if you want to stick around. Senator Sheldon Whitehouse (D-RI) will be talking — I’ve heard him, he knows his stuff — and the panelists will include Lawrence BaxterDaniel KaufmanSteven Davidoff and Robert Weber. And me. I’ll be talking (for ten minutes, plus discussion) about types of regulatory capture, in particular how regulatory capture can operate in the absence of corruption and dishonesty.

I believe according to the website it’s free if you don’t want lunch. And lawyers can even get CLE credit (you have to pay a bit more), even though I’m still in law school!

16 responses to “Fordham Panel on Monday

  1. As a regulator, I’m interested in a particular kind of capture: regulations that favor large corporations over small businesses. In the environmental regulatory game, there are certain pollution release reduction targets that are mandated by law and are implemented on a gradual basis over time. Although some targets are met by identifying new sources of pollution, most of these targets are met by imposing stricter limits on existing sources. The industry stakeholders that control the majority of the sources are large corporations, and the active nature of our regulatory regime necessitate building a strong working relationship with these stakeholders in order to meet our reduction targets and allow industry time to adjust. Over time, a dynamic has evolved that has somewhat crowded out small players in the industry from the marketplace, since they face much higher control costs as limits are imposed, and the sources they control are not large enough to merit much regulatory consideration. This is similar to the “close the small banks, bailout the large banks” dynamic that the US government is pursuing.

    This dynamic seems to have naturally evolved as companies adapt to regulation and the regulatory environment, and regulators adapt to (and favor) companies that play the game well. This synergy will be difficult to disrupt, since both players are achieving their missions: our reduction targets are being met without fail, and the corporate stakeholders gain market share. Indeed, this unintended consequence of the system had become a feature, rather than a bug, as the smaller, weaker regulated entities leave the marketplace and take their pollution with them.

  2. ” how regulatory capture can operate in the absence of corruption and dishonesty”

    Looking forward to your definition of dishonesty.

  3. And how would you define it, in terms of corruption, and capture, when basically self-appointed bank regulators, with amazing hubris, take upon themselves to be the risk-managers for the rest of the world and making a mess of ground zero in the process? Self capture? And when then after they failed completely… they ignore it and keep digging us deeper in the hole where they placed us… sadism?

  4. Dr. Kurowski, is it at all possible that you’re stuck in a rut? Almost every day, and sometimes several times a day, I read your comments blaming the financial crisis on the “self-appointed bank regulators” but somehow you never cast any blame on anyone–ANYONE–else.

    It’s clear that you are erudite, highly qualified, and knowledgable and that your opinion is worthy of serious consideration. But as an ignorant commoner who lost some money and most of the value of my home in this whoop-de-do by the bankers and the masters of the universe, I must ask, can it really be so simple as you make out?

    Common sense alone suggests that the “amazing hubris” to which you refer was liberally spread around to include legislators, bank executives, hedge fund managers and many others. Even professional economists.

  5. @James Kwak: you say will be speaking about “in particular how regulatory capture can operate in the absence of corruption and dishonesty.”

    I must ask why you would spend time on that angle when in our continuing national calamity, regulatory capture does NOT operate in the absence of corruption and dishonesty. In the absence of corruption and dishonesty, I doubt the phrase “regulatory capture” would even exist.

    THINK, man, THINK.

  6. Yes I am indeed also sorry for having to be so fastidious, obnoxious and obsessively repetitive with my arguments but, what is one to do if no others, for whatever reasons of their own, want to point at the real causes of this crisis? Let me assure you though, that I am not a Monday morning quarterback on this but have been warning, in clear terms, since 1997, which was when I first became aware of what was happening.

    Can it all be as simple as I make out? Of course not… but it is quite simple to see that with respect to the major cause of this crisis, the regulators managing risk and favoring so much what was perceived as having no risk, nothing has been done and the Basel Committee now just tries doing more of the same.

    “amazing hubris”? Yes there is plenty to go around, and we all are probably guilty of it, but hubris come in layers of importance, and so, the other risk-managers, full of hubris, have to work with a ground zero that has been seriously distorted by regulatory hubris.

  7. Herbert Wetherby

    Your not prepaird to take my IQ test, but I can still place you as a monday morning qb, and in a boat with many cons, the only solution is to wait for more weak banks to fail and the strong banks to carry on. Distortion is in the mind of the beholder.

  8. Right! Until we end up with just one monstrously big last bank, which can then be embraced by one monstrously big last government… This might be bliss for you… but not for me.

    Simon Johnson “The latest credit rating methodology from Standard and Poor’s says essentially just this – henceforth, it will evaluate banks not just on their “stand alone” creditworthiness, but also in terms of their ability to attract generous support from a creditworthy government in the event of a crisis.”

  9. Herbert Wetherby

    I’m sorry to hear about that, but if the difference between Right and wrong is one big right bank or one big wrong bank then the monstrousity of it all makes no difference. You STILL have the right and wrong percieved vision, -vs- the actual right and wrong facts. Now if not being able to find the facts is blissless, then you end up on the wrong side of the margin and forfit your investment. In that instance you actually can create a crisis -vs- the percieved creation of jobs.

  10. Croak! Croak! Croak! This has been going on since Reagan, though the tentative start was late the Carter Administration, and it is good to see it at last making the public consciousness.

    It might help if the beginning was tied to Reagan. For one thing, it’s true. For another, discrediting Reaganism might prevent younger people from turning to conservatism. For a third, Reagan is an object example of a dishonest charismatic leader, and remembering that might help when the next dishonest charismatic leader arrives.

  11. James, remember, regulatory capture is not a passive phenomenon. Nor is it like the Stockholm Syndrome. Regulatory capture results from the direct efforts of the regulated, acting through political forces, to shape the regulatory system. Politicians appoint those, acceptable to the regulated, to high positions in regulatory agencies. Over time, these regulators hire and promote those who agree with them and they chase out those who do not. Eventually, those who agree with the deregulatory agenda, advanced by the regulated, dominate the regulatory system Regulatory capture does not happen over night, like the conversion of Patty Hearst. It results from deliberate decisions and actions that can be traced back to regulated industries and their lap dog politicians. Is it influenced by corruption and dishonesty? I’ll let others define those terms. But after 27+ years at the SEC, beginning in 1981, I know what I observed and it wasn’t pretty.

  12. Bruce E. Woych
    “In economics, regulatory capture occurs when a state regulatory agency created to act in the public interest instead advances the commercial or special interests that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure, as it can act as an encouragement for large firms to produce negative externalities. The agencies are called Captured Agencies.”
    “Gamekeeper turns poacher or, at least, helps poacher. The theory of regulatory capture was set out by Richard Posner, an economist and lawyer at the University of Chicago, who argued that “REGULATION is not about the public interest at all, but is a process, by which interest groups seek to promote their private interest … Over time, regulatory agencies come to be dominated by the industries regulated.”
    “According to Herb Denenberg, former Pennsylvania Insurance Commissioner (1971-74), “Don’t think the insurance commissioner regulates the insurance industry. It’s the other way around. The typical insurance commissioner over the years has been somewhere between a lapdog and puppet of the industry. That means consumers often pay too much for insurance, get the wrong kind of protection, don’t get their claims paid property, and are otherwise ripped off by an industry that pretty much operates without the restraints that a commissioner is supposed to apply.””
    “Conflict over pollution control follows a long-standing pattern that goes back to the 1920s and before. No force of nature makes regulators do the bidding of those they are supposed to oversee. Nor is it the effect of some vague intellectual influence. Direct political and economic pressure, it turns out again and again, has been the cause of capture.”


    “The reason why those who see economic regulations as akin to tyranny often win policy debates is because they have a fiery argument with visceral appeal. Those who try to sell the virtues of the supervisory state tend to favor the passive voice. They don’t do fire. They do law review.

    The situation ought to be the reverse today. We have just come through the most wrenching financial disaster in decades, brought about in no small part by either the absence of federal regulation or the amazing indifference of the regulators.”

    “In a dramatic illustration of regulatory capture, a new report from an Interior Department review board has found that poorly trained, ill-equipped and overextended federal inspectors who were supposed to be policing the nation’s offshore oil and gas drilling facilities were routinely bullied by industry representatives and were often undercut by their managers when they reported safety violations.”

    Daniel Kaufmann, Senior Fellow, Global Economy and Development

    The Brookings Institution

    “…In the past couple of years, we have written about how the undue influence of and the regulatory capture and “legal corruption” by some Wall Street firms enabled them to take on huge systemic risks, while minimizing their own exposure.

    In this capture process – however subtle or coarse – financial regulatory institutions, such as the Securities and Exchange Commission (SEC) and the Office of Thrift Supervision (OTS), failed to perform their regulatory and oversight roles. Furthermore, Wall Street institutions, through a combination of political contributions, lobbying, and the seamless revolving door with public sector executive positions in Washington, wielded significant influence over top policymakers in government and Congress.

    …In fact, further transparency regarding exposure of conflicts of interest between senior government officials, regulators and legislators, on the one hand, and the industry they oversee, on the other, is warranted.

    …With further transparency and timely disclosure of crucial information and data, public interest groups, expert consultants and researchers, as well as investigative journalists would effectively serve as a check and balance on the performance of the executive and legislative bodies in their regulatory and oversight functions. In the throes of the recent Supreme Court decision doing away with remaining constraints on direct political contributions by corporations, such timely disclosure and dissemination is even a higher priority to guard against capture.”

  13. Bruce E. Woych

    “Together, all corporations and organizations invested $3.47 billion on lobbying last year, according to the Center’s analysis of 2010 lobbying reports;…”

    “Many — but not all — of the industries targeted for new regulations and restrictions by the Obama administration and congressional Democrats invested more on lobbying last year than the year before.

    For instance, among big-spending special interests, electric utilities, the securities and investment industry, the air transportation industry, the defense aerospace industry and commercial banks all increased their lobbying expenditures in 2010 compared to 2009….”

    “..Meanwhile, other large industries — particularly those with their most critical legislative battles behind them — slowed their spending last year.

  14. Not only the regulated can capture the regulating agency, the regulators can too.

    The Basel Committee was captured by a small mutual admiration club of regulators, in order to play out their bedroom fantasies of playing risk-managers to the world and having no banks defaulting.

    That they themselves were captured later, as described and implied above, well that is a different story.

  15. Herbert Wetherby

    Most of what you are saying hear is true, and can even be expanded on. Between agencys and layers of bureaucracy their exists mulitipul levels for individuals to take advantage of the system. They require you to be accountable to them, yet they haven’t much, if any, requirement toward you. This is the way they make thier money. A good example of this was 2 decades ago an expansion joint raised up from a highway bridge and cause multipul damages to cars, vans, and emotions. A State trooper swore with his life that the damage would be paid for since it was a State Insured road. (BY aetna). A close friends cousins vehicle was paid for, I didn’t even know she was part of the accident until years later when a discussion arose. But my $4000 claim was denighed and I had to cover the cost of a temp car and the damages caused by another, and that was a year after law firms told me they can’t help me with my inheritance. Which was plundered 3 years after the road accident. So the deception and fraud runs very deep in this country and shows little sign that it has any intention of making goood on thier mistakes. Its just the opposite, they want to dig in and capture more for themselves, with disreguard for the timer that ticks slowly away frustrates them more than they desire. But I can see them running out of tools rapidly and falling on the defenceive as they throw change at you hoping its enough to allay the situtation for now. Time will tell, what little there is of it.

  16. Or… Who incepted the Basel Committee with the idea of controlling for perceived risks instead of regulating for risks not perceived?