By James Kwak
A few years back I wrote a paper on “cultural capture” in financial regulation. The basic idea is that the industry can achieve the practical result of regulatory capture—industry-friendly policies—not just by bribing regulators (legally or illegally) and not just by providing useful “information” to agencies, but by cultivating other types of influence such as social relationships status advantages. The response was decidedly mixed. Some people said, “Yes, that’s exactly right!” while others said, “Nice idea but how can you prove that it actually happens?”
I completely concede the identification problem. Regulatory decisions are always overdetermined, and it’s hard to find data on, say, how many regulators’ kids go to school with lobbyists’ kids. But sometimes it just hits you between the eyes.
Yesterday the invaluable Jesse Eisinger published the backstory of the SEC’s ABACUS investigation (which will always have a special place in my heart, since the complaint was filed shortly after the publication of 13 Bankers, getting Simon and me a full-hour interview on Bill Moyers and boosting the book up the charts). Eisinger’s story is based on information provided by James Kidney, a veteran SEC lawyer who thought the agency should pursue Goldman senior executives on a broader theory of liability—but was opposed by other insiders and, ultimately, Enforcement Director Robert Khuzami.
And here’s the smoking gun, in an email by Reid Muoio, then head of the team investigating complex mortgage securities (that is, most of the financial crisis):
Let’s leave aside the illogical conclusion: of all the people at Goldman, Tourre most closely fits the description, “good people who have done one bad thing.” His higher-ups, the ones who designed and supervised the whole operation, are the serial wrongdoers. And forget for the moment the obvious contrast with how the justice system treats minor drug offenders.
Muoio’s charging decision is based on sympathy with the entire category of securities law defendants. They’re good people. They’re like us, but for one little mistake. So let’s go easy on them.
Kidney knew what was going on. This is what he wrote in one email: “We must be on guard against any risk that we adopt the thinking of those sponsoring these structures and join the Wall Street Elders, if you will.” The problem is that his colleagues seem to have wanted to be part of the Wall Street Elders—not that they necessarily wanted jobs on Wall Street, but that they wanted to feel like part of the sophisticated club, the people who designed the most complicated financial products ever.
There’s an argument to be made that the SEC couldn’t have won the broader case that Kidney wanted to bring; I can’t judge that from what I can see. But the key thing is, that wasn’t the only factor behind the SEC’s decision to go easy on Goldman.
Kidney explains why he came forward on his blog here. It’s a great read, full of passages like this:
Yessir, according to the Obama administration, Goldman Sachs, JP Morgan, Bank of America, Citibank and other institutions made their contributions to tearing down the economy, but no one was responsible. They are ghost companies.