So let’s say you’re a bank and, redundantly, you are in trouble with the SEC. And you want to hire a new lawyer to get you out of that trouble, because your old lawyers got you into it. You decide, sensibly, to hire a lawyer directly from the SEC, both because those lawyers have valuable experience and contacts and because they lawyers are paid so much less than your other lawyers that they’re a bargain. Who would you rather hire:
(1) An SEC lawyer who has always been nice to you, settled cases easily, not pushed too hard on investigations, and waived collateral consequences of your repeated securities fraud, or
(2) A lawyer who has always been a huge dick to you, litigated everything to the death, made your life difficult, and taken unreasonable positions?
If you chose option (1), you probably don’t work at a bank.
This study of the SEC revolving door is actually pretty neat, though suspect for reasons Yves Smith points out.* The most important conclusion is that the prospect of leaving the SEC to go represent companies doesn’t make SEC lawyers nicer to the companies: in fact, SEC lawyers who later leave to represent clients before the SEC seem to litigate more aggressively than those who don’t. But that’s actually pretty obvious, isn’t it?
For one thing, aggressiveness correlates with ability and intelligence and hard work and the general facepunching ethos required to succeed in private industry. The SEC lawyer who goes home at five o’clock after a relaxing day of ignoring financial fraud probably won’t fit in at a bank with a fast-paced culture of committing financial fraud.
For another thing, aggressiveness creates the conditions for private-sector employment: if you are the SEC employee in charge of policing CDOs, say, and you never sue anyone over CDOs, then no one will ever need to hire you to defend their CDO cases against the SEC. The more people you sue or regulate or generally bother, the more potential clients you have.**
Most of all, aggressiveness creates the desire in your victims to be rid of you as an SEC employee. Even if you’re an unbearable jerk and an idiot and cannot be useful in defending lawsuits, if you’re annoying enough at the SEC then some bank will hire you and pay you $500,000 a year to sit in a windowless room with no internet access. Better than leaving you at the SEC to continue pestering them.
All of this is obvious enough. The conclusions you’d draw from it are mixed: on the one hand, it’s probably true that the revolving door really shouldn’t deter firm regulation and zealous investigation of financial companies, so if you like that sort of thing you shouldn’t be too troubled by the fact that everyone at the SEC hopes to one day work at Goldman Sachs. On the other hand, the revolving door’s incentives encourage regulation and enforcement optimized not to prevent fraud but to create future private employment: arcane rules and arbitrary litigation make SEC insider knowledge and contacts more valuable than clear rules and consistent enforcement.***
One more speculative conclusion is: if the private sector thinks this way, why not the government? Maybe those who want to clamp down on banks should welcome the SEC hiring Goldman Sachs alums. Aggressiveness is aggressiveness, whether applied to enforce or thwart regulation. And if they’re doing so much damage at Goldman Sachs, why not move them somewhere with, let’s say, a more mixed track record of effectiveness?
Study Questions Risk of S.E.C. Revolving Door [NYT]
Does the Revolving Door Affect the SEC’s Enforcement Outcomes? [American Accounting Association]
Dubious Study Defends SEC Revolving Door [Naked Capitalism]
* In addition to its sampling dubiousness – one portion of the SEC, relatively junior lawyers, etc. – and difficulties in extracting causation, I found most counterintuitive the claim that law firms who hire SEC lawyers don’t get better results for their clients with the SEC, and would endorse the explanation “that litigation was far from a complete picture of how ex SEC staffers could interact with the agency. It isn’t hard to imagine their highest and best use would be to settle matters quietly, meaning to forestall litigation being filed.”
** I mean, you probably can’t defend against the cases you actually brought, but just creating the fear that there’ll be more, and a template for other SEC-sters to bring them, is a good way to make yourself useful to future employers.
*** If exchanges have discretion over whether or not to break erroneous trades, then you want to hire the guy who’s a personal friend of the head of the NYSE. If it’s a bright-line rule, then nobody can save you from yourself with a phone call to Mary Schapiro on her vacation.