Bloomberg has a big article today about former SEC commissioner Annette Nazareth’s current work as a Davis Polk lawyer-lobbyist-fixer for the financial industry that is sort of sneery but still interesting. It’s a long litany of her quasi-misdeeds in dealing with her former agency, although at paragraph 738 there’s an obligatory “no indication Nazareth violated the federal ethics law that bars senior officials from representing clients before their agency for one year after they leave”; instead the misdeeds are mostly of this variety:

The overlap [of business and shaaaaaady] was sometimes evident in Nazareth’s salutations, which varied from “Dear SEC friends” and “Dear Mary and David” to “Hello All.” On March 10, 2010, for example, she wrote to “Chairman Schapiro” asking if she’d take a meeting with Credit Suisse “to discuss the SEC’s concept release on equity market structure.” After Schapiro agreed, Nazareth wrote back: “Fantastic, Mary!”

In addition to inconsistent use of first names, Nazareth sometimes summarized proposed legislation for the SEC and pointed out drafting errors in the agency’s proposals. “Nazareth’s communications provide an inside look at what happens when the revolving door spins”: the summaries were read; the errors were corrected. The Bloomberg article in general does a good job of not actually saying anything Nazareth or her SEC contacts did was unethical, while cheerily letting others pick up that implication. Others oblige:

In Nazareth’s e-mails, you can’t necessarily see instances of overt capture. There are no smoking guns or tit-for-tat favor-currying. But what you can see are the contours of a friendship that, over time, can weaken a regulator’s ability to be unsparing in his or her day job. Nazareth is a Davis Polk attorney, paid millions of dollars by the nation’s largest banks and financial firms to help them water down Dodd-Frank and other financial regulation, whose tactics apparently include joking, cajoling, and making workaday small talk with a guy whose job it is to help write those rules. It’s the clearest real-life example we have of how the Blob works and how insidious its effects can be.

“No instances of overt capture … clearest real-life example of how insidious its effects can be” is nicely self-refuting but there you have it.*

Actually you can build a parsimonious principal-agent model of all of this without ever saying “revolving door.” You might start on this model with the question: why does the SEC need a private law firm to summarize its own rules? Then you’d maybe build something like:

  • the SEC doesn’t have the resources to quickly read and understand all of Dodd-Frank, say;
  • Davis Polk does;
  • so it does;
  • and sends the summary to the SEC;
  • which is grateful.

This is a good model for Davis Polk! Of course Davis Polk is a profit-maximizing entity and ultimately its clients pay for it to do that summarizing; the clients presumably think they get good value. Here I drew you a picture**:

The gratitude flowing from the SEC, through Davis Polk, to the banks is a form of regulatory capture that does not depend on any revolving door; anyone with time on their hands and PowerPoint skills could try to win their way into the SEC’s heart by the same method.

Good as this is for Davis Polk, is it good for the SEC? That gratitude presumably favors Davis Polk-client banks over miscreant individual investors who can’t even be bothered to do the SEC’s job for it. Bloomberg points out that “SEC pay scales generally can’t compete with industry; they top out at about $240,000 for staff and $156,000 for commissioners,” with the implication that SECsters feather their nest by planning to jump to more lucrative private-sector work after they’re done. This is surely true – it’s the only explanation for why the bosses get paid less than the staff, because the bosses have more lucrative exits – but even if SEC staff and commissioners were routinely executed at the end of their tenures they’d still probably enjoy having Davis Polk summarize their rules for them. Because why read your rules when someone else will do it for you, if all it will cost you is a little nebulous gratitude down the line? That’s just common sense. Former SEC general counsel Gary Becker knows what I’m talking about:

Early in the Dodd-Frank debate, in November 2009, Nazareth forwarded a summary of a Senate proposal to Becker, who noted that the actual text ran to 1,100 pages. “More nap time for me,” he wrote.

That prompted Nazareth to ask, “Yea, but what about me? No rest for the outside counsel.”

Yup! You get paid $1,000 an hour, you never sleep. You get paid a fixed salary and someone else offers to do your work for you, you block out nap time in your schedule. This is standard stuff: if you can’t influence your compensation by what you do, you might as well do less.

But of course you have a staff! Is it not weird that the SEC can’t summarize securities legislation itself? The picture that I get from the Bloomberg article isn’t really about nefarious back-room dealings between current and former SEC staffers. It’s about the private sector being entrepreneurial and staying up all night to understand the rules and then going home to shower and change and coming right back with a smile on its face to call up the regulators and say “I got you a little something, it’s a flowchart, hope you like it.” While the regulators are overburdened or undercompetent or, um, napping. The problem may not be that the SEC and the industry are too close to each other, but that they’re too far apart.

Top Bank Lawyer’s E-Mails Show Washington’s Inside Game
Lawyer’s E-mails Set New High Score in ‘Capture the Regulator’ Game [DI / Kevin Roose]

* Also: “We don’t like these kinds of cozy relationships between journalists and the sources they cover,” “these kinds of cozy relationships” meaning I guess calling each other by their first names. Some journalists disagree.

** Quick aside – that reminds me, remember this? It’s Davis Polk’s flowchart of the Volcker Rule and it is how I understand the Volcker Rule; it is also how everyone [who understands the Volcker Rule] understands the Volcker Rule, because Davis Polk has the time to read the Volcker Rule and everyone else has at most the time to read Davis Polk’s flowchart. (Davis Polk’s time costs $500+ an hour, so they can always manufacture more of it.) I submit to you that if you produce the Quasi-Official Annotated Volcker Rule, and you are in the business of representing clients affected by the Volcker Rule, that is good for you – and the more people who think it’s quasi-official, the better. Banks, great. The SEC, even better. Journalists, meh, they’ll take it.

Comments (62)

  1. Posted by guest | September 5, 2012 at 6:00 PM

    no nap –> grumpy pants –> volker rule

  2. Posted by Hank Guillotine | September 5, 2012 at 7:11 PM

    "if SEC staff and commissioners were routinely executed at the end of their tenures"

    Genius idea Levine! We'll get on that.

    Hank Guillotine
    Founder & CEO
    Guillotines Unlimitied

  3. Posted by Lloyd and Gary | September 5, 2012 at 7:20 PM

    if this is all you can produce, Levine, you can say goodbye to those unvested RSUs and the paycheck. We got you installed at DB to turnaround our reputation by making us look fun and cool, not to be all preachy and lawyery. git!

  4. Posted by Guestest | September 5, 2012 at 7:59 PM

    So IANAL but doesn't it seem like an obvious solution here is for the SEC (well, taxpayers) to hire outside counsel that is not conflicted by also doing business for the regulated entities, or at the very least has a wall up like said entities?

  5. Posted by guest | September 5, 2012 at 10:22 PM

    To rational

  6. Posted by Matt's Intern | September 5, 2012 at 11:17 PM

    Okay, so I've got all the "Levine for SEC Commissioner" pins made up and the t-shirts printed, I picked up the giant Caymanian flag, got a gallon of frozen Margheritas and organized all the research reports on Facebook you printed out from highest price target to lowest and then reorganized them in order of estimated 2017 earnings, or if not available, relative complexity of charts, or failing ability to determine that, whatever "whatevs" means. Now can I go home for the night?

  7. Posted by Matt's Interns"*" | September 6, 2012 at 12:47 AM

    Well, I guess walking through a literal revolving door, reading Ayn Rand while going clockwise and then Gore Vidal with Aldous Huxley pages interspersed within while going the counterclockwise added the kind of value I'd see this semester by interning for you, thanks for the dregs of the mars.

  8. Posted by Duke of URL | September 6, 2012 at 6:34 AM

    Too bad you embarrassed your old MD with a sloppy picture. Center the text you fool!!!

  9. Posted by Bandersnatch | September 6, 2012 at 7:16 AM

    Nazareth – now she's no longer with the SEC, now you're messing with a son of a bitch.

  10. Posted by laserhaas | September 6, 2012 at 11:07 AM

    Dear Matt Levine;

    If you would like a slam dunk of a case that has the potentional to point out that the SEC "destruction" of case files has benefits to Goldman Sachs and Bain Capital bad faith deeds (especially during the CEO "retroactive" years). Then please look upon our saga?

    It is a fact that the law firm for Goldman Sachs and Bain Capital in Delaware is one and the same.

    Also, beyond dispute, it is a fact that same law firm confessed to lying under oath to become eToys attorney. (Admitting it did lie about the Goldman Sachs relationship – where Goldman Sachs is the law firm that took eToys public – but failing to confess the relationship to Bain Capital/ Kay bee).

  11. Posted by laserhaas | September 6, 2012 at 11:08 AM

    Dear Matt Levine;

    The issues (among hundreds of crimes) being that the law firm lied to become eToys bankruptcy counsel and then asked for (and rec'd) permission to Destroy Books & Records.

    Those books that would show eToys was NOT bankrupt.

    The Records on the fact that eToys went public with the stock soaring to above $78 – but eToys only getting approx $16.50 per share.

  12. Posted by laserhaas | September 6, 2012 at 11:09 AM

    Dear Matt Levine;

    The same law firm, connected to Creditors counsel – who both conspired to put in (Illegally) a partner of Creditors counsel as CEO of eToys (doing so POST bankruptcy petition filing AFTER they were told NOT to do so by the US Trustee's office (testimony of U.S. Trustee part of case record).

    One and same law firm who then conspired to give eToys assets to its other secret client (Bain Capital) for FREE — colluding/ conspiring with illegal CEO and conflicted Creditors attorney (who also confessed to lying under oath "intentionally")

    The same law firm that conspired to nominate the Creditors law firm to prosecute Goldman Sachs in NY Supreme Court (case No 601805/2002) (thus Al Capone picked Frank Nitti to prosecute Al Capone's client)

    But – you cannot see the NY Supreme court case of eToys (ebc1) vs Goldman Sachs
    They put that ENTIRE case under SEAL from public view.

  13. Posted by laserhaas | September 6, 2012 at 11:09 AM

    Dear Matt Levine;

    Though the SEC, DOJ, FBI, Corp Fraud Task Force and so many others had all this evidence (and the confessions to lying under oath [deliberately] 34 times –

    No Prosecution transpired.

    That is because the same law firm got its client (Bain Capital CEO) to resign August 2001
    and then that law firm's partner was made to become the United States Attorney in Delaware

    August 2, 2001

    Where for 7 years – he did refuse to investigate/ prosecute his former partner & clients.

    ALL of this is Public Docket Records.

    TAG – You're IT!

  14. Posted by lenny | September 6, 2012 at 11:11 AM

    Former GC for the SEC is David Becker, not Gary.

  15. Posted by laserhaas | September 6, 2012 at 11:12 AM

    Now – of course – you can choose to leave this issue alone.

    Matt Taibbi received the files from me and was supposed to talk to me
    and then never rescheduled the cancelled call – but did make part of these issues
    the Cover story of Rolling Stone.

    PoliticsUSA then quotes Taibbi and goes into further details
    in their article by Rmuse (entitled "Vampire Squad")

    But – none of them have mentioned the RICO issues and massive cover ups – around eToys.

  16. Posted by Just wondering | September 6, 2012 at 11:53 AM

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    Jesus who let this guy out of the Pimco afternoon limbo line…

  19. Posted by Jerry Egert | September 9, 2012 at 11:31 PM

    All the big guns running the SEC get all the goods for themselves while the real players bleed from extra work. Moreover, they have such influential friends who are former SEC executives who knows very well the work and system. There is a big potential for corruption right there.

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