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Where Bank Regulators Go to Get Rich

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April 8 (Bloomberg) -- Mary Schapiro, the former chairman of the Securities and Exchange Commission, must take us for fools.

No need to worry about her and the so-called revolving door between government and Wall Street, she told the Wall Street Journal on April 2, after announcing she would be joining the Promontory Financial Group LLC as a managing director in its Washington office, in charge of its governance and markets practice. “In my case, there’s no revolving door,” she said. “I won’t ever be going back to government.”

Oh well, then, I guess that makes it OK that four months after leaving the SEC, Schapiro is joining a firm stuffed to the gills with former government financial-services regulators peddling their knowledge of Washington’s regulatory thicket to the banks and financial-services companies they once oversaw. (Schapiro, remember, also had a swell incoming trip through the revolving door: She previously ran the Financial Industry Regulatory Authority, Wall Street’s self-appointed watchdog, which paid her a bonus of almost $9 million after she left to go to the SEC in 2009.)

Promontory, founded in 2001 by Eugene Ludwig, a former comptroller of the currency, has become a sort of mini-version of Fannie Mae in its heyday. Back then, the mortgage giant was the ultimate revolving door between Washington and the private sector, paying retired politicians huge salaries to lobby their former colleagues. We all know how that turned out.

About 100 of the 400 Promontory employees are former Washington regulators; some 5 percent, like Ludwig, come from the Office of the Comptroller of the Currency, which regulates all banks with federal bank charters, including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. Last year, the firm hired Julie Williams, the former chief counsel of the OCC. To keep things in the family, the agency hired as Williams’s replacement Amy Friend, a Promontory managing director.

Among the members of Promontory’s advisory board are Arthur Levitt, like Schapiro a former SEC chairman (and now a senior adviser to Goldman Sachs Group Inc. and a board member at Bloomberg LP); Frank Zarb, a longtime Wall Street hand at firms such as Lazard, American International Group Inc. and Citigroup; Kenneth Duberstein, the former chief of staff to President Ronald Reagan and a member of the special committee of the board of directors of Dell Inc.; and Alan Blinder, a Princeton University economics professor and former Federal Reserve vice chairman.

Blinder is a particularly interesting case study of how Promontory works its magic. According to the Promontory website, Blinder is a co-founder of something called Promontory Interfinancial Network, which when you cut through the gobbledygook says it helps smaller financial institutions get some of the same benefits of size enjoyed by our “too big to fail” banks. One of the products Promontory Interfinancial offers customers is Insured Cash Sweep, which according to a fancy video allows someone with more than $250,000 in cash on deposit in a bank -- the limit of what the Federal Deposit Insurance Corporation will insure -- to get federal insurance for any amount.

What the company does is allow someone to hand over, say, $1 million, which is then broken up for him into four $250,000 pieces and farmed out to separate financial institutions so that, voila, each $250,000 is FDIC-insured. The depositor notices no difference on a daily basis -- he can still get his money whenever he wants, unless the money is in a savings account, where access is limited to six times a month -- but, like magic, $1 million is federally insured instead of just $250,000.

Nassim Nicholas Taleb, the best-selling author of the “Black Swan,” describes in his latest book, “Antifragile,” how he ran into Blinder at the World Economic Forum in Davos, Switzerland, one year and thought he was going to engage the former Fed vice chairman on ideas about how to save the financial system. Instead, Blinder tried to sell him on Insured Cash Sweep. It quickly dawned on Taleb what Blinder was up to.

“It would allow the super-rich to scam taxpayers by getting free government sponsored insurance,” Taleb wrote. “Yes, scam taxpayers. Legally. With the help of former civil servants who have an insider edge.”

“Isn’t this unethical?” Taleb asked Blinder.

According to Taleb, Blinder told him, “It is perfectly legal,” adding that, “we have plenty of former regulators on the staff.”

Taleb felt this implied “that what was legal was ethical and asserting that former regulators have an edge over citizens.” Taleb calls it the Alan Blinder Syndrome: “A model of how people use public office to, at some point, legally profit from the public.”

Taleb told me the other day that he views Schapiro’s move to Promontory -- and to a seat on the board of General Electric Co. -- no differently. “I find Mary Schapiro morally repulsive,” he said, because there is an “implicit deal” whereby regulators such as Schapiro and Blinder (and many others) “make regulations complex” and then “sell their services at a higher price when they go to the private sector.”

Taleb proposes that high-ranking regulators who return to the private sector, where they benefit directly from their knowledge of complex regulations and agencies, be forced to return to taxpayers any compensation above their own former salary. In Schapiro’s case, Taleb would have her return to taxpayers anything exceeding the $165,000 or so she earned as SEC chairman. “Mary Shapiro has used the taxpayer to puff up her career,” he said. “To me, it is a legal scam, taking advantage of the taxpayer because no regulator will ever make a regulation that’s clean anymore.”

While the chances of Taleb’s proposal becoming reality are exactly zero, it remains deeply disturbing that former top government regulators can skip off to the private sector so soon after leaving public service, and then insist it is something we shouldn’t worry about. Enjoy your big new payday at Promontory, Ms. Schapiro, but please spare us the sanctimonious claptrap.

(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. The opinions expressed are his own.)

To contact the writer of this article: William D. Cohan at

To contact the editor responsible for this article: Tobin Harshaw at

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