The Regulatory Revolving Door

 |  Includes: IYF, KBE, KRE
by: Ira Stoll

In the post about Paulson & Co.'s $32 billion in assets under management we mentioned that one benefit of being that big is that you get invited to meetings like the one the FDIC held last week. Representing Paulson & Co. at the meeting, according to a participants list, was a senior vice president, Allen Puwalski, whose "Linked In" resume reports that he was chief of bank analysis at the FDIC from 2003 to 2005.

Other participants included John L. Douglas, a partner at Davis Polk & Wardwell. Mr. Douglas, who was general counsel of the FDIC from 1987 to 1989, lately has been "counseling Citigroup with respect to FDIC matters," according to his law firm's Web site.

Another participant was John C. Murphy, Jr., a partner at Cleary Gottlieb Steen & Hamilton, who was general counsel of the FDIC from 1984 to 1987. Mr. Murphy now "represents financial connection with ...regulatory and supervisory issues" and "enforcement proceedings," according to his law firm's Web site.

Another participant was Kevin Stein, a managing director at FBR Capital Markets, whose Linked In resume identifies him as having served at the FDIC as "associate director - resolutions" from 1991 to 1994.

And another participant was Randal Quarles, a managing director at the Carlyle Group's Global Financial Services Buyout Fund. "Before joining Carlyle, Mr. Quarles was Under Secretary of the U.S. Treasury, where he led the Department's activities in financial sector and capital markets policy, including coordination of the President's Working Group on Financial Markets, development of administration policy on hedge funds and derivatives, regulatory reform of Fannie Mae and Freddie Mac, and proposing fundamental reform of the U.S. financial regulatory structure," according to the Carlyle Web site. (I met Mr. Quarles once in Brooklyn before he joined the Bush administration (long story) and so far as I can recall he was an impressive guy.)

Anyway, the point is not that anyone who ever enters government service should be bound to everlasting poverty, nor that government regulators shouldn't ever benefit from the perspective of colleagues who have departed for the private sector. But it's closed-door meetings like this that lend credence to the idea of regulatory "capture," that the regulators who are supposed to be representing the interests of taxpayers and consumers are in fact more focused on the firms that may hire them when they leave office.

It can leave an ordinary investor with the feeling that if they don't have a former top FDIC or Treasury official on their team, they don't have much chance of successfully investing in banks, or with the suspicion that the regulators have incentives to make rules so complex or arbitrary that market participants have no choice but to spend lots of money hiring former regulators to help them to navigate the system.