As head of the Securities and Exchange Commission for the past four years, Mary Schapiro failed to win a major civil action against any Wall Street executive connected to what may be the worst financial fraud in history, the subprime-mortgage scam that led to the 2008 crash. As head of the Justice Department’s criminal division for the past four years, Lanny Breuer failed to accomplish the same with criminal action. And now both are headed back over to the other side: deep-pocketed firms that earn their keep largely from Wall Street. In Schapiro’s case, that’s Promontory Financial Group, which advises financial firms on regulation; in Breuer’s, it’s Covington & Burling, a major law firm that defends financial clients.
If this sounds like a dog-bites-man story, it is. Actually it’s more like, Wall Street bites everybody. But that too is pretty predictable these days. “It used to be called ‘selling out,’ ‘cashing in,’ or ‘influence peddling.’ Now it’s referred to politely as the ‘revolving door,’ ” said Dennis Kelleher, president of Better Markets, a Washington nonprofit that advocates for better regulation of financial markets. “But whatever it’s called, nothing is more corrosive to the American people’s trust in government than when former senior public officials turn their so-called public service into multimillion-dollar riches unimaginable to almost all Americans.”
Schapiro will no doubt be welcomed back to her tribal homeland with open arms. During her rather undistinguished tenure, SEC failed to gain any significant prosecutions related to the subprime disaster, though she did manage bolster SEC’s enforcement process and create a new tips database and a whistleblower office. At one point, SEC was even rebuked by U.S. District Court Judge Jed Rakoff, who refused to approve the agency’s $285 million settlement with Citigroup because, as in another case with Goldman Sachs, SEC failed to gain any admission of wrongdoing.
Schapiro told The Wall Street Journal this week that she would be doing no lobbying at Promontory and that "in my case, there's no revolving door.... I won't ever be going back to government.” She added that after spending "28 of the last 32 years as a regulator," now was the "right time ... to do something different."
But Promontory will feel more like familiar ground to her. The firm benefits from its senior employees’ supposed inside knowledge of the rules (and how to get around them), which Schapiro certainly has. Most recently, it got about $1 billion in fees for reviewing foreclosures, which didn’t help any homeowners. Kelleher says it’s “irrelevant for someone working for Promontory Financial Group to say they aren’t going to lobby because, as the founder and CEO says, they don’t lobby anyway.”
No one has ever accused Schapiro of dishonesty or corruption, but in her long career as a regulator, she was not renowned for coming down hard on dubious trading or banking practices. As head of the Commodity Futures Trading Commission in the mid-1990s, she failed to assert control over derivatives trading at a time when the practice was already beset with fraud and manipulation. (When a successor, Brooksley Born, came in, she called the unregulated derivatives market "the hippopotamus under the rug.")
Later, when Schapiro was running the Financial Industry Regulatory Authority, the industry's ostensible "self-regulator" (though it was widely seen as a joke in the industry), she also missed Bernie Madoff's Ponzi scheme and R. Allen Stanford's mini-Madoff scam, which later sent Stanford to prison for 110 years. According to Reuters, associates of Stanford's even served as advisers to FINRA, as was the case with Madoff's family. In all her jobs, Schapiro followed a pattern: She tended to aggressively investigate relatively minor violations while failing to see the hippopotamus-size frauds in the room.
Breuer's resignation was curiously timed, coming soon after a recent Frontline documentary depicted him as ineffectual against the main culprits of the crisis. In that piece appeared this exchange:
Breuer: “What we’ve had is a multipronged, multifaceted response. And it’s simply a fiction to say that where crimes were committed, we didn’t pursue the cases. And that’s why, where crimes were committed, you have more people in jail today for securities fraud, bank fraud, and the like than ever before.”
Frontline reporter: “But no Wall Street executives.”
Breuer: “No Wall Street executives.”
Yeah, it’s a dog-bites-man story. But that's a really, really big dog.