William K. Black, October 30, 2016      Bloomington, MN

When last I wrote of Roger Lowenstein he was complaining that the Wall Street felons were being criticized – not jailed – criticized.  Lowenstein is Wall Street’s self-appointed apologist-in-chief.  Naturally, he despises Senator Warren, the most effective elected official in exposing Wall Street’s elite frauds.  The New York Times granted him an op ed in which he sought to mansplain financial regulation to Senator Warren.

Lowenstein does not like women that he considers too loud, gratuitously complaining that Senator Warren is “high-decibel” supporter of regulation.  Coming from someone who has spent his journalistic career shilling for Wall Street, this sexist trope is painfully embarrassing.  Wall Street is infamous for raging males who believe that screaming at subordinates who can’t fight back proves their virility.

Lowenstein was piling on to the recent sexist attack of Congressman Blaine Luetkemeyer, an ultra-right wing Missouri Republican, on Senator Warren.  Congressman Luetkemeyer, a senior member of House Financial Services, was speaking to the American Bankers Association when he labeled Senator Warren the “Darth Vader of the financial services world” and pleaded with the bankers to work with the Trump Republicans to “neuter her.”  The Kansas City Star coverage of this Trumpian assault on women notes that Congressman Luetkemeyer “led multiple congressional efforts to protect the payday loan industry, according to fortune.com.”

Senator Warren, who is decidedly not a screamer, is the target of Lowenstein and Luetkemeyer’s wrath because Wall Street’s greatest fear is the return of effective regulators who would end the elite frauds and make the criminal referrals that would imprison thousands of Wall Street’s elite criminals.  Wall Street knows that Senators Warren, Sanders and Brown are working tirelessly to ensure that the next president appoints regulatory leaders that would restore the rule of law to Wall Street.  Lowenstein and Congressman Luetkemeyer are desperate to defeat that effort.

Lowenstein wrote that his article was prompted by Senator Warren’s recommendation that President Obama fire Mary Jo White as the chair of the SEC.  Because Senator Warren understands federal regulation, she made no such recommendation.  Senator Warren requested President Obama to designate another SEC commissioner as the Chair.  The President does have that power.

Ms. White has been an exceptionally weak leader of the SEC.  I witnessed Ms. White’s presentation at the annual law professors meeting years ago giving her ode to “good earnings management.”  “Earnings management” is one of many euphemisms for a form of accounting securities fraud that reduces the value of corporation in order to “hit the number” and maximize the officers’ bonuses.  The revolving door perverted someone who once was a moderately effective prosecutor into a very well paid apologist for elite frauds.  President Obama is notorious for appointing weak law enforcement officials at the Department of Justice and the financial regulatory agencies.  Senator Warren is correct to call on President Obama to transfer the chair to a more capable SEC commissioner.

Senator Warren knows that there is no chance that President Obama will request Ms. White’s resignation or no longer designate her as the SEC Chair.  Senator Warren is establishing her consistency and serving notice on the next president that the democratic-wing of the Democratic Party will push for appointees in the next administration that will be dedicated to restoring the rule of law to Wall Street. 

Lowenstein has no expertise in regulation.  Senator Warren is one of the Nation’s experts in financial regulation.  As one would predict, his pretense of mansplaining financial regulation to Senator Warren went hilariously wrong.  Lowenstein begins with a fundamental error that betrays the fact that he does not understand even the basics of federal regulation.

“Last time I checked, the S.E.C. was a regulatory agency of the executive branch….”

The SEC is an independent regulatory agency, as was the Federal Home Loan Bank Board (FHLBB) when I worked for it — and unlike the Office of Thrift Supervision (OTS) when I worked for it.  The OTS was “a regulatory agency of the executive branch.”  The normal view under U.S. jurisprudence is that the independent regulatory agencies such as the SEC are “creatures of Congress.”  The problem is not that the SEC became an independent regulatory agency since the “last time [Lowenstein] checked.”  The SEC was created as an independent regulatory agency in 1934 and has remained one for its entire existence.

Lowenstein never understood the SEC’s legal nature because he never “checked” on the SEC’s legal nature.  Had he checked, he would have found statements such as this by the SEC:

[A]s an independent regulatory agency the SEC is not obligated to follow the guidelines for regulatory economic analysis by executive agencies….

Building on this initial error, Lowenstein imagines President Obama’s response to Senator Warren’s call for President Obama to ask Ms. White to resign as Chair of the SEC:

“Hey, firing agency heads is my job.”

Well, no.  The President cannot “fire” the heads of independent regulatory agencies such as the SEC, precisely because they are not “executive branch” agencies.  The SEC Commissioners do not serve “at the pleasure of the president.”  

I am delighted that progressives such as Senators Sanders and Warren blocked Larry Summers’ appointment to chair the Federal Reserve, which led to the well-deserved appointment of Janet Yellen to Chair the Fed.  Progressives were enthused that progressives such as Senators Sanders and Warren blocked Antonio Weiss — whose only ostensible qualification for the Treasury slot was that he was an investment banker who contributed to the crisis rather than warning about it and trying to prevent it.  Contrary to Lowenstein’s assertion, Weiss had to be pushed by Senators Sanders and Warren to even begin to respond to Puerto Rico’s bankruptcy. 

The thing that the Street will never forgive Senator Warren for is the thing they claim they value as their preeminent virtue — she succeeds.  Indeed, she succeeds despite their intense opposition and their rage against her.  They try to go head-to-head with her and she hands them their heads.  CEOs like Wells Fargo’s John Stumpf are so used to being surrounded by sycophants that tell them how brilliant they are that they approach prepping for Senator Warren’s questions with contempt and immense over-confidence.  Then she tears into them and they look like a deer frozen in place by headlights while being eviscerated by a wolverine.  The best that Lowenstein can muster in his attempted takedown of Senator Warren is that “there is no good evidence” that Stumpf resigned because of Senator Warren’s evisceration of him.  Senator Warren has never claimed that Stumpf resigned due to her questioning.  Prior to the Senate hearings the commentators were virtually unanimous that he would not resign.  After the hearings, he was doomed.

Wall Streeters’ belief that they are far smarter than anyone else (because they pay themselves more than almost everyone) and should run the economy and the government by divine right is a form of arrogance so central to their self-definition that they are frequently clueless about the most basic facts of finance, e.g., a “flight to quality” will produce highly correlated changes in interest rates among a wide range of securities.  Lowenstein propagated this Wall Street “genius” myth in his best-known book (When Genius Failed).  The “geniuses” he profiles in the book were unable to understand that a “flight to quality” would render their investing strategy suicidal.

Lowenstein’s ode to the revolving door rests on his assertions about the supposed Wall Street giants of federal regulation.  His assertions will strike most readers, correctly, as bizarre.  He asserts that “many of the best” financial regulators came from Wall Street, giving three supposed examples including Henry M. Paulson Jr., a Treasury Secretary under the second President Bush.  Unsurprisingly, Robert Rubin, President Bill Clinton’s Treasury Secretary wrote a glowing review in the NYT’s of Lowenstein’s most recent book.  Rubin and Paulson share a number of characteristics.  They both were the leaders of Goldman Sachs before being appointed as Treasury Secretary.  They both presided over the three “de’s” – deregulation, desupervision, and de facto decriminalization of finance.  They both are immensely culpable for creating the criminogenic environment that produced the three most damaging epidemics of accounting control fraud in history.  Those fraud epidemics hyper-inflated the bubble and drove the financial crisis.  The fact that Lowenstein cites Paulson as one of the greatest financial regulators in history and the fact that Rubin wrote such an over-the-top review of the supposed brilliance of Lowenstein demolish Lowenstein’s credibility and his claim that the revolving door that leads Wall Street.  His modern hero was one of the important contributors to the catastrophe.

Lowenstein’s second proposed Wall Street hero is Arthur Levitt, who worked for a series of Wall Street firms before being appointed as Chairman of the SEC.  After he left the SEC he worked for Goldman Sachs.  Levitt did try to make some reforms as Chairman of the SEC.  Mr. Levitt, however, was ultimately critically flawed – and those flaws came from the dogmas he absorbed from his many years on Wall Street.  I discuss one of those flaws below.

Lowenstein fails to even mention this Nation’s most effective financial regulator, Edwin Gray, Chairman of the FHLBB.  This is unsurprising because Gray was successful largely because he had no Wall Street ties.  Gray’s most virulent foe in the government was Donald Regan, the former head of Merrill Lynch, and the fiercest proponent of the deregulation that made the savings and loan industry so criminogenic that George Akerlof and Paul Romer concluded it was “bound” to produce widespread “looting.”  Gray enraged Mr. Regan by seeking to regulate against deposit brokers.  Merrill Lynch was the Nation’s largest deposit broker.  Gray’s top supervisors who proved so brilliantly successful in countering the raging fraud epidemics in Texas and California that drove the savings and loan debacle, Joe Selby and Michael Patriarca, were long-time government employees who had never worked for Wall Street.  None of regulatory leaders who distinguished themselves in containing the debacle came from Wall Street.

Lowenstein fails to mention the sole federal regulatory leader of the last 20 years who sought to emulate Gray and serve as a vigorous financial reregulator – Brooksley Born – who attempted to regulate financial derivatives.  Ms. Born’s efforts were destroyed by a bipartisan coalition of Wall Street officials and alums holding key government positions that exemplify the dangers of the revolving door.  That coalition included Bill Clinton (as President of the U.S., soon to be made wealthy by Goldman Sachs and other Wall Street firms for speeches with obscene payoffs), Treasury Secretary Rubin (former CEO of Goldman Sachs and soon-to-be be made even wealthier as a top officer of Citigroup where he had no real job duties), Mr. Greenspan (Chairman of the Fed; Wall Streeter before and after), Eugene Ludwig (Comptroller of the Currency; soon to leave to be made wealthy by Bankers Trust/Deutsche Bank, the giant serially criminal enterprise that is Germany’s largest bank), Senator Gramm (Chairman of Senate Banking; later made wealthy by UBS, the giant, serially criminal enterprise that is one of Switzerland’s largest banks) – as well as both of Lowenstein’s purported modern financial regulatory heroes – Mr. Paulson (while he was running Goldman Sachs, before being named by the second President Bush as his Treasury Secretary) and Mr. Levitt (when he was SEC Chairman, before he would take the revolving door to Goldman Sachs).  Note that Mr. Paulson was only one of the infamous “13 Bankers” (the CEOs of the largest banks) who met with Treasury Secretary Rubin to (successfully) demand that Ms. Born’s be forbidden to regulate huge classes of financial derivatives, including credit default swaps(CDS).

You can see why Lowenstein left out of his column any discussion of these Wall Streeters racing through the revolving door to enrich themselves and other Wall Street officers at the expense of our Nation and people all over the world by bringing together this assemblage of naked political and economic power to crush Ms. Born’s efforts to fulfill her statutory duties as Chair of the CFTC.  I agree that Mr. Levitt was the least bad regulator of this corrupt coalition.  Mr. Levitt has conceded that his attacks on Ms. Born were disgraceful and erroneous.

As best I can tell, Senator Warren takes a position about the revolving door that is very similar to mine.  We do not oppose any appointment of people of Wall Street to government.  We oppose the continued domination of the regulatory agencies and executive agencies by Wall Street personnel.  That domination has produced a pathetic track record of intentional failure due not simply to conflicts of interest and self-interest, but even more to the anti-regulatory dogmas that are endemic on Wall Street.  Neither our economy nor our democracy can afford the terrible cost of this continued, corrupt domination.  The domination has perverted the U.S. into a system of crony capitalism.  As one of my fellow co-founders of Bank Whistleblowers United (BWU), Gary Aguirre (formerly an SEC enforcement attorney before he blew the whistle of the SEC leadership) stresses, the SEC routinely waives for former senior SEC officials the existing revolving door restrictions.  BWU has called on the SEC to end this indefensible practice.

Lowenstein then makes another dishonest claim about the SEC.

When the S.E.C. has landed in trouble, it has usually been because it has wandered from its charter and ignored its bread-and-butter responsibility (see Madoff, Bernie).

That statement is carefully crafted to mislead the reader.  The SEC failed with regard to Bernie Madoff by refusing to act on clear evidence of fraud provided by multiple whistleblowers.  Madoff was an example of a variant of the revolving door.  Mr. Madoff was a Wall Streeter who became for years the Chairman of the Board of Directors of the NASD, a self-regulatory association that functions under aegis of the SEC.  The SEC generally treats the NASD as a quasi-public ally.  The SEC was reluctant to believe warnings about Mr. Madoff because of his former role as the NASD’s leader.

The SEC did not get in “trouble” with Madoff because it “ignored” its core responsibilities to divert large of resources in order to take on some exotic, tangential function.  Lowenstein simply invented that fiction.  The SEC got in trouble in large part because of the combination of the revolving door and Congressional Republicans’ war on the SEC budget.  The Republicans want the SEC to be ineffective as a regulator because the Wall Street’s leaders who are criminals fear a vigorous SEC.

Lowenstein knows that this Republican war is a critical threat to the Nation, but asserts a policy implication of this war that is nonsensical to anyone but Wall Street’s apologist-in-chief.

[T]he S.E.C. faces continual pressure on its budget from a skeptical and unappreciative Congress. The last thing it needs is political grandstanding from Ms. Warren.

Note that Lowenstein dishonestly uses the term “Congress” instead of “congressional Republicans.”  The congressional Republicans are not “skeptical and unappreciative” of the SEC – they are virulently hostile to effective securities (and financial derivatives) regulation.  This exceptional hostility has been a constant feature preventing the SEC and CFTC from having adequate resources to fulfill their statutory duties since the early 1990s.  Criminologists call this the deliberate creation of “systems incapacity.”  Senators Sanders, Brown, and Warren are the strongest supporters of the SEC and the CFTC receiving the substantial increases in budget required for these agencies to perform their statutory missions.  Logically, Lowenstein should be criticizing virtually every Republican member of Congress and praising Senator Warren and her progressive allies.  Instead he refuses to identify the Republicans as the source of problem and attacks only Senator Warren – implying dishonestly that if she would stop pushing for the SEC to restore the rule of law to Wall Street the Republicans would cease their actions on behalf of criminal Wall Street elites designed to gut the SEC’s ability to counter the elite Wall Street frauds.