Revolving Doors

Friday last on the Diane Rehm Show I heard some distressing remarks from Ron Elving, an NPR reporter whose work I ordinarily like. He floated this explanation for why the government has failed to prosecute any prominent Wall Street bank or executive:

Ron Elving: "I think that there's a reality here that people have to bite down on that's extraordinarily distasteful, and that is that when you look at the law, you're not just talking about what is the law. You're talking about what you can make stick in a courtroom. And what the Department of Justice has learned again and again is when you try to take people to court and you try to prove complex cases in front of a jury, you're going to be putting government Justice Department attorneys up against the very finest, the most experienced, often times former Justice Department attorneys, people who have had extraordinary careers who are going to be the defense lawyers for the banks or for whichever miscreant you're going after in court. And you are going have to have not only an extraordinary case, not just the people who were egregious, not just the people send email saying, hey, let's do some really bad stuff, but that they specifically broke the letter of certain laws, did it repeatedly, did it in a certain particular way and make sure that they jury has no other decision it can make other than guilty. That turns out to be extremely difficult under our laws and in our courts."

Diane Rehm: "Especially when you have top New York lawyers going up against you."

Elving: "As you might very well have and if you take these people on."

It's a variation of the "revolving door" meme, a fork more insidious than the root version.

Let me explain.


The "revolving door" theory posits that regulators are so keen not to piss off prospective employers in the private sector, they won't bring actions against the mightiest corporations and chieftains on Wall Street. (The authors of a study, "Does the Revolving Door Affect the SEC’s Enforcement Outcomes," would likely say I am describing only the "rent-seeking hypothesis" of the revolving door; there is a positive, "human capital hypothesis," which we'll get to, below.) 

Elving's variation seems to posit that, even when regulators do get up the nerve to bring a case, they'll end up getting thrashed anyway in court. By whom? The very lawyers who had been pulling their punches before leaving to work for Wall Street!

A sort of "damned if you don't, trounced if you do" attitude about the efficacy of enforcing the law.

This is depressing. As Rehm herself, quoting an email from a listener, said later on the show:

 "The idea that we can't take a bank fraud case to court because their lawyers are too high powered is the most outrageous argument for lack of prosecution I've ever heard. If we take Ron Elving's advice, we might as well hand over the keys of the republic to the bankers right now."

But the authors of the aforementioned SEC study say this is not right. "[T]he current implementation of revolving doors," they conclude, "is not associated with observable compromise in enforcement effort." And that's not all. "If anything," they write, "future job prospects make SEC lawyers increase their enforcement efforts while they are at the SEC." In short, the study supports, not the rent-seeking hypothesis, but the human capital hypothesis, which is that government lawyers who want to signal competence to prospective employers have more incentive to kick ass in court and will tend to be more aggressive at enforcement.

That's the marketplace we want live in.

I also take a lot of comfort from this perspective from Broc Romanek, writing about the SEC enforcement study:

"Personally, I'm not surprised in the least by the study's findings. Generally speaking, SEC alumni treat the agency with more respect than those that have not graced its hallways - and I imagine that translates into not trying to push the envelope beyond the grey areas of the law. And I can't imagine that the colleagues that they leave behind would cut corners for them. People that work at the SEC believe in the mission of investor protection."

Photo: Todd Metcalfe / Flickr.

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