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«Financial Services Conflict of Interest Act Outlining the need for increased revolving-door and reverse revolving-door legislation Acknowledgments ...»

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July 15, 2015 www.citizen.org

Financial Services Conflict

of Interest Act

Outlining the need for increased revolving-door and reverse

revolving-door legislation


This report was written by Craig Holman, Ph.D., government affairs lobbyist, and Emma

Stein, researcher, Public Citizen’s Congress Watch division, and edited by Lisa Gilbert,

director, Public Citizen’s Congress Watch division.

About Public Citizen

Public Citizen is a national non-profit organization with more than 400,000 members and supporters. We represent consumer interests through lobbying, litigation, administrative advocacy, research, and public education on a broad range of issues including consumer rights in the marketplace, product safety, financial regulation, worker safety, safe and affordable health care, campaign finance reform and government ethics, fair trade, climate change, and corporate and government accountability.

Public Citizen’s Congress Watch 215 Pennsylvania Ave. S.E Washington, D.C. 20003 P: 202-546-4996 F: 202-547-7392 http://www.citizen.org © 2015 Public Citizen.

Public Citizen Conflicts of Interest and the Revolving Door T he problem of the revolving door, the movement of officials in a conflict of interest situation from government positions and into the same private sector they had previously regulated, is one of the most pernicious factors that erodes the public’s trust in American government. As of April 2014, only 40 percent of American’s trusted the government to do what was right a majority of the time.1 The American people see the conflicts of interest and opportunities for corruption that are introduced as scores of officials leave government to work for and/or lobby for the industry that they used to oversee.2 Federal examiners whose job it is to inspect large financial institutions, as well as the officials who supervise the examiners, routinely take jobs in the same industry and sometimes with the same banks once they revolve out of government, raising questions of partiality.3 These former officials use their knowledge from years of public service to help banks influence agency rules, counter investigations of suspected misconduct, and win exemptions from federal law.4 This problem can also be seen in the movement of people from the private sector to positions of power within the government, known to some as “the reverse revolving door.” President Obama’s 2009 Ethics Executive Order 13490 applied strict restrictions for people going into and out of government and has made Obama’s Administration arguably one of the cleanest in recent history. However, the executive order applies only to presidential appointees, so federal agencies continue to recruit Wall Street veterans with obvious conflicts of interest. Even still, some of these revolvers are presidential appointees who recuse themselves from official actions that directly and substantially affect their former employers. Alumni from Citigroup, for example, head the Treasury Department and Office of U.S. Trade Representatives.

Presidential appointees subject to the recusal requirement need to excuse themselves only from a “particular matter involving specific parties” – in other words, “contracts, grants, 1 Gallup Poll, 2014.

2 Center for Responsive Politics and Public Citizen, BANKING ON CONNECTIONS: FINANCIAL SERVICES SECTOR HAS DISPATCHED NEARLY 1,500 “REVOLVING DOOR” LOBBYISTS SINCE 2009 ( June 3, 2010), http://bit.ly/1CzNg2H.;

Megan R. Wilson, Dodd-Frank army skips to K Street, THE HILL (March 25, 2014), http://bit.ly/1glPQD9.; and Alan Zibel, Consultants Snap Up Alumni of Consumer Watchdog Agency, THE WALL STREET JOURNAL( July 3, 2013), http://on.wsj.com/1CzNve7.

3 Matthew Boesler and Jeff Kearns, ‘Revolving Door’ Between Fed and Banks Spins Faster,BLOOMBERG (January 30, 2015), http://bloom.bg/1CiUrBK [hereinafter Revolving Door Spins Faster].; Tom Braithwaite, Gina Chon, and Henny Sender, Banking: Firefighting at the NY Fed, FINANCIAL TIMES (December 4, 2014), http://on.ft.com/1FFLRMC.; and Shannon D. Harrington and Matthew Leising, New York Fed Swaps Reformer Lubke Joins Goldman Sachs, BLOOMBERG (December 14, 2010), http://bloom.bg/1FFLX71.

4 Project On Government Oversight, DANGEROUS LIAISONS: REVOLVING DOOR AT SEC CREATES RISK OF REGULATORY CAPTURE (February 11, 2013), http://bit.ly/1GtXpWi.

–  –  –

licenses, product approval applications, investigations, [or] litigation” – if it is likely to affect a former employer or client. However, the definition of “particular matter involving specific parties” does not cover “rulemaking, legislation, or policy-making of general applicability.” Some of these officials have even taken advantage of an ethics loophole that allows them to write industry-wide rules that benefit their former employer after recently lobbying the government on that industry’s behalf.5 Other former Wall Street executives and lobbyists serve as senior economic policymakers and close aides to presidential appointees and members of Congress, and thus are not subject to the ethics executive order.6 Nevertheless, these key players in the government and regulatory agencies yield considerable influence and can also be part and parcel of the capture of government by Wall Street. This is also why some employers, including Citigroup and JP Morgan Chase, have offered their employees large “golden parachute” bonuses if they are able to secure full time government employment at a high level.

Solving the problem of the revolving door is no easy task because of the overlap that exists between government and financial interests. A coalition of civic organizations is working hand-in-hand with members of Congress committed to passing an ethics reform package specifically for the financial services sector. The package will ensure that the ethics policies enacted by President Obama will last long after 2016, and to expand these policies to reach beyond presidential appointees. The Financial Services Conflict of Interest Act contains five distinct legislative sections that cover entering government service, serving in the public interest, and leaving government to return to the private sector. This report documents the nature of the problems that have been reported under each section in order to shine light on the importance of a strong conflict of interest and revolving door code covering financial services regulatory agencies.


SERVICE A number of powerhouse Wall Street banks, including Goldman Sachs, JPMorgan, and Citigroup, have provided special financial rewards to their company executives who 5 Project On Government Oversight, WRINKLES IN THE ETHICS RULES (February 11, 2013), http://bit.ly/1Jtc5TV.

6 Stephanie Armour and Shayndi Raice, Citi Alumni Are Force in Nation’s Capital, THE WALL STREET JOURNAL, (February 25, 2014), http://on.wsj.com/1CZxX6R.; Ted Kaufman, To Police Banks, Obama Spins Revolving Door To Bring In More of Wall Street’s Own, FORBES( July 23, 2013), http://onforb.es/1CzO6fR.; and Jean Eaglesham and Jessica Holzer, Tangle of Ties Bind SEC’s Top Ranks, THE WALL STREET JOURNAL (February 4, 2013), http://on.wsj.com/1FFMdD3.

–  –  –

become senior government officials, known as the “golden parachute.”7 Recently appointed officials to the Department of the Treasury, the State Department, and other agencies cashed in on rewards when they joined the Obama administration.8 Current Treasury Secretary Jack Lew received an exit package worth over $1 million from Citigroup shortly before joining the Obama administration in 2009. His exit package explicitly stated that the bonus was contingent on his securing a high-level position within a government regulatory body.9 Imagine a company paying its employees to leave. This odd phenomenon highlights the value to Wall Street of getting senior and loyal employees posted in the financial services regulatory agencies.

–  –  –

When news of Lew’s golden parachute originally broke, it was touted by Wall Street as being a singular case. It quickly became apparent that the Lew case was not unique. These bonuses recently received more public attention when Antonio Weiss, a former investment banker at Lazard who now serves as counselor to Mr. Lew, acknowledged in financial disclosures that he would be paid $21 million in unvested income and compensation upon exiting Lazard for a full-time job in government.10 Stanley Fischer, currently the vice chair of the Federal Reserve, had a similar clause in his Citigroup employment contract. Citigroup also paid U.S. Trade Representative Michael Froman over $4 million in exit payments when he left for the Obama Administration.11 Morgan Stanley’s executives have been eligible to receive a bonus — one that they would 7 Jonathan Weil, Citigroup’s Man Goes to the Treasury Department, BLOOMBERG (February 22, 2013), http://bloom.bg/1CuFYNS.; Project On Government Oversight, BIG BUSINESSES OFFER REVOLVING DOOR REWARDS (March 21, 2013), http://bit.ly/1clXQEq.; and Letter from Craig Holman and Bartlett Naylor, Congress Watch, Public Citizen, to the Honorable Eric Holder, Attorney General, Department of Justice, and the Honorable Walter Shaub, Director, U.S. Office of Government Ethics, requesting formal review of contract between Citigroup and Jack Lew, February 27, 2013. http://bit.ly/1IOenvL 8 Lee Fang, Obama Admin’s TPP Trade Officials Received Hefty Bonuses From Big Banks, REPUBLIC REPORT (February 17, 2014), http://bit.ly/1JtcMwn.; and Susanne Craig, Windfalls for Wall Street Executives Taking Jobs in Government, NEW YORK TIMES: DEALBOOK (March 21, 2013), http://nyti.ms/1CmBI3K.

9 Lee Fang, The Reverse Revolving Door: How Corporate Insiders are Rewarded Upon Leaving Firms for Congress, THE NATION (May 4, 2013), http://bit.ly/1Lwy0vB [hereinafter Reverse Revolving Door].

10 David Dayen, Wall Street Pays Bankers to Work in Government and it Doesn’t Want Anyone to Know, NEW REPUBLIC (February 4, 2015), http://bit.ly/1v1nHp4 [hereinafter Wall Street Pays].

11 Id.

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ordinarily forfeit for leaving the company prematurely — if they go to work for a “governmental department or agency, self-regulatory agency or other public service employer,” according to a company pay-plan filed in 2012.12 The same can be said of The Blackstone Group, JPMorgan Chase, Goldman Sachs and Northern Trust; all four companies offer stock awards and other types of compensation to employees who choose to accept a full-time government position.13 Goldman Sachs’ employment policy, found in filings from the Security and Exchange Commission (SEC), even offers “a lump cash payment” for government service.14 “Only in the Wonderland of Wall Street logic could one argue that this looks like anything other than a bribe,” wrote Sheila Bair, former Chair of the Federal Deposit Insurance Corporation.15 Craig Aaron, president and CEO of Free Press, stated that he couldn’t see how “a bonus equal to or several times a person’s salary as a government employee wouldn’t impact [their] judgment.”16 Richard Painter, the chief ethics counsel to President George Bush, wrote that he sees these corporate bonuses as a “great strategy” for planting the company’s alumnus in key government jobs so that the staffers are able to have influence over matters that affect their previous employers. The bonuses are sometimes defended as acting as a supplementary income so that people are able to leave their much higher paying private sector jobs to work in government agencies in the first place.17 But the impact is precisely the same: company executives are encouraged to leave the company and take over a financial services regulatory agency and, with no small level of expectation, that extra bonus will buy some loyalty from the new regulator, often called “regulatory capture.” The golden parachute must be ended for the integrity of financial regulatory agencies.

There are several ways to end the golden parachute. The Financial Services Conflict of Interest Act opts to prohibit any bonus from a company specifically awarded for government service. Companies, of course, could still offer bonuses to their employees, so long as that bonus is not contingent on taking government service. It is very unlikely any Wall Street firm would structure their general bonus system to reward those who leave 12 Michael Smallberg, BIG BUSINESSES OFFER REVOLVING DOOR, Project on Government Oversight (March 21, 2013), http://bit.ly/1clXQEq.

13 Id.

14 Wall Street Pays.

15 Sheila Bair, Obama’s treasury pick is another bank watchdog straight from Wall Street, FORTUNE, December 5, 2014. http://for.tn/1tRPcjW 16 Reverse Revolving Door.

17 Reverse Revolving Door.

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prematurely, or even those who leave to work for a competitor. By prohibiting the practice for these cases, the problem of a special golden parachute for those entering government service would come to an end.


The Obama Administration has been plagued with far fewer conflict of interest scandals than the administrations of Presidents George W. Bush or Bill Clinton at least in part because of his 2009 Executive Order 13490 that set restrictions on presidential appointees entering government through the reverse revolving door. Thus far President Obama has had only one major conflict of interest scandal, which involved Terence F. Flynn, one of the five members of the National Labor Relations Board in 2012. Flynn allegedly used his position of power to feed information back to his previous employers, the National Association of Manufacturers.18 According to data compiled and analyzed by Public Citizen, the number of Reverse Revolvers that have been appointed by the past three presidents is documented. Public Citizen looked at 137 of the most influential positions within the executive branch and the people who have held those positions over the past two decades. These presidential appointees have a great deal of autonomy in decision-making and are entrusted with a high degree of regulatory and contract-granting authority. This means that there can be large monetary and political consequences when conflicts of interest are unchecked in these high-level offices.

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