March 18, 2015 6:49 p.m. ET
One of Wall Street’s top lawyers says strains between banks and regulators have never been greater.
After the record mortgage-related fines paid by banks over the last two years, “the regulatory environment today is the most tension-filled, confrontational and skeptical of any time in my professional career,” Sullivan & Cromwell Senior Chairman H. Rodgin Cohen said Wednesday at a banking legal conference in Phoenix.
Instead of blaming regulators themselves, Mr. Cohen said the acrimony stems from the fight over a phenomenon called regulatory capture, in which watchdogs essentially get too close to the subjects they regulate. Many policymakers have expressed concerns about such capture, but Mr. Cohen says the fears are overblown.
Almost on cue a few hours later, a top regulator criticized banks.
Federal Reserve Chairwoman Janet Yellen, asked about banks’ culture and recent regulatory fines at a news conference in Washington said: “It’s certainly been very disappointing to see what have been some really brazen violations of the law.”
She added that the Fed was keeping a close eye on bankers’ bonuses to make sure they didn’t encourage bad behavior.
So it goes in the postcrisis world of banking. On one coast, a top banking watchdog pushes bankers to reduce risky actions, while thousands of miles away, bankers and their lawyers discuss how regulators are being tougher than ever.
Mr. Cohen is on the front lines of the battle. The veteran attorney has represented many, if not most, big banks. In the days when bank mergers were common before and during the financial crisis, he was usually representing one side, keeping in close touch with government officials.
In the wake of the financial crisis, he’s advised banks being investigated by regulators and helped them settle allegations of various improprieties for billions of dollars. He’s also counseled them on capital rules and dealing with new financial laws such as the Dodd-Frank Act in the U.S.
These days, Mr. Cohen says the strained relations between government regulators and bank officials stems from “the myth of regulatory capture.”
“Recently, this supposition of regulatory capture has become as pervasive as it is false,” he said, speaking alongside panelists from the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Reserve Bank of New York and the industry-funded regulator Finra.
“I have never experienced a situation that an examiner was so close to an institution that the examiner went easy on that institution,” Mr. Cohen said at the conference sponsored by the Securities Industry and Financial Markets Association, a trade group representing Wall Street firms.
Earlier this month, Ms. Yellen flagged the “the risk of regulatory capture” as “something the Federal Reserve takes very seriously.” The central bank “works very hard to prevent” any bias toward the industry, stressing that Fed employees should “feel safe speaking up when they have concerns.”
As a bank lawyer, Mr. Cohen in some ways is talking his book, trying to keep the huge fines that have hit the industry at bay. The six largest U.S. bank holding companies have paid about $130 billion in settlements, fines and other costs related to mortgages and the financial crisis, according to a February report in The Wall Street Journal. Continuing investigations into alleged rigging of currency markets could add hundreds of millions more to the tally for some global firms.
Mr. Cohen, a longtime lawyer, said the confrontational tone that has grown in recent years makes it harder for bank supervisors to do their jobs and understand the specifics of how banks are generating profit.
“The consequences of such as approach are likely to be less effective examinations, not more,” he said. “Unless we deal with the canard of regulatory capture, we will inevitably be placing pressure on examiners to disprove this charge.”
The debate bubbled to the surface last year after a lawsuit filed by a former New York Fed examiner raised questions on whether the regulator had failed to scrutinize Goldman Sachs Group Inc. adequately in its oversight of the Wall Street firm.
Then, in October, the Fed’s inspector general criticized the New York Fed for failing to identify the risks taken by J.P. Morgan Chase’s chief investment office before it lost some $6 billion in the “London Whale” trades.
At a November hearing called to address capture, U.S. Senate Democrats grilled New York Fed President William Dudley over his regulator’s oversight. At one point, Sen. Elizabeth Warren (D., Mass.) suggested that Mr. Dudley should be replaced if the New York Fed didn’t toughen up. “Either you need to fix it, Mr. Dudley, or we need to get someone who will,” she said.
At Mr. Cohen’s panel, the financial regulators present didn’t address Mr. Cohen’s arguments directly.
One noted however that bank supervisors and bankers work closely together, even though investigations and billion-dollar settlements have pitted regulators against banks in recent years.
“If people are expecting my group of 40 to understand every single risk without the help of the [banking] institutions, that’s an impossible task,” said Michael Walsh, an assistant Vice President in the New York Fed’s legal and compliance group.
Write to Justin Baer at [email protected]
This entry passed through the Full-Text RSS service – if this is your content and you’re reading it on someone else’s site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.