Bill Black: What Does it Take to Get Fired from the SEC?

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives

“Yves Smith” has a distressingly wonderful column in her blog, NakedCapitalism, on the SEC’s Andrew Bowden. The SEC Chair, Mary Jo White, needs to read it and walk to Bowden’s office and tell him she needs his resignation letter on her desk by noon or she will terminate his employment. When the SEC appointed Bowden as its lead examiner it put out a press release that purported that his unit was hiring folks from the industry like Bowden, which was going to make it a competent, kick-ass regulator.

The SEC’s National Exam Program conducts inspections and examinations of SEC-registered investment advisers, investment companies, broker-dealers, self-regulatory organizations, clearing agencies, and transfer agents. OCIE has adopted a risk-focused examination program, hired industry experts, leveraged technology to increase efficiency, and launched a training program focused on quality and consistency. These initiatives have enabled OCIE to more effectively fulfill its mission to promote compliance with U.S. securities laws, prevent fraud, monitor risk, and inform SEC policy.

The reality was that under the Clinton, Bush, and Obama administrations huge areas of finance had been left with minimal regulation. As “Yves Smith’s” article explained, as soon as the SEC actually looked at these areas it found wholesale non-compliance “with U.S. securities laws,” endemic fraud, and unmonitored risk at private equity firms. In sum, the private equity firms were ripping off their investors.

As I have long stressed, a regulatory agency must always worry about being made ineffective due to the three “de’s” – deregulation, desupervision, and de facto decriminalization. Bowden exemplifies two of these routes to regulatory failure – desupervision and decriminalization. He found substantial problems, many of them criminal, at most private equity firms. How many recommendations for enforcement action did he make? How many criminal referrals did he make? Neither number should be confidential.

The reason why White should demand Bowden’s resignation comes from Bowden’s recent public statements that make it clear that he is unfit for office. He does not believe in supervision. He does not believe in holding frauds and abusers accountable through criminal prosecutions and enforcement actions. He is an apologist and a literal cheerleader for the industry he is supposed to regulate. He is also incapable of financial analysis due to his cheerleader syndrome.

“Yves Smith” provides the context for Bowden’s remarks.

Bowden’s previous appearances have been industry conferences, not open to the public, and not recorded. But an event earlier this month was taped, and the picture that emerges is disturbing.
At a minimum, Bowden reveals himself to be captured to an embarrassing degree. His remarks about the industry aren’t merely fawning; a former Goldman staffer called them ‘fellating’. Even worse, Bowden comes uncomfortably close to the line of offering to play the revolving door game at an unheard-of level of crassness, putting his son, and by implication himself, into the job market at an industry conference.

Bowden, along with Erin Schneider of the SEC’s enforcement staff in its San Francisco office, senior private equity investment professionals Sarah Corr from CalPERS and Margot Wirth of CalSTRS, and John Monsky, general counsel of private equity firm Oak Hill, appeared on March 5 at a conference at Stanford Law School,Emerging Regulatory Issues in Private Equity, Venture Capital, & Capital Formation in Silicon Valley. In a sign of undue chumminess, the moderator, former SEC commissioner and Stanford law professor Joseph Grundfest, didn’t see fit to disclose that he is a board member of KKR.

I have watched the video excerpts of Bowden’s remarks and can confirm that “Yves Smith’s” quotations below are accurate.

Bowden: Let me throw my two cents in, which is this is something I ran into for like 25 years in the industry. So when I was in the industry and I’d be on panels like this, a lot of the older people would talk about growing regulation, ’cause it has increased, right, over the last couple of decades, I don’t think there’s any two ways about it, and they’d sort of lament and say, I have money to get out of the business, there’s too much regulation, it’s not worth it any more.

And even when I was in the industry, I’d always look at them and say, like, “What are you talking about? This is the greatest business you could possibly be in. You’re helping your clients.”

I think if you look at McKinsey studies, the average asset manager, I’m not even talking about private equity, the average asset manager has margins of 25 or 30 percent. Like what, who else out there is in a business that’s that good? And I reckon, it’s sort of interesting for me for private equity in terms of all we’ve seen, and what we have seen, where we have seen some misconduct and things like that, ’cause I always think like, to my simple mind, that the people in private equity, they’re the greatest, they’re actually adding value to their clients, they’re getting paid really really well, you know, if I was in that position, the one thing I would think to myself as I skipped to work was like just “Let’s not mess it up. You know, this is the greatest thing there, I’m helping people, I’m doing OK myself.”

And so my view on the small ones is, I still think this is one of…I tell my son, I have a teenaged son, I tell him, “Cole, you want to be in private equity. That’s where to go, that’s a great business, that’s a really good business. That’ll be good for you.”

So for me personally, as we share our opinions…

Questioner [interrupting]: I’d love to hire your son, by the way. That’s a deal.

I would have asked for the resignation of any of my staff who made remarks even remotely like Bowden’s remarks. As financial regulators, particularly if we have the disadvantage of coming from the industry, we maintain at all times a professional distance from those we regulate. The remarks about his son are so beyond the pale that they demonstrate he is incapable of even pretending to maintain such a professional distance. His cheerleader nature is on full display.

But there are two additional factors as a regulator that would have caused me to ask for his resignation. First, he engages in classic “neutralization” techniques designed to minimize the seriousness of the staggering violations by private equity firms’ senior officers that SEC investigators found without any full-scale investigation backed by subpoenas and taking testimony under oath. The violations they found were the facially obvious violations. In his remarks, Bowden treats these violations as so trivial that they (perversely) demonstrate to his cheerleader mind that “the people in private equity, they’re the greatest.” More than half the private equity firms had significant violations that the grotesquely understaffed SEC was able to identify on the face of the documents without any serious investigation – and that proves that “the people in private equity, they’re the greatest.” So I ask again, how many enforcement and criminal referrals did Bowden make against private equity leaders in response to the SEC findings?

Second, Bowden’s moral reasoning and financial analytical powers are conveniently inept in his remarks. There’s the small matter of those “clients” the “greatest” people are helping – the ultra-wealthy. He seriously thinks that the world’s “greatest” people would choose to spend their time helping the world’s wealthiest people get even wealthier.

Then there’s the financial analytical aspect.

[T]he average asset manager, I’m not even talking about private equity, the average asset manager has margins of 25 or 30 percent. Like what, who else out there is in a business that’s that good?

Well, loan sharks have even bigger margins. The estimated margin on PPI that UK banks sold to their customers to rip them off was 80 percent. Still, Bowden has quite a point – everything neo-classical economists and the “modern finance” faculties taught about returns says that “the average asset manager” should be making tiny margins and private equity managers, because they deal with the purportedly “sophisticated” investors who should be canny and tough negotiators should have even smaller margins. The reality, however, is that the average private equity manager receives far larger markups than does “the average asset manager.” According to Bowden’s version of the facts, at means that Bowden is demonstrating a colossal market failure that according to him has persisted for decades and needs to be ended, rather than celebrated, by the SEC.

Two things could be going on. The asset managers, could be ripping off their clients – and the private equity managers might be the most adept at “pick[ing]” “investors’ pockets” to quote an SEC official – named Bowden. That would cause us to return to the moral question – how does picking your customers’ pockets make you the “greatest?”

The other thing that could be going on is welfare for the wealthiest Americans. It could be that there was a special tax break that allowed private equity managers to become fabulously wealthy by paying taxes at a far lower rate than the rest of us on their income. Of course, that would be so morally, financially, and politically indefensible that it could never happen (except in our surreal reality).

Bowden thinks it’s a great thing that “the average asset manager” makes out like a bandit – and shares the bandit’s ethics – and that the private equity managers make out like robber barons, and share their ethics. Bowden should resign and join DealBook’s legion of cheerleaders and apologists for the corrupt industry he serves so fawningly in his pose as a regulator.