The practice of government regulators and other officials regularly finding employment in the financial sector, and vice versa, is widely criticized for creating a system of favoritism. For example, in advocating for financial reform, Sheila Bair, the former chairperson of the Federal Deposit Insurance Corporation, hypothetically asks the presidential candidates the following question in a recent Forbes column:
WILL YOU END THE REVOLVING DOOR? The spectacle of senior regulators moving into and out of industry has undermined public confidence in our regulatory system. Will you commit to appointing individuals at the Treasury Department and regulatory agencies who will be independent and promise never to work for the industry they regulate? People who want to use regulatory positions as stepping stones to more lucrative employment in the private sector have no place in government.
Underlying Bair's claims is anecdotal evidence. This includes a 2010 report by the Securities and Exchange Commission (SEC) Inspector General about an SEC official that led an investigation against short seller David Einhorn at the behest of Allied Capital (the target of the short) who thereafter went to work for a law firm that obtained Allied Capital as a client. The revolving door criticism is also supported by data such as that compiled by the Project on Government Oversight, which found "that 219 former SEC employees filed 789 statements between 2006 and 2010 announcing their intent to appear before the SEC or communicate with its staff on behalf of private clients."
But despite the anecdotal evidence and criticism by former high-ranking government officials such as Bair, it is unlikely that the revolving door will end any time soon. In fact, the revolving door is most likely going to increase due to the increasing demand for specialized legal expertise in the financial services field.
The growing demand for expertise is being driven by the rise of potential sources of legal claims against financial institutions. A recent story in the Economist noted the multiple sources of government and civil claims, including numerous financial regulators (and departments within them), state attorney generals, and private litigants. Potential legal liability is on the rise not only due to the the increasing number and aggressiveness of regulatory agencies and departments, but also due to the failure of settlements to stop new lawsuits from being brought.
The growing demand for legal expertise is also being fueled by financial regulatory reform, which is creating rules that are both numerous and complex. Firms are responding by increasing legal and compliance staff, and also by making regulatory compliance a part of the company's overall approach to risk management. A March 2012 survey shows a clear upward trend in the last four years in compliance hiring by financial firms:
As the law and potential sources of liability become more extensive and complex, the value of industry expertise to government, and the value of government expertise to industry, will only increase. And along with this dynamic we should expect the financial industry revolving door to spin even faster.
But whether a faster revolving door is a reason for concern is an open issue. A recent empirical study of the impact of the revolving door found that it probably isn't the problem implied by Bair. The study suggests that in the securities industry lawyers in government demonstrate their value to potential private employers by being more aggressive, not less.
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