By Justin Baer
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.
Recently, J.P. Morgan Chase & Co. Chairman and Chief
Executive James Dimon said the overlapping work of regulators was a
"hard thing to deal with" and made bankers feel they were "under
assault."
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.
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