Want a good way to make a bundle at your corporate job? Leave it and go work for the government. Then come back.
That’s what Lanny Breuer did when he left his job at law firm Covington & Burling — a law firm that worked for some of the nation’s biggest banks — to serve as the Assistant Attorney General for the Criminal Division of the U.S. Department of Justice (DOJ). After Frontline broadcast a particularly damning expose criticizing Breuer for failing to prosecute (or even adequately investigate!) Wall Street banks for fraud, he resigned and went right back to Covington & Burling, with a $4 million salary to cushion his fall.
In other words, Lanny Breuer passed through the revolving door between the public and private sectors, in which employees regularly go from one sector to the other and then back again.
Let’s take a look at why this practice should concern investors, even as corporate executives benefit from keeping that revolving door well-greased.
Benefits for corporations
Private companies can benefit from having former employees in government positions because they often empathize with their former employers. This makes corporate alumni more likely to approach enforcement and policy making in a way that benefits their former employers.
Also, private companies are willing to pay big bucks for former government workers’ insider expertise and, importantly, the connections of public-sector executives.
There are plenty of examples of major figures who’ve passed through the revolving door and have been accused of questionable behavior as a result of loyalties to their former employers. Here are just a couple.
Before serving as chair of the SEC, Mary Schapiro headed the Financial Industry Regulatory Authority (FINRA) — a non-government organization Wall Street set up to regulate itself. During Schapiro’s time there, she gained the reputation as “a regulator with a light touch ” as the fines levied in 2008 by FINRA dropped by 73% from those levied in 2005 by its predecessor agency, the National Association of Securities Dealers (NASD). Keep in mind that Schapiro’s tenure overlapped with the Madoff scandal and the 2008 economic crisis, which means she had plenty of villains to chase. When Schapiro was asked to chair the SEC, she got a $9 million sendoff and proceeded to lead the SEC through what some have characterized as a period of wrist-slapping.
Like Lanny Breuer, U.S. Attorney General Eric Holder was a partner at Covington & Burling, which has served clients like Bank of America Corp (NYSE:BAC), Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), and Wells Fargo & Co (NYSE:WFC). Along with Breuer, Holder has been criticizedfor failing to prosecute any mortgage servicing companies, despite significant evidence of possible illegal foreclosures.
Greasing the revolving door
What keeps this revolving door rolling? One culprit might be the existence of compensation policies that privilege employees who leave for government positions. For example, Citigroup Inc. (NYSE:C) recently agreed to vest restricted stock and pro-rate incentive and retention awards for Jack Lew when he left his position as chief operating officer of its alternative investment group to work at the U.S. State Department. Not all employees get these special favors.
Other major financial institutions also have policies that offer special financial awards to employees taking government positions, including Morgan Stanley (NYSE:MS), JPMorgan Chase, Goldman Sachs Group, Inc. (NYSE:GS), the The Blackstone Group L.P. (NYSE:BX), and Northern Trust Corporation (NASDAQ:NTRS).
While it’s unclear whether these policies aim to grease the revolving door, it’s easy to see that they will promote that outcome.