A Tale of Two Regulators

Andrew BowdenA year ago, it seemed that SEC examination chief Andrew Bowden was going to do his job. He had just finished a study of private equity firms and found that at more than half of them, the companies that were purchased were being inappropriately charged fees for things like services that they didn’t receive or similar shenanigans. This is the whole point of private equity: siphon off as much money as possible and then get rid of the company. In this case, the people who get screwed are the investors who put up the money to purchase the firm. If poor people did this kind of thing, they’d be thrown in jail. When rich people do it, they are deified.

So after the study was finished, Bowden gave a big fiery speech where he said:

When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50 percent of the time.

Time for some prosecutions, right? But since then, the SEC has done what it normally does: nothing. As Matt Taibbi noted last week, “Last May, Bowden, a senior SEC official, described this problem as almost epidemic.” But now:

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, because 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.”

Ah yes! That’s the kind of person we want policing the private equity people: people who have simple minds and bow down before the greatness that are these masters of the universe who, after all, are just adding value to their clients. Bowden went on to joke about them giving his son a job, but I hardly think that was necessary to know exactly what Bowden (doubtless along with his peers) is all about. Needless to say, the Andrew Bowden of last year was far more in danger of losing his job than the Andrew Bowden of this year.

Two weeks ago, Michael Hiltzik discussed the issue in a broader context, Bankers Are Complaining — Again — About too Much Regulation. He perfectly described what is going on with Bowden and the thousands of bureaucrats like him:

The term “regulatory capture” refers to what happens when regulators swim so close to the companies they regulate that they get snared in those companies’ gravitational fields. What results is tolerant, indulgent regulation, or none at all.

He started with the story of corporate lawyer and pox on the world H Rodgin Cohen who claimed in a recent talk that there was no regulatory capture. He said “the regulatory environment today… the most tension-filled, confrontational, and skeptical of any time in my professional career.” But his professional career only really start in the 1970s and got going in the 1980s. These are the times when the government was turning its back on efforts to control the crooks that people like Cohen get rich representing. What does it really matter how today lines up with his career? Of course, there is little doubt that all he’s really saying is that at this point his privilege is so extreme that even the smallest push-back would seem “tension-filled, confrontational, and skeptical.”

Regardless of what Cohen thinks (or says, anyway), the example of Bowden kind of destroys it. But we have to wonder which Bowden is the one who goes to work each day: the fiery regulator or the private equity pawn? Hiltzik noted something interesting in this regard. Last year’s strong words were a major event and the speech at the conference earlier this month was not. So I’m guessing that Bowden is the obsequious one, not the Cohen skeptic of myth. Plus we have data: since Bowden’s big speech, there haven’t been big indictments. This country has a long way to go to fix its problems. And we haven’t even started.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

2 thoughts on “A Tale of Two Regulators

  1. The guy is complaining that people are ‘skeptical’? Deserves a beating.
    Seriously now – any rational observer, given the information we know, has to put the burden of proof on the equity firms. What we have seen, again and again, is that the least-crooked of these firms are very crooked – every time we have an opportunity to check.
    The burden of proof is firmly on the defenders of investment firms. Every equity firm should be assumed guilty until proven innocent, because that is clearly indicated by the evidence. To be not highly skeptical would be completely unreasonable.
    And they complain about the slightest regulation and even have the nerve to cry ‘oppression’. And let’s be clear about the origin of such reasonable skepticism. There is nothing ‘leftist’ or ‘liberal’ about being highly skeptical of equity firms, and about expecting heavier regulation. No; it is plain common sense.

    • What really bugs me is that we don’t have the capitalist system: we have a capitalist system. It is set up to make certain kinds of industries thrive. But listening to commentary, you would think this was the only way we could arrange things. The fact that this is not true is most obvious with these firms. They are rich because the system makes them rich. I do not think they help the economy. Skepticism, for sure! But they don’t think they have anything to prove. It doesn’t even occur to them that anyone would reasonably question them.

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