Regulatory Capture

Proof came to light recently that bank regulators were licking the boots of managers at Goldman Sachs as Goldman and other megabanks precipitated the economic crash of 2008 by their recklessness and greed.

The phenomenon is known as regulatory capture.  Bank examiners from the New York Federal Reserve have permanent offices in Goldman’s New York headquarters, as examiners do at all of the nation’s major banks.

Bank examiners had become subservient to Goldman’s managers, kowtowing to the bank’s insidious practices.*

All levels of federal, state and local oversight are susceptible to this phenomenon.

It might start as a seemingly innocuous attempt at flattery, as for example when the Detroit Water & Sewerage Department (DWSD) featured a flattering article in a water department house publication about the Michigan Department of Environmental Quality’s principal (and usually only) site inspector.

On August 22, 2012, DWSD Director Sue McCormick wrote to the Board of Water Commissioners, in part (p. 2), “...I received a letter from MDEQ after a visit from the Chief of the Water Resources Division...The letter (attached) notes the observed improvements and continued partnership between DWSD and the Division, as we work through issues.  Monthly calls with the Division continue to build on the partnership approach…”  (Emphasis added.)

Attached to McCormick’s letter was a copy of Chief of Water Resources Division (MDEQ) William Creal’s letter of July 19, 2012, which ended, “We appreciate the office you have provided to us for Ms. Jodi Peace [the site inspector] to use.  I expect this to further our partnership as we continue to work through the issues that we face.”  (Emphasis added.)

   

Let’s be absolutely clear.  Regulators are not supposed to be partners with the regulated.

To prevent the compromising of government regulators, two important requirements are obvious. First, the government agency should always be represented by at least two regulators at meetings, inspections and similar contacts.  Each regulator should write, sign and file a preliminary report, independently.  Second, regulators ought to be rotated in and out of regulatory settings routinely every year or two.

We need to be vigilant to ensure that regulatory capture and other perversions of the regulatory process don’t infect the anticipated regional water agency, the Great Lakes Water Authority.  Clean water matters.  Lax enforcement of clean water laws subverts the public interest.

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*  Compare regulatory capture and the Stockholm syndrome.