Liberal Democrats have made an election-year issue of the “revolving door” between corporate executive positions and government service. If a regulator comes from the business they are supposed to regulate, progressives argue, they will necessarily operate with a lighter touch and give free passes to their friends and former colleagues. It’s another way the system is rigged for special interests and against ordinary people.
But the revolving door can be more insidious than that, as a recent case involving the New York Federal Reserve and Goldman Sachs illustrates. When individuals pass smoothly between government and the private sector, they can use their contacts to engage in that most American of pursuits: making money.
That’s what Joseph Jiampetro, a Goldman Sachs managing director and a former top aide at the Federal Deposit Insurance Corporation (FDIC), apparently figured out after a performance review encouraged him to “increase the amount of revenue generating business he brought to the firm.” Jiampetro worked at Goldman as a technical advisor to mid-sized and regional banks on government regulation, his area of expertise after years at the FDIC and the Senate Banking Committee.
According to the narrative provided by federal officials, Jiampetro hit on an idea: If he could get so close to the regulators that he knew what they were saying about banks, he could lure clients to Goldman based on his superior inside information. How did he do it? He hired Rohit Bansal, who previously worked at the New York Fed.
Jiampetro allegedly recruited Bansal directly, and after the hiring, encouraged him to use a friend at the New York Fed, Jason Gross, to obtain 35 pieces of confidential information about 20 unnamed banks. Bansal and Jiampetro then used that information to pitch those banks on working with Goldman to manage their regulatory requirements. The banks accepted the offer, and why wouldn’t they? Goldman appeared to be reading the minds of the New York Fed.
A few months later, when an executive at Goldman saw the confidential information in one of Bansal’s emails, they turned him in. Last October, New York’s Department of Financial Services fined Goldman $50 million, and federal prosecutors imposed misdemeanor criminal charges on both Bansal and Gross. Both pleaded guilty and were given probation.
The case has returned to the spotlight because the Federal Reserve wants to go after Jiampetro, Bansal’s manager. In addition to fining Goldman another $36.3 million, the Fed wants to ban Jiampetro from the banking industry for life. The Fed alleges that Jiampetro had been handling confidential information for years, even before getting Bansal hired and using his sources to obtain more.
Jiampetro, who Goldman fired last year, denies all charges; his attorney said in a statement that “the Fed has the law wrong and the facts wrong.” But his claims are a bit of a stretch. Jiampetro says that he never read the documents, even though some of them were found on his desk. He also says that he had no idea where the documents came from, even though Bansal would regularly put in emails that the information he obtained was “highly confidential,” “not public” and “has not been issued as guidance yet.”
Everyone understands the use of the revolving door to limit regulatory pressure. But this is a novel concept: using contacts inside the government to extract things of value that could effectively be sold to third parties. In this case, Goldman executives sold the knowledge gleaned from the New York Fed’s secret files.
If you wish, you can call this a victimless crime. After all, the banks that worked with Goldman really did get value for their money: They learned what their regulators expected of them and how they could improve. Goldman profited from the deal, but it was a genuine transaction. Of course, there’s the part about stealing a federal regulator’s confidential documents, which the New York Fed keeps secret because it doesn’t want member banks to be able to circumvent its oversight.
The larger point is that if Goldman can figure out how to turn secret documents into dollars, it can turn all kinds of other government relationships into money as well.
Maybe knowing the contents of government reports on banks would be useful to investors in buying or selling their stock. After all, Goldman’s wealth management business is far larger than its bank advisory business. Maybe having a friend in government passing along secret files can give Goldman itself the trajectory of regulations, even if the information isn’t directly about their bank. Knowing what regulators look for and focus on is helpful to an investment bank. Maybe they can sell this information to “political intelligence” firms, who are always looking for scraps to pass on to clients.
Once you figure out a way to gather information, there is literally no end to how you can put it to use. And the above brainstorm just concerned supervisory notes from a regulator. There are many more pieces of classified information that would be of use to a major investment bank like Goldman Sachs.
That’s the core danger of the revolving door. Whether directly through inside information or indirectly through relationships and gossip, companies can benefit from having employees who previously worked at a regulator, or a regulator who previously worked with the company. The Goldman/New York Fed incident is just the most brazen way of capitalizing on that. Most favors stay far more under the radar, in the form of tips or access and not specific non-public information. But it’s all the same game, really.
Hillary Clinton and Donald Trump have already begun their presidential transitions. Both of their finance chairs — the people who take in the fundraising dollars — are alums from Goldman Sachs. While at some level you can’t escape some private sector expats in government, the easy practice of moving back and forth between Washington and the corporate world really has to end. It saps trust in institutions across the board, and it provides too many opportunities for mischief. And what the Goldman incident tells us is that the revolving door isn’t just protection insurance for large corporations; it can be a tangible asset.