Monthly Archives: July 2013

Reading a recent Slate post by Matthew Yglesias titled “The SEC’s Top Cop Is Cashing In as a Wall Street Lawyer, and You Should Feel OK About It” it looks like Yglesias suffers from a profound, crippling lack of imagination.  Which is odd, seeing as how he’s Slate’s “business and economics” correspondent and a rather prolific analyst and commentator.  Heck, Andrew Sullivan named an award after him, given in honor of those “who actually criticize their own side, make enemies among political allies, and generally risk something for the sake of saying what they believe.”  So he can cross political lines, he can think outside the box.  His first reaction to the collapse of the factory in Bangladesh that killed a few thousand people was to write that it was cool that Bangladesh had laxer safety standards than the US.  So he does posses a creative intellect, capable of drifting free of more trifling, prosaic concerns.

Yet, in some areas, his creative analytical skills completely fail him.  Just look at the piece linked above.  The topic is Robert Khuzami, former director of the Enforcement Division at the Securities and Exchange Commission, who stepped down to take a job at Kirkland & Ellis, a major corporate law firm for over $5 million a year.  And “major corporate law firm” means that their clients are the firms that Khuzami formerly regulated.  And this is where Yglesias’ imagination breaks down.  He can’t really see what might be wrong with that.  Here is the key paragraph from the piece:

If you manage to unplug from the revolving door narrative for a second, you can see why this makes sense—if you spend your time as a government lawyer being extremely lackadaisical in your prosecutorial efforts that’s going to make you look like a bad lawyer who people don’t want to hire. If you want to cash in some day, you want to have the reputation of being someone who’s really smart and tough and effective and who understands how to make cases. That’s the kind of lawyer who the private sector wants to hire.

There is a market for labor you see, supply and demand and all that.  If Khuzami hadn’t zealously regulated Kirkland & Ellis’ clients, it would show he wasn’t a good lawyer, so why would they hire him for an extraordinary amount of money?  You just don’t pay top dollar for sub par talent, markets don’t work that way.  Easy peasy.

In the next paragraph Yglesias does cover his bases by acknowledging it’s possible that some untoward motive is lurking about, before dismissing the concern:

That’s not to say that the bad rent-seeking version of the revolving door never happens. Clearly it does happen. But different contexts are different. One salient issue, it seems to me, is the existence of collective action problems. It wouldn’t really make sense for Kirkland & Ellis (or any other major law firm) to spend millions of dollars to reward a specific individual for lax enforcement whose benefits are widespread.

I’m not really sure what Yglesias is arguing with his “collective action problems”, but I think he’s saying that it wouldn’t make sense for one firm to spend so much money on a single ex regulator because they just wouldn’t get that much benefit from them specifically.  Again, it’s a market thing.  So, nothing to worry about here, this is the invisible hand of the labor market doing its magic.  Khuzami was one bad-ass regulator.  The evidence?  A large corporate law firm hired him at a salary of over $5 million a year.  Why else would they pay him that?

But lets put our thinking caps on.  Make sure the chin strap is fastened because we are going to do some serious brain work.  So we have the SEC, the corporations that they regulate, and we have large corporate law firms (sometimes called “white shoe” firms) who have those SEC regulated corporations as clients.  Now, the job of the corporate law firms is to protect or defend the firms from the regulators.  Might it be possible that these smart regulators know that seven figure jobs are waiting for them at these white shoe firms if they play ball and go easy on the firms’ clients?  Maybe these corporate law firms know it’s in all of their collective interest to have huge paydays awaiting the regulators when they pass through that revolving door.  This is to say nothing of the contacts and friends back at the regulator that they can use as back channels to hash out or head off any “unpleasantries” that may arise.

Actually that all seems pretty obvious, that thinking cap turned out not to be necessary at all.  And by obvious, I mean klaxon going off an inch from your ear obvious.  And yet not quite 5 years out from the global financial crisis Yglesias just can’t quite see that scenario.

There’s an irony in the fact that Yglesias’ own conception of the labor market that justifies Khuzami’s $5 million plus doesn’t explain his own employment at Slate.  Why would Slate pay a correspondent who can’t seem to see what is in front of his face?  Why pay a correspondent who misses, or easily dismisses, one of the more obvious and powerful explanations?  Maybe, in some circumstances, and in spite of where you think the invisible hand should guide you, it pays to do a poor job.