In July 2016, European citizens were told that Manuel Barroso, former President of the European Commission, was leaving office to join the famous American investment bank, Goldman Sachs. This “Barroso Affair” put the spotlight on the ethical problems posed by movements of high-level officers between public office and regulated private industries. In the US, these back and forth movements are even more frequent. Goldman Sachs has attracted famous public figures as Robert Zoellick, and Larry Summers. But there are also movement from industry to public service. Trump has appointed in his administration, four former Goldman Sachs “alumni” — Steve Bannon (WH’s Chief strategist), Steven Mnuchin (Secretary of Treasury), Gary Cohn (National Economic council’s Director), and Jay Clayton (SEC’s Head).

These back and forth movements between public offices and regulated firms, termed “revolving doors”, can lead to situations of conflict of interests and capture of regulators by undue private interests. It was shown that during the Dodd-Franck Act’s rule making process, comments from financial firms having hired former SEC employees were more likely to be incorporated in the Act’s final rule, than firms who were not. Moreover, the SEC has published that the undue influence of former SEC officials working for financial firms led to a main slowdown in the investigations that followed the 2008 financial crisis. These examples stress that due to the revolving door, the financial sector is particularly prone to unethical behavior.

Why does the revolving door lead to unethical behavior? Because the regulator during his office accumulates knowledge, may create over-complex or ill-designed regulations, and also builds connections and relationships with key individuals of the public office. This knowledge and these connections, termed as “bureaucratic capital”, are valuable to the firms in the industry and to the regulator, but they are highly unethical. Bureaucratic capital therefore enables, in a legal way, the ‘revolver’ to cash in after leaving public office, and passing through the revolving door; and the firms to alleviate its regulatory constraint. This is the first highlight of our paper, ‘The revolving door, state connections, and inequality of influence in the financial sector‘.  

But this paper focuses also on another facet of the revolving door: inequality of influence. We show that the revolving door in the financial sector generates inequality of influence between “too-big-to-fail” firms, which can afford hiring prominent revolvers by paying them high wages, and the other firms which cannot afford this, leading to inequality in profits. Based on our novel database, presenting data on revolving door movements, we have developed various measurements of the inequality of influence resulting from inequality in bureaucratic capital allocation.  

Our main results is that top-5 US commercial banks concentrate 80% of revolving door movements, 86% of revolvers who held prominent positions in the public administration, and that revolvers at Goldman Sachs stand out by having brought some 700 years of cumulated public-office experience to this specific firm (some 30% of the total amount).

We show that regulators who have created much bureaucratic capital are more likely to be hired by the top five banks after leaving public office. More specifically, the elements of bureaucratic capital affecting the probability of a regulator to move to the top 5 are the revolver’s position in the agency hierarchy, the agency’s regulatory power, and the time spent as regulator. We also stress the value of imposing cooling-off period between public and private offices, which are found to reduce the likelihood that revolvers supply bureaucratic capital to the top-5 banks.

In conclusion, this paper has stressed that the revolving door phenomenon enables the largest firms to derive influence over public decision-making and to maintain their dominant positions. In consequence, there is a need for more transparency and more equality in the design and implementation of financial regulations. Goldman Sachs and the other too-big-to-fail financial firms have always known how to exploit their proximity to public decision-makers for their own interest.

While it is often difficult to bring proof of conflicts of interest involving these banks, it is possible to apply minimal precautionary principles for the revolver. First ensuring that risk assessments made by public committees on appointment of public servants to the private sector are not consultative but truly binding. Second, allowing public scrutiny on these appointments and on assessments pronounced by these committees. Finally, extending the duration of mandatory cooling-off periods before and after public position take-up in regulatory agencies.

‘The revolving door, state connections, and inequality of influence in the financial sector‘ was written for the Journal of Institutional Economics and is currently free to access.