Roger Lowenstein, Investment Banker, Mansplains Elizabeth Warren

Roger Lowenstein, a director of the Sequoia Fund–the flagship fund of Ruane, Cuniff & Goldfarb–wants to explain how regulation works to Elizabeth Warren, who he describes as “the nation’s unelected regulatory czar” and someone who–dear, oh dear–paints “bankers with as broad a brush as Donald J. Trump uses to demean Muslims.” He does so in an Op-Ed that is destined to be used as a prime example of mansplaining at its worst. Continue reading

The FBI, Online Brokerages, And The Hiring Of ‘Potheads’

This almost-two-years-old story about the FBI’s claim that it could not find hackers–AKA ‘cybersecurity experts’–to hire because they smoke marijuana (and thus would fail their pre-employment drug tests) reminds me of a story from the days of the Internet gold rush, as demand for programmers, system administrators, and the like meant the instant hiring and satisfaction of salary requests with little regard for the background of the applicant other than their technical credentials.

The background to this story, as described in a previous post, is as follows:

As the summer of 1997 ended, I found myself, within the confines of New York City, a nomad. A break-up with my girlfriend meant I had to find new accommodations, and it had resulted in my moving thrice in three months. Finally I settled on the Lower East Side, renting a room in an apartment still under construction. I was broke; the moving had cost me; I had lost apartment deposits and spent too much money eating out, drinking beer, whiling away my time in bars playing pool. My meager summer employment hadn’t kept pace with my reckless expenditures and I found myself skimping, saving, borrowing money from friends, just to get by and pay rent. Even more problematically, my doctoral oral examinations awaited; I had an ambitious reading list–in philosophy of language, logic, and science–to get through.

As the fall semester began, I found myself caught, willy-nilly, in a form of monastic discipline. I had wasted enough time over the summer; I had to buckle down now. I had two section of Introductory Philosophy to teach, a long list of journal articles to get through, and very little money to spend. So I did what all abstainers do: I enforced a routine. I tried to wake up at the same time everyday, avoided my old haunts, and kept my nose to the wheel.

Well, it worked. I passed my oral exams (I was told I had earned ‘a distinction.’) But I was still broke. I needed work, and would have to take a semester–the coming spring of 1998–off from graduate school. So, I typed up a CV, detailed my previous experience as a C programmer and a UNIX system administrator, and faxed it to a dozen or so head-hunters in New York City. By the end of the day, I had received several call-backs. The next morning, I spoke to one of the agencies, and was directed to an interview with an online brokerage for the position of a UNIX system administrator (to take care of their battery of SUN servers that powered their website.) I interviewed, made my salary demands known, and waited for a call. It soon came, informing me I was hired. But I had to take a drug test first.

I had smoked pot several times over the past summer, but from September onward, I had abstained. You see, folks who smoke marijuana can make reasoned decisions about whether they think indulgence in it may interfere with personal and professional projects of importance. I wanted to concentrate on my teaching and exam preparation; simple abstinence seemed like a good way to facilitate that process.  And now, it seemed my abstinence would also help me pass the drug test my employer wanted me to undertake.

There was one problem though: the drug test was not the usual ‘piss-in-a-bottle’ test; instead it tested hair samples. I found this out on the day I went for the test. Surprised at not being handed a bottle, I dutifully raised my arms for clippings to be taken from my armpits. This did not bode well, for I had learned that traces of marijuana can be found in hair samples for months longer than in urine samples.  A day later, I received a phone call from the Human Resources Department. The conversation went as follows:

Administrative Lady: Mr. Chopra, we want to let you know that you tested positive for marijuana in your drug test.

Me: Oh, really?

Administrative Lady: We would like you to know that at XXX, we have a drug-free workplace.

Me: Uh-huh

Administrative Lady: Can you please come in as soon as possible to fill out your remaining forms?

Me: Sure.

And that was it. I had failed the drug test, but I was still hired. I was a UNIX system administrator; I ‘knew’ Solaris; I was in a possession of a ‘rare’ skill. What were they going to do? Go find another system administrator, back into the madness of trying to find someone qualified, in competition with other brokerages and Wall Street employers? Fat chance. I was in.

Six months later, I quit. I had saved enough money to float my graduate school boat for a while. And I continued to abstain from pot till the day I defended my doctoral thesis, on January 6, 2000. Then, I celebrated.

How Low Can You Go? The Market for Regulatory Fees

The close, unholy, and corrupt relationship between Wall Street and Capitol Hill isn’t really news any more. And so inured have our sensibilities become to the giant, rigged con-game that is today’s financial-political system, that exposure to yet another one of its details fails to induce any suitably condemnatory reaction. Still, that said, when a babe-in-the-financial-woods like me turns his attention to trying to understand the grim forensic details of how this nation, despite suffering one  financial calamity after another, is still in the hock politically and economically to its architects, he is liable to stumble onto revelations that have not lost their capacity to shock and awe. (I’m well aware that the details below are unlikely to be news for veterans of this arena.)

Consider then, the market for regulatory fees. (I owe my edification in this matter to Simon Johnson and James Kwak‘s excellent 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.) A quick primer: while Congressional legislation ostensibly constrains the activities of financial institutions,  actual, on-the-ground regulation is carried out by components of the executive branch–the Treasury Department, the Federal Reserve–and a smorgasbord of agencies (including, for our current interests, the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS); on July 21, 2011, the OTS became part of the Office of the Comptroller of the Currency).

These two agencies, among others, were “funded by fees levied solely on the banks they regulate.” And financial institutions that fell under multiple regulatory agencies were “allowed to select their primary regulator.” Let’s take a short break so that you can ruminate on the various possible outcomes of a setup like this.

Done? Good.  How would such a market function? Presumably, agencies would compete–in order to ensure their financial viability–for the attention and patronage of those they sought to regulate. And those that were to be regulated would stroll through the boutique of agency offerings, inspecting fee schedules and regulatory requirements, turning up their nose at an ‘expensive’ offering of a seemingly-onerous regulation. Agencies would jostle for position, begging financial institutions to accept their regulations, perhaps by lowering fees, and far more interestingly, by tweaking and weakening their regulations. A suitably enervated set of regulations, coupled with a modest fee schedule, would stand out  as a prominent offering in this bustling bazaar of foxes-in-the-coop. (If there is one thing I’ve learned from market logicians, it is that I can predict outcomes like this with some confidence; market analysis does work, huzzah!).

Even among this lot of lily-livered law enforcers the OTS distinguished itself by its pusillanimity. Unsurprisingly, American International Group (AIG; remember them?) chose the OTS as its primary regulator when it opened a savings and loan, despite the fact that OTS with its primary focus on mortages was patently ill-equipped to take on the task of regulating the bankrupt offerings of AIG’s Financial Products Division. And in 2005, the mortage lender Countrywide, irked and chafing at the bit at its regulation by OCC, decided to switch to the more friendly OTS.

Cliche time: the rest is history.

Market Panglossianism; the curse of our times.