Turning a Blind Eye: Why Washington Keeps Giving in to Wall Street

Wall Street’s political and regulatory victories since 2010 shed new light on the financial industry’s remarkable success in gaining broader powers and more lenient regulation during the 1990s and 2000s. Four principal factors account for Wall Street’s continued dominance in the corridors of Washington. First, the financial industry has spent massive sums on lobbying and campaign contributions, and its political influence has expanded along with the growing significance of the financial sector in the U.S. economy. Second, financial regulators have aggressively competed within and across national boundaries to attract the allegiance of large financial institutions. Wall Street has skillfully exploited the resulting opportunities for regulatory arbitrage.
Third, Wall Street’s political clout discourages regulators from imposing restraints on the financial industry. Politicians and regulators encounter significant “pushback” whenever they oppose Wall Street’s agenda, and they also lose opportunities for lucrative “revolving door” employment from the industry and its service providers. Fourth, the financial industry has achieved “cognitive capture” through the “revolving door” and other close connections between Wall Street and Washington. A widely-shared “conventional wisdom” persists in Washington—notwithstanding abundant evidence to the contrary—that (i) giant SIFIs are safer than smaller, more specialized institutions, (ii) SIFIs are essential to meet the demands of large multinational corporations in a globalized economy, and (iii) requiring U.S. SIFIs to comply with stronger rules will impair their ability to compete with foreign financial conglomerates and reduce the availability of credit to U.S. firms and consumers.

Arthur Wilmarth

University of Cincinnati Law Review, V. 81, No. 4, 2013

September 18, 2013

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