This week America lost one of its most aggressive financial regulators. Ben Lawsky was a behind-the-scenes aide to New York Sen. Chuck Schumer and then New York Gov. Andrew Cuomo before Cuomo named him to lead his newly created Department of Financial Services in 2011.

DFS doesn’t have jurisdiction over criminal matters, but over the last four years, the 44-year-old former prosecutor has earned a reputation as a kind of Wyatt Earp of Wall Street, going after banks like Barclays, BNP Paribas and Credit Suisse for all kinds of sketchy and fraudulent behavior, from money laundering to currency manipulation to evading sanctions against Iran.

Lawsky has raked in more than $6 billion in fines for the state, and has demanded the firing of dozens of bank executives. He has not made a lot of friends on the Street or, for that matter, in the Justice Department or other oversight agencies who have felt upstaged.

Tuesday was Lawsky’s last day on the job; he’s leaving to set up a private consulting practice. He spoke to POLITICO’s Michael Grunwald about whether the financial system has gotten safer since the financial crisis, why bankers haven’t gone to jail for their roles in the meltdown, whether the Obama administration was aggressive enough in its law enforcement response, and what could go wrong next.

He thinks we’ve entered an era of “hyper-regulation” of banks — and he thinks that’s a good thing — but he wouldn’t have launched a “paranoia project” if he didn’t still see plenty to worry about on Wall Street and beyond.

MG: Seven years after the big financial crisis, are we safer? I saw one interview where you said the financial reforms have made it less likely that the exact same crisis will happen again, which sounded like a backhanded compliment.

BL: Look, the laws and regulations that have been passed since the financial crisis have clearly made a difference in certain ways. I also think regulators all over the world are in an entirely different place. They’re on their toes and monitoring in a way they haven’t done in recent memory. We’ve entered a world of hyper-regulation. And I think all that has addressed a lot of the issues that led to the crisis. My hedge is: Every crisis looks at least a little different than the one before it — sometimes a lot different. The concern is always, as regulators and as policymakers, that we’re spending a lot of time remedying the ills of the past. The scary thing is the new illness could be something we haven’t seen before. So I do think we’ve made a lot of progress. I just don’t think we should be complacent or think we’re prepared for the next crisis.

MG: What’s the something we haven’t seen? What should we worry about?

BL: One thing we worry about a lot is cyber risk. That’s something new that regulators are still quite reactive to, as opposed to proactive. We’ve tried to change that, but dealing with cyber, it’s a war you’ll never win. There’s a lot we can do to prevent a lot of cyber risks, but we’ll never eradicate hackers. It’s a risk we’re going to have to live with, and it’s going to get more sophisticated in the future.

MG: So how does that turn into a disaster?

BL: The work we’re doing around cyber here, I call it our paranoia project. We sit around and game out the worst possible scenarios for the financial system from a coordinated cyberattack. I don’t really talk a lot about it because we don’t want to get people panicky, but I feel like we don’t want to have some catastrophic hack or set of hacks that causes a real bump in the system and then look back and say: Why didn’t we spend more time thinking about just how bad this could be?

MG: Well, you’re leaving your job. Give me the panicky scenario. Freak me out.

BL: Well, one scenario is a coordinated, sophisticated attack on multiple financial institutions – maybe along with it a major exchange, or the Fed – where all of a sudden people can’t get access to their accounts. Maybe an exchange stops trading. And then you see a real loss of confidence in the system. Some of the people who are smarter than me on cyber risk also worry that you could see a major attack on some big piece of infrastructure — let’s say the power grid on the Eastern Seaboard — and then a coordinated attack either with it or right after it on the financial system. That really sets people into a panic. Again, I want to be very clear: I’m not saying any of these things will happen, and I don’t think people should panic. But I do think that, as regulators, we should imagine the worst-case scenarios and prepare for them.

MG: So where do you see progress in the financial system? Is it capital, leverage, the traditional stuff that people think causes the classic bubble that then explodes?

BL: Exactly. Higher capital levels; getting leverage out of the system. There’s been a lot of progress around preparing to wind down institutions in a calamity without crushing the system. There’s still more progress that needs to be made there. And again, I just think regulators are attitudinally in a different place. On the banking side, at least, I think they’re far more aggressive, far more vigilant, far more careful, willing to question a lot of things that they might have taken for granted before.

MG: You’ve been very aggressive in pursuing fraud by financial institutions. You’re seen as this sheriff on Wall Street. But seven years after the big mess, a lot of people are asking: “Hey, how come nobody went to jail?”

BL: It’s a very good question, and I hesitate a little because I don’t think anyone really knows. Like every complicated issue in life, there are probably a number of different factors. But I look back on it and compare the reaction of the federal government to Enron with the reaction after the financial crisis. With Enron, we put together a whole big group of prosecutors from around the country, the best of the best. We put them in an office and gave them huge resources with the FBI and other agencies to do a really deep-dive investigation into exactly what took place. And that was just for one company. If we had, as a country, devoted the same proportional level of resources to reacting to the financial crisis — a group of maybe several hundred prosecutors and several thousand agents tasked with doing an investigation in the immediate aftermath — we may have seen different results. Again, all speculation. I don’t mean to cast aspersions on anybody’s motives, because I don’t think anyone had bad motives. I was in the attorney general’s office in New York, and I remember during that period the federal government was very deeply focused on keeping our financial system from collapsing, and then afterwards starting that healing process that we so badly needed. There were a lot of resources and a lot of great minds devoted to doing that.

MG: Are you saying Obama put the brakes on investigating this? I’ve always assumed that a lot of prosecutors would’ve liked seeing themselves on magazine covers as a sheriff like you were, that probably whatever terrible things people did weren’t illegal or provably illegal. Do you feel like the feds pulled their punches?

BL: No. I don’t think they put the brakes on any cases. I guess what I’m saying is, I’ve worked in a U.S. attorney’s office, and there’s a real difference between having a bunch of U.S. attorneys around the country with often limited resources working on different aspects of the financial crisis, and putting together a nationwide task force where you devote very significant resources in one place with one leader who, frankly, probably reports to the top law enforcement officials in the country.

MG: We didn’t mobilize an army?

BL: Remember, on the other side of the table were the very best defense teams in the world with virtually unlimited resources. To say, “Oh, we’ll have X U.S. attorney’s office handle this case and Y office handle that case,” it’s a much tougher proposition, especially when these cases would have been very tough to make. And look, I want to be clear, in some of the cases, you’re right. There may have been bad conduct that we didn’t like, but it’s another matter to say we can provably show, beyond a reasonable doubt, intentional fraud. But if you had had the kind of proportional resources you had in Enron, my guess is you would have seen some of those cases.

MG: You’ve imposed some big fines on banks. Gov. Cuomo has been able to use that money to do infrastructure and other things that help the state. Do you worry about states, and the feds, too, getting addicted to that sweet JP Morgan cash?

BL: I don’t really think about that. My role has been to enforce the banking rules and laws. And it’s been very seamless with the governor, because he’s never weighed in once on any kind of these matters. I think he recognizes, having been the attorney general, that enforcement should be done without that kind of pressure.

MG: You’ve also pushed the idea that it can’t just be the institution paying a cost-of-doing-business fine. There has to be individual responsibility. Can you talk a bit about that? You’ve cracked down on Iran sanctions and money-laundering — super-important stuff, but not the stuff that caused the crisis. Do you think it sends a bad message that there hasn’t been the same personal accountability?

BL: Institutions don’t act. They’re just legal fictions. If you want to make the system better in the future, you have to deter bad conduct, so you can’t just go after these legal fictions. You have to deter the people who make the decisions inside those institutions. We just started to ask the question on every one of our enforcement matters. If there is bad conduct, there has to be some person or group of people who engaged in that bad conduct. And if you can’t find them, you’re just not looking hard enough. I think it’s an attitudinal change. I don’t know why we ended up in a world where there was less focus on individual accountability, but I think we’ve certainly tried to change that. Now it’s a much harder question on the criminal side: Can you prove it up? Because again, before you take away someone’s liberty, before you ruin someone’s career, before you single them out before their peers and their families, I do think you have to be very clear in your own mind that you’ve got the facts right. It turns out, though, that in many of these cases we do know who did what. It’s well documented in emails and recorded phone calls, in testimony, in admissions from those people.

MG: People hate Wall Street. Do you feel it’s got a really bad culture? Do you feel like it’s changed in the last seven years for the better?

BL: I’m very weary of broad statements like “Everybody on Wall Street is bad” or “Wall Street is broken” or “Wall Street has a bad culture” or “I hate Wall Street.” I know it’s popular to say, but there are a ton of really great people and really bright people who work on Wall Street. They go to work every day trying to do their jobs. And they’re all not the most wealthy among us. Wall Street employs tons of middle-class New Yorkers who are trying to make ends meet and have careers and have families. One thing I like about focusing on individual accountability is it forces us, as regulators and as prosecutors, potentially, to have the rigor to decide who exactly is responsible for whatever bad conduct we didn’t like. And if you do that, it keeps you from painting with this broad brush that an entire sector is bad, that an entire bank is rife with fraud, that all of Wall Street has got a big culture problem.

MG: You mention that regulatory attitudes are changing and it’s a lot more aggressive, more skeptical. Is that having an effect on the regulated community? Do you see different types of behavior, different types of incentives?

BL: I have a lot of interactions with the institutions we regulate, and I think they’ve been profoundly impacted by this new era of hyper-regulation. There is a very clear acknowledgement that times have changed. I think it takes a while for culture to change. I don’t think we should fool ourselves and think that because we’ve entered this new era, that there aren’t still going to be bad actors. I’m a former prosecutor. There are always going to be bad guys. There are always going to be fraudsters. There are always going to be people who let greed get the best of them. The question is: Do we put enough safeguards into the system to weed them out faster, deter more of them, and when we catch them, really hold them accountable?

MG: We had the subprime crisis with mortgages. On the consumer end, are student loans the next frontier for big problems?

BL: We worry about student loans; we also worry about the subprime auto market. I think those are two areas worth thinking a lot about from a consumer perspective. I think the servicing around student loans bears some real scrutiny.

MG: You’ve suggested that bank regulation has improved, but insurance regulation is still a problem.

BL: Insurance is regulated at the state level, with very little federal regulation at all. That’s how it’s always been. And people don’t pay enough attention to what’s been going on. There has been a movement to change the way life insurance companies count their reserves. It’s like capital at a bank. The rules are very conservative, and there’s a lot of antipathy towards those rules in parts of the industry, and they’ve been lobbying very hard to change those rules. They need a certain number of states to pass it, and they’re getting close. New York has been fighting very hard to not have that happen. I’m afraid we may lose that battle, and I’m also afraid if we do lose that battle we’re going to look back on it someday and really regret it.

MG: You’ve used the phrase “hyper-regulation” in a positive way. But especially in the Republican Party, you hear that financial regulation is going too far. Are you being too mean to Wall Street? I saw a study today that New York has lost 50,000 finance jobs. Is that because Ben Lawsky was too tough on a vibrant industry?

BL: Look, I worry about that. I worry about becoming too strident. I think the best regulation is thoughtful and careful and not overly broad. In the areas where we see real problems — take foreign exchange trading — these are matters where the conduct took place way after the financial crisis. Everyone knew better, but you still had a group of people at certain institutions willing to just flat-out break the rules. In those cases, there should be severe consequences.

That said, we don’t want to create a world where no one is willing to innovate, or nobody’s willing to bank in certain areas of the world. As regulators, as policymakers, we tend to lurch from one side of the spectrum to the other. Probably the best place to be is somewhere in the middle. I, certainly as a New Yorker, want to see Wall Street and the financial industry do well. It’s very important for our economy. It’s thousands and thousands of jobs. It’s important to New York’s tax base. So I think they’re not mutually exclusive. I think we can have a system where we’re focused on being aggressive and rooting out the really bad conduct, and the financial players are competing in a kind of race to the top to be the most compliant, to be the best for consumers. They’re attracting more business, they’re innovating, but at the same time they’re protecting people better than ever before. Maybe that’s wishful thinking, but I do believe it can be done.



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