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Trump Nominee Jay Clayton Will Be the Most Conflicted SEC Chair Ever

America's incoming top cop on finance is literally married to industry

Jay Clayton is Donald Trump's pick to head the Securities and Exchange Commission. Credit: Trump: Getty

When Donald Trump picked hotshot Wall Street defense lawyer Jay Clayton to head the SEC Wednesday, there was a predictable outcry from certain quarters. Ohio Sen. Sherrod Brown, who sits on the banking committee, had one of the most circulated quotes:

"It's hard to see," Brown said, "how an attorney who's spent his career helping Wall Street beat the rap will keep President-elect Trump's promise to stop big banks and hedge funds from 'getting away with murder.'"

Most of the consternation over Clayton's appointment has to do with his own background as a longtime defender of big banks. He's been involved in some infamously shadowy episodes in the post-crisis era, with two in particular standing out.

He represented Goldman Sachs when the firm received a $5 billion capital infusion from Warren Buffet during the September 2008 meltdown. He also represented Barclays during its malodorous acquisition of the assets of Lehman Brothers, an episode one lawyer described to me years ago as "the greatest bank robbery you never heard of." (There is a chapter about this story in my last book, The Divide.)

That Clayton has been a devoted legal slave to the usual Wall Street monsters over the years is obviously concerning, though not terribly unusual.

What makes this situation somewhat unique is the fact that this incoming SEC chief is also married to a broker at Goldman Sachs – his wife Gretchen is a wealth management advisor. This means that a significant portion of Clayton's family income while in office will presumably be coming from a company he is charged with policing.

This is both far less common and a much bigger problem than you'd think. As one former congressional aide put it to me today, "Clayton will be the most financially conflicted SEC chairman in history."

Remember, at the Republican convention last year, Trump supporters heckled Ted Cruz's wife, Heidi, for being a Goldman Sachs employee.

Where are all those furious Trump supporters now that their idol has put the husband of a Goldman broker in charge of the SEC? Pretty quiet. You can hear the crickets chirping all across America today.

How much of an ethical problem Clayton's marriage is can be seen in a bizarre contradiction in the rules. As SEC chairman, Clayton going forward will have to recuse himself from any enforcement decision involving Goldman. This is no small thing, since Goldman has not exactly been a stranger to SEC enforcement decisions over the years.

Yet even as he has to sit out Goldman's inevitable enforcement problems because of his wife, Clayton will not have to recuse himself from rulemaking decisions that could affect Goldman far more than isolated corruption cases.

Ethics rules say officials like Clayton do not have to recuse themselves from matters of "general application," meaning in this case that Clayton may rule on matters concerning Goldman, provided they also impact other banks.

But these decisions about things like the Volcker rule or fixed-income transparency or swaps could have a profound impact on Goldman's bottom line, with hundreds of millions, or even billions, of dollars at stake.

Who knows how much this will or even could affect his wife's personal compensation. Industry lawyers I spoke with today seemed split on how big a deal it is. But all agreed that it's not a good look for Clayton.

"I get the feeling that this Trump crew doesn't particularly care how bad things look, though," said one.

Obviously there have been many previous instances of familial conflicts involving government officials. Even the outgoing SEC chief, Mary Jo White, was criticized for conflicts involving her husband, John White, a partner at the white-shoe firm Cravath, Swaine & Moore.

Trump's pick for Transportation secretary, Elaine Chao, is the daughter of the owner of a major shipping company, which poses obvious problems. Former Sen. Tom Daschle's marriage to a lobbyist was a source of consternation for ethics watchdogs for years. There are other examples. The Beltway typically yawns at these situations.

"In general, Washington has kind of a professional courtesy among the corrupted to not take romantic partner conflicts seriously," says Jeff Hauser, director of the Revolving Door Project. "It's a major issue."

Goldman Sachs isn't just a frequent flyer when it comes to SEC enforcement fiascoes. The bank is also a regular applicantand recipient – of SEC waivers exempting it from the automatic penalties and sanctions that would otherwise be triggered by their offenses.

Even if Clayton sits out these decisions, the situation is ridiculous. Who needs an SEC chief who has to stay on the sidelines for some of the most important cases the agency considers? It's like having a police commissioner who has to cover his ears every time someone mentions the Crips or the Latin Kings.

A year ago at this time, Donald Trump was ridiculing Ted Cruz for being a "puppet" of Goldman. Now Clayton joins senior advisor Steve Bannon, Treasury appointee Steve Mnuchin, NEC director Gary Cohn and White House advisor Anthony Scaramucci as high-ranking Trump appointees who are either from Goldman or married to someone at the firm. What a joke.