Figuring out how much to blame financial regulators for the financial crisis.

Relationships between London banks and their regulators are not especially warm just now. The latest rules on bonuses issued by the Committee of European Banking Supervisors (soon to morph into the European Banking Authority), have left those sensitive souls on the trading floors feeling rather bruised and unloved. In the future, 70 percent of their bonuses will have to be deferred. Imagine living on only $3 million a year, with the other $7 million paid only if the profits you earned turn out to be real? It is a shocking turn of events.

Yet, in narratives of the financial crisis, regulatory capture is often an important part of the story. Will Hutton, a prominent British commentator, has described the Financial Services Authority, which I chaired from 1997 to 2003 (the year things began to go wrong!) as a trade association for the financial sector. In America, critics have charged that regulators—and, indeed, Congress—are in the pockets of investment banks, hedge funds, and anyone else with lots of money to spend on Capitol Hill.

How plausible is this argument? Can benign regulation really be bought?

When I was a regulator, I would certainly have denied it. I had never worked in the financial industry and knew few people who did. (Full disclosure: I am now an independent director of Morgan Stanley.) My successors have all come from the financial sector, however, which, until recently, was regarded as a sign that they were streetwise. Now we are not so sure.

The consultation processes on rules and regulations were highly structured, and much effort was devoted to ensuring balanced representations from providers and users of financial services. We funded research for a consumer panel in an effort to ensure "equality of arms." Of course, regulatory staff had more informal links with the industry than with consumers. But that is inevitable in any country. The industry's voice was more often heard in Parliament as well. The most effective lobbyists were Independent Financial Advisers, who seemed to be especially active in local Conservative Party associations. Goldman Sachs could learn a lot from their tactics!

I have no firsthand knowledge of the legislative process in the United States. But, as an outsider, I am amazed at the apparent intensity of lobbying, and at the amounts of money that firms and their associations spend. Is it effective? The media seem to think so, though with relations between government and industry still only a notch below open warfare, it is difficult to be sure.

An intriguing sidelight on the relationship between Congress and business is provided in a study by Ahmed Tahoun of the London School of Economics on "The Role of Stock Ownership by U.S. Members of Congress on the Market for Political Favors." Tahoun analyzed the relationship between stock owned by members of Congress and contributions to their political campaigns by the relevant firms, and found a powerful positive association.

In particular, Tahoun's research shows that U.S. members of Congress systematically invest more in firms that favor their own party, and that when they sell stock, firms stop contributing to their campaigns. Moreover, firms with more stock ownership by politicians tend to win more and bigger government contracts.

The data are not from financial firms alone, and Tahoun has not disaggregated them by sector. But the results are of interest nonetheless. They suggest a less-than-healthy relationship between lawmakers' political and pecuniary interests.

Regulators are typically not subject to those temptations. They are not normally allowed to own stock in financial firms (at least in the jurisdictions that I know). But can they nonetheless be captured?