Throw Them All Out

by Peter Schweizer

  He goes on: "Just let me explain by examples. My party's in power in the city, and it's going to undertake a lot of public improvements. Well, I'm tipped off, say, that I go to that place and I buy up all the land I can in the neighborhood. Then the board of this or that makes its plan public, and there is a rush to get my land, which nobody cared particular for before. Ain't it perfectly honest to charge a good price and make a profit on my investment and foresight? Of course, it is. Well, that's honest graft."21

  More recently, Lyndon Johnson, while he served in the House and the Senate, told people to purchase advertising on his Austin radio station, KBTC, in order to get his attention.22 LBJ also frequently used his power at the Federal Communication Commission to obtain licenses for his radio and television stations and to block competitors from invading his markets in Texas. His company, needless to say, prospered. An initial investment of $17,500 grew into a media empire worth millions.23

  Or consider the case of the late Congressman Tom Lantos of California. He was one of the most respected representatives and a champion of human rights. But no mention has ever been made of the glaring conflict of interest that was central to his personal financial life. A former economics professor at San Francisco State University, he served in the House for more than twenty-five years. Through much of his later public life, Lantos invested heavily in the stock of a single company. He never worked for the company. Indeed, the company was not even in his district.

  When he first went to Congress, Lantos had little in the way of Boeing shares. But he kept buying and buying, year after year. According to his last financial disclosures, Lantos ended up owning between $1 million and $5 million of stock in the airplane maker. This when his total net worth was between $1.9 and $11 million.24

  Lantos did very well with his investment. When he first arrived in Congress, Boeing stock was trading at $5 a share. By the time he died in 2008, it was $85 a share. It's hard not to come to the conclusion that Lantos had something to do with Boeing's success.

  So why did Lantos tie up so much of his wealth in the fortunes of one company? It probably had something to do with the fact that because of his congressional position, he had an extraordinary amount of influence over the health of Boeing. Lantos served as chairman and ranking member of the House Committee on Foreign Affairs, which had direct oversight of the Export-Import Bank, a little-known federal agency that operates as one of the most blatant examples of corporate welfare in America. (Both the libertarian Cato Institute and Senator Bernie Sanders, a self-professed socialist, have denounced the Export-Import Bank as "corporate welfare at its worst.") Created at the height of the Great Depression, the bank had the goal of boosting American manufacturing.

  Today, the Ex-Im Bank is often referred to as "Boeing's bank." The bank helped fund more than 25% of the airliners Boeing delivered in 2009, for example. In 2008, the year Lantos died, Boeing deals accounted for almost 40% of the bank's $21 billion in business. Boeing is a major manufacturer in the United States, to be sure, but the amount of support it receives is totally out of proportion to its size. The recent Ex-Im investments are actually down from their height. In 1999, 75% of the Export-Import Bank's financing went to Boeing. That same year, shareholders like Lantos saw the stock price jump from $32 to $45 a share.25

  About 2% of all U.S. exports get Ex-Im financing; about 20% of Boeing's business does. In other words, it's ten times more likely to get funds than are other exporters.26 As the Wall Street Journal put it, "No company has deeper relations with Ex-Im Bank than Chicago-based Boeing."27

  Lantos was a champion of Ex-Im, fighting off efforts by conservative Republicans to end it and aggressively pushing for its reauthorization. He was a tireless advocate of a government program that was directly benefiting his largest single stock asset.

  Honest graft is so insidious because it piggybacks on legitimate service, and cloaks both in the name of public good.

  Give someone the chance to feel that they are serving the public and getting rich at the same time and you have created a nightmare. Always a practical observer of human nature, Benjamin Franklin in 1787 expressed concern to the Constitutional Convention that when you give politicians the opportunity to "do good and do well" you are asking for trouble: "There are two passions which have a powerful influence in the affairs of men. These are ambition and avarice; the love of power and the love of money. Separately, each of these has great force in prompting men to action; but when united in view of the same object, they have in many minds the most violent effects. Place before the eyes of such men a post of honor that shall at the same time be a place of profit, and they will move heaven and earth to obtain it."

  Ben Franklin knew human nature. He would not have been surprised by the deep sense of entitlement claimed by the Government Rich. Because of their "public service" and "sacrifice" to us, they feel entitled to the manipulation of the business market for their own benefit. Their attitude is that the rules that apply to the rest of us—insider trading laws, conflict-of-interest statutes—don't apply to them and never should. The Permanent Political Class is, and expects to continue to be, untouchable.

  The Permanent Political Class does not produce any goods or services. Their ability to make money rises from their ability to extract wealth by leveraging it from others. Politicians can write legislation that can destroy corporations or help them prosper. They can perform constituent services to benefit friends or punish enemies. They can intervene with bureaucrats in a way that can reap billions for a company. They have access to information that can dramatically affect the economy and financial markets, information that few other people have.

  All of this crony capitalism comes at a high price for the rest of us. Under free market capitalism, the idea is that a rising tide lifts all boats. Henry Ford wanted Americans to become more prosperous because then he could sell them more cars. Crony capitalism is a zero-sum game. Crony capitalists don't care whether a rising tide lifts all boats. They just want to buy their way onto the big party boat.

  All too often people assume that corporations and special interests have the real power and that politicians are mere corks tossed around in the rough surf of capitalism. The fact is that the Permanent Political Class has immense formal and informal powers that are both blunt and subtle. For example, your chance of getting audited by the Internal Revenue Service often depends on who your congressman is. One study found that the IRS actually shifts enforcement away from congressional districts represented by legislators who sit on committees with oversight of the IRS.28

  A study by Stanford University's Rock Center for Corporate Governance found evidence that firms that make political contributions and hire lobbyists are less likely to face enforcement actions by the Securities and Exchange Commission. And if they are subject to an SEC enforcement action, they are likely "to face lower penalties on average."29

  Two professors found that companies that hire lobbyists are, on average, much less likely to be detected for fraud, or they can evade detection for 117 days longer than average. These firms are also 38% less likely to be detected by regulators. The scholars note that "the delay in detection leads to a greater distortion in resource allocation during fraudulent periods. It also allows managers to sell more of their shares." Having friends in Washington can be extremely valuable.30

  Washington's financial leveraging power can be found even in something as seemingly innocuous as the Endangered Species Act (ESA). The act can have an enormous economic effect on property owners and developers. Scholars at Auburn University found that the implementation of the ESA has been highly political. Politics determine which species gets listed as threatened or endangered and how quickly (or slowly) a certain species gets recognized and protected. The researchers found that states with House members on the budget oversight subcommittee responsible for funding the U.S. Fish and Wildlife Service and the Environmental Protection Agency had significantly fewer listings than other states. As the researchers put it, "Congres
sional representatives who sit on the Interior subcommittee of the House Appropriations Committee use their position to shield their constituents, at least partially, from the adverse consequences of ESA."31

  By looking at Department of Housing and Urban Development grants designed to combat economic blight and help "distressed" cities, researchers found that there was no evidence that these factors had any real effect on how the HUD grants were awarded. The decisions were instead based on political influence, by bureaucrats rewarding friends.32

  Has anything really changed since George Washington Plunkitt's day? The methods, techniques, and tools are similar. But while Tammany Hall corruption controlled a city, today's crony capitalism is about a system that operates at the highest levels of an entire nation.

  There is a lot of money sloshing around in the nation's capital. As of 2010, seven of the ten richest counties in the United States were in the Washington, D.C., area. During the Great Recession of 2008–2009, Washington boasted the best-performing real estate market in the country. What is it that drives the D.C. economy? Not private enterprise, certainly. And we can only expect these trends to continue, unless we make changes.33

  The upper tiers of the U.S. economy are increasingly a network of individuals who make special deals with politicians—and the politicians themselves. The distinction between the public and private sectors has become blurred. More than half of the Fortune 1000 companies have an ex-politician or ex-bureaucrat sitting on their corporate boards.

  Before plunging into the specifics and key offenders of modern crony capitalism, we need to ask: How is this possible, and why does our system of laws allow all this to happen? As you will see, the answer isn't simply a matter of overlooked corruption. The system of crony capitalism has powerful defenders.

  The bank robber Willie Sutton was once asked why he robbed banks. His well-known response: "Because that's where the money is." Why has crony capitalism become so widespread? The response is the same. Let's take a look at how the crony insiders get their loot.

  Part One

  CONGRESSIONAL CRONIES

  1. THE DRUG TRADE

  OVER THE PAST half century there has been a massive web woven between the federal government and the health care industry. Whether due to special taxes, fines, regulations, subsidies, or mandates, there have been enormous sums of money at stake in governmental decision-making for health care companies—and the companies' investors. By 2007, federal government programs like Medicare, Medicaid, and others accounted for 46% of all health care spending in the United States.1 Knowing what changes might be in store for those programs, and having advance notice of details of other health care legislation, could translate into a lot of profits. For a sitting United States senator, trading stocks at the same time you are pushing and writing legislation could net you millions in capital gains.

  Throughout 2009, Washington was consumed by the Patient Protection and Affordable Care Act, or what became commonly known (at least to its critics) as Obamacare. It began as a campaign promise, became a debate, and ended with horse-trading, political threats, and partisan muscle. The bill that was eventually passed by Congress and signed by President Obama was 2,500 pages long. Very few members actually knew everything that was in the bill or what it all meant. Some members had not even had a chance to read it. The health care industry and pharmaceutical companies employed thousands of lobbyists to shape the legislation. When the dust finally settled, clear winners and losers emerged. The details that determined who came out ahead and who didn't were almost always hammered out behind closed doors. A single event could cause the price of a stock to swing wildly. For example, when six senators announced on July 27, 2009, that they were going to eliminate the "public option"—a government-run insurance policy—from their version of the health care reform bill, the share prices of three major insurance companies surged by between 8% and 10% the next day. Trading stocks in such an environment could be highly profitable, especially if you knew about such events in advance.

  One of those at the center of shaping the bill was Senator John Kerry of Massachusetts. Kerry, first elected to the Senate in 1984, had been a longtime advocate of health care reform. He serves as a member of the Health Subcommittee on the powerful Senate Finance Committee. The former Democratic nominee for President is a member of the wealthy Forbes family and is the beneficiary of at least four inherited trusts. In 1995, his wealth jumped dramatically when he married Teresa Heinz, the widow of Pennsylvania Senator John Heinz, heir to the Heinz family fortune. Teresa Heinz Kerry is worth hundreds of millions of dollars.

  Like other very wealthy people, John Kerry is an investor. His family trusts are relatively small, worth less than $1 million, according to his 2009 financial disclosures. By themselves they could hardly sustain his lifestyle. The bulk of the Kerrys' wealth resides in a series of marital trust and commingled fund accounts. All together, these funds include significant investments in stocks of many corporations. It is his buying and selling of health care stocks during the debate over health care reform that is particularly interesting. While some have reported that the Kerrys' assets are in a blind trust, they have not been designated as such on his financial disclosure forms.2

  Contrary to public perception, the major pharmaceutical companies were in favor of Obama's health care bill. The President's new program was expected to increase the demand for prescription drugs by making health care more accessible. Big Pharma, as the companies are collectively known, decided it could not stop the bill, so it might as well try to influence its provisions. Back in 1994, when the Clinton administration (and notably Hillary Clinton) had pushed for dramatic changes in the health care system, several effective ads sponsored by the pharmaceutical industry, starring "Harry and Louise," helped defeat "Hillarycare." In 2009, Big Pharma hired the two actors again. Only this time they were fifteen years older—and they were in favor of the bill. "Well, it looks like we may finally get health care reform," said Harry, in one ad.

  In July 2009, industry representatives met with key members of Congress and hashed out critical details of the new Obama bill.3 As the bill snaked its way through the House and Senate, where Kerry was actively pushing it, the Kerrys began buying stock in the drug maker Teva Pharmaceuticals as the prospects of its passage improved. In November alone they bought close to $750,000 in the company.4

  When the Kerrys first began buying shares, the stock was trading at around $50. After health care reform passed, it surged to $62. In 2010, after the reform bill was signed, the Kerrys sold some of their shares in Teva, reaping tens of thousands in capital gains. (It's unclear exactly how much because of the way the transactions are reported. Politicians are required to report ranges only—not exact dollar amounts.) And they held on to more than $1 million worth of Teva shares. All in all, health care stocks proved to be some of the Kerrys' best investments that year, in terms of return on investment.

  To be sure, Senator Kerry wasn't the only congressional trader in pharmaceuticals. John Tanner of Tennessee, a member of the House Ways and Means Committee, bought up to $90,000 worth back in April 2009, when the House was approving reserve-fund budgeting for health care (part of the annual budget process). Also buying Teva were Senator Jim Webb of Virginia and Congressman Vern Buchanan of Florida. Unlike Kerry and Webb, however, Buchanan voted against the bill. Casting a vote is one thing; betting on the final tally is something else. Most members, most of the time, know full well which bills will pass before they cast their votes. Health care was such an important bill, and the Democrats had such a strong majority (even if Scott Brown's surprise election in Massachusetts denied them a supermajority of sixty votes in the Senate), that opposing members like Vern Buchanan could still place bets that the bill would eventually get to Obama's desk.

  The very idea that politicians trade stocks while they are considering major bills comes as a shock to many people, but it is standard behavior in Washington. Senator Tom Carper of Delaware sat next to Kerry on the Senat
e Finance Committee's Health Subcommittee. Carper, more of a centrist than Kerry, was concerned about the public option. And according to former Senator Tom Daschle, who was a point man in the Obama administration's push to pass the bill, Carper was intimately involved in hammering together the health care bill throughout the spring, and summer of 2009. By the fall he'd joined a group known as the Gang of Ten, who were trying to bring about a compromise with Republicans.5

  PRIMING THE PUMP

  Just a few weeks after three committees had approved health care bills in rapid succession, Carper began buying health care stocks that would benefit from the legislation he was supporting. He bought up to $50,000 in Nationwide Health Properties, a real estate investment trust that specialized in health care—related properties. He also picked up shares in Cardinal Health and CareFusion. (As we will see, Cardinal was a popular investment choice for those involved in the health care debate.)

  Congresswoman Melissa Bean of Illinois, a moderate, seemed torn over whether to vote for or against Obamacare. But her indecision didn't apply to her stock portfolio. Along with her husband, Bean traded shares as she watched the debate unfold in Washington. Indeed, although Bean and her husband are active traders, the only stock purchases they made during 2009 were in the health care sector. They bought shares in Cardinal Health, CareFusion, and two drug manufacturers, Mylan and Teva. Bean bought Teva in April at about $46 a share. After Obamacare passed, shares soared to more than $63. She bought Mylan when it traded at $14 a share. After Obamacare became law, it rocketed to $23 a share, up more than 50%.6

  One of the more creative and cynical plays on health care reform came from Congressman Jared Polis of Colorado. Polis is a young politician who had just taken his congressional seat in January 2009. But he was clearly seen as a rising star, with an appointment to the powerful House Rules Committee. He also sits on the House Democratic Steering and Policy Committee and on the Education and Labor Committee's Subcommittee on Healthy Families and Communities. Polis is wealthy. He grew up amid privilege, and his family became enormously rich after founding and later selling Bluemountain.com, the greeting card website.