In other words, we seem to have reached an unhappy position in which a substantial fraction of our most intelligent and articulate citizens either sit at Bloomberg trading terminals or jet around the world in very expensive tailor-made suits “doing deals” that, judging by the recent record, have no purpose except to put more money in their own pockets, and that on a net basis are economically detrimental to the rest of the population.
The drain on America’s talents is substantial. In 2008, exclusive Harvard University reported that 28 percent of its “gainfully employed” new graduates chose jobs in finance; for equally prestigious Yale, it was 26 percent. Even in 2011, the percentages remained strikingly high—17 percent for Harvard, 14 percent for Yale. Across all of the elite Ivy League, Princeton University had the highest percentage in the Ivy League—40 percent. Whatever cynical thoughts one might have about the value (and ethics) produced by an Ivy League education, there is no doubt that finance has diverted enormous human capacity away from more productive work.
Reflection and self-questioning, however, are not the financial sector’s greatest strength. Self-reform is accordingly unlikely. In his January 2011 speech at the World Economic Forum in Davos, Jamie Dimon complained of “this constant refrain [of] ‘bankers, bankers, bankers’—it’s just a really unproductive and unfair way of treating people.”15 Lloyd Blankfein told a different audience that he was doing God’s work.
Can we turn Mr Hyde back into Dr Jekyll, shrink the financial sector, restore safe banking, and rid the world of the winner-take-all casino controlled by the likes of Goldman Sachs and THL? The truthful answer is that maybe we can’t yet; the industry’s power is greater than ever, despite the crisis. So it may take another crisis before enough people get angry enough; we consider that question in the final chapter.
Next, however, we examine another important sector of society, one that has long been considered immune to the corrupting influence of corporate money and “revolving door” hiring. Academia, along with the media, has generally been regarded as an important bastion of independent, and if necessary critical, analysis of economic and political behaviour. Unfortunately, this is less and less true. As with politicians, the financial sector and other wealthy interest groups have figured out that professors make an excellent investment. They have proven stunningly easy to buy; for very small sums, considering the stakes involved, the financial sector has hired the best propagandists in the world.
CHAPTER 8
* * *
THE IVORY TOWER
MANY PEOPLE WHO SAW my documentary Inside Job found that the most surprising, and disturbing, portion of the film was its revelation of widespread conflicts of interest in universities, at think tanks, and among prominent academic experts on finance, economics, business, and government regulation. Viewers who watched my interviews with eminent professors were stunned at what came out of their mouths. It was indeed very disturbing, and sometimes I was stunned myself.
And yet, we should not be entirely surprised. Over the past couple of decades medical professionals, professors very much included, have amply demonstrated the influence that money can have in a supposedly objective, scientific field.
Randomized clinical trials of pharmaceuticals, including those conducted in academic centres, are, according to one large study, 3.6 times as likely to produce a favourable result if they are financed by a pharmaceutical company. Doctors who own interests in diagnostic imaging centres are four and a half times more likely to refer patients for such services. A recent US Senate investigation showed how the pharmaceutical manufacturer Sanofi enlisted medical groups and individuals it had financed to help block generic equivalents to one of its drugs. In the course of just a few years in the 2000s, the US Justice Department won settlements of more than $1.5 billion against three pharmaceutical companies for paying kickbacks to doctors or otherwise engaging in illegal marketing of their drugs. It became a common practice even at top medical schools for doctor-professors to sign their names to papers drafted by drug company staff. Indeed, Stanford University Medical School banned this practice in 2006; but not all medical schools have done so. In general, medical schools and leading medical journals are responding fairly well to the rise of this problem, with many of them adopting stringent disclosure requirements and even, in some cases such as Stanford, absolute limits on outside compensation from sources that could pose a conflict of interest.1
But the economics discipline, business schools, law schools, and political science and public policy schools have reacted very differently. Over the last thirty years, in parallel with deregulation and the rising power of money in American politics, significant portions of American academia have deteriorated into “pay to play” activities. These days, if you see a famous economics professor testify in Congress, appear on television news, testify in an antitrust case or regulatory proceeding, give a speech, or write an opinion article in the New York Times (or the Financial Times, the Wall Street Journal, or anywhere else), there is a high probability that he or she is being paid by someone with a big stake in what’s being debated. Most of the time, these professors do not disclose these conflicts of interest in their public or media appearances, and most of the time their universities look the other way. Increasingly, professors are also paid to testify for defendants in financial fraud trials, both civil and criminal. The pay is high—sometimes a quarter of a million dollars for an hour of congressional testimony. But for banks and other highly regulated industries, it’s a trivial expense, a billion or two a year that they barely notice; and just as with politicians, it’s a very good investment, with very high benefits.
I watched the growth of this problem when I was in academia myself, and must confess that I once participated in it. When I was a twenty-four-year-old PhD student, I was hired for a summer by Massachusetts Institute of Technology professor Peter Temin, a prominent economist, to help him defend AT&T, which was still a nationwide monopoly and had been sued for antitrust violations by the US Justice Department. I was very young and naive, and was stunned at what I saw. Within a month, I realized that AT&T had literally hired the majority of the most prominent telecommunications and regulatory economists in America. Everywhere I went—MIT, Harvard, Stanford, Yale, the University of California at Berkeley—the main guys were working for AT&T, whose spending dwarfed the Justice Department’s, probably by fifty or a hundred to one. I concluded that AT&T was guilty; wrote something very unfavourable to AT&T, which of course never saw the light of day; and returned to my PhD work. Peter Temin is actually a very nice guy, and was very kind to me and the six other graduate students he hired that summer. But the experience left me with a bad taste in my mouth.
And, having been sensitized, I noticed over the intervening years that the problem was growing—fast. Vast amounts of money (by academic standards) started arriving from powerful industries, mainly in the form of direct consulting payments to professors. This problem is now so pervasive that the academic disciplines of economics, business, public policy, and law have been severely distorted by the conflicts of interest now endemic to them. The areas most severely affected have been finance, the economics of regulation, industrial organization, corporate governance, antitrust analysis, the economic analysis of law, and the analysis of specific industries affected by government policy. The principal industries involved are energy, telecommunications, health care, agribusiness—and, most definitely, financial services. There are also serious problems in medical research and, disturbingly, even national security policy (we will shortly consider some interesting facts about Libya).
Academics on industry payrolls, and the interest groups that pay them, are now so numerous and powerful that they can prevent universities, professional associations, and academic journals from adopting or enforcing strong conflict-of-interest policies. They also have a chilling, even dominant, effect on several areas of academic research and policy analysis. Most of America’s best universities do not limit financial conflicts of in
terest, do not require their disclosure, and aggressively resist inquiries into the issue. There are several reasons for this, including fear of public embarrassment; the existence of personal conflicts of interest among university presidents and deans; dependence on donations from companies and executives; and the internal power (within the university) of large numbers of professors who wish to preserve their incomes and reputations, and who know that disclosure and reform would endanger them.
The sale of academic “expertise” for the purpose of influencing government policy, the courts, and public opinion is now a multibillion-dollar business. Academic, legal, regulatory, and policy consulting in economics, finance, and regulation is dominated by a half dozen consulting firms, several speakers’ bureaus, and various industry lobbying groups that maintain large networks of academics for hire specifically for the purpose of advocating industry interests in policy and regulatory debates.
These consulting firms are not like McKinsey or the Boston Consulting Group. They do not exist to help companies make better products or lower their costs or forecast demand. Their principal focus is on helping companies avoid or influence legislation, public debate, regulation, prosecution, class-action lawsuits, antitrust judgements, and taxes.
The largest academic regulatory consulting firms are the Berkeley Research Group, the Analysis Group, the Brattle Group, Criterion, Compass Lexecon, and Charles River Associates. All have relationships with many prominent academics. Their combined academic roster is around one thousand, and their combined revenues are certainly well over $1 billion per year. (Most are private and don’t release revenue information.) In some cases, they include a majority of the prominent academics in important policy-related fields, such as antitrust policy.
The Berkeley Research Group, for example, lists 148 “experts”, most of them identified as “principals” or “directors”, and most of them high-profile academics—Laura Tyson is one, for example.2 With eighteen offices in the US and one in London, it organizes its work around “high-stakes, complex commercial disputes and regulatory and legislative issues.” BRG lists nineteen specialties, including antitrust, energy, environmental research, and intellectual property, as well as litigation support services—damages analysis, forensic financial analysis, and class-action certification.3
The Analysis Group, headquartered in Boston with offices throughout the US, has a staff of five hundred and a star-studded list of academic experts, including John Campbell, chairman of the Harvard economics department, Jonathan Gruber, a leading health care economist at MIT, and Glenn Hubbard, the dean of Columbia University’s business school.4 Compass Lexecon has three hundred on its staff, which now includes six former chief economists of the Department of Justice’s antitrust division.5 It recently signed several new experts, including a Nobel laureate from New York University.
Charles River Associates was founded by MIT economist and antitrust expert Franklin Fisher in 1965 and is now a publicly traded international consulting firm with seven hundred employees. It also maintains exclusive relationships with forty-four prestigious academics for occasional advisory assignments.6 And business is good. The Charles River financials show revenues averaging over $300 million annually between 2008 and 2010. Revenues per employee were nearly $450,000 a year, and revenue per consultant exceeded $600,000 per year. Those are investment-banking-type numbers.
Speakers’ bureaus are another significant channel, and are sometimes used to launder or disguise payments to academics for lobbying and policy advocacy. Speaking fees (for corporate events and industry conventions, for example) sometimes exceed $100,000 for prominent academics, particularly if they have also served in government. Prominent academics often make half a million dollars a year that way, particularly if they study and write about a highly regulated industry.
But how important and influential are these people and their relationships? What follows is a sample of the academic world’s relationships to the financial services industry and their impact on public debate and policy. I think that most readers will find it all too . . . convincing. The financial sector is, yet again, very well connected.
The Money People
THE MOST EMINENT academics in the US, particularly those who have studied, written about, and/or worked on financial regulation and deregulation, have made fortunes from Wall Street while advocating its interests in Congress, regulatory proceedings, the courts, and the media. Here we will consider some examples in detail, all of them very prominent:
• Glenn Hubbard
• Larry Summers
• Frederic Mishkin
• Richard Portes
• Laura D’Andrea Tyson
• Martin Feldstein
• Hal Scott
• John Campbell
Glenn Hubbard. R. Glenn Hubbard became dean of Columbia Business School in 2004, shortly after leaving the George W. Bush administration, where he was chairman of the White House Council of Economic Advisers from 2001 through 2003. Hubbard has a PhD from Harvard and has taught at Columbia since 1988. He also served in the US Treasury Department during the George H. W. Bush administration. Hubbard is cochairman of the Committee on Capital Markets Regulation, a nonprofit charity that serves as a de facto public policy lobbying organization for Wall Street.
Much of Hubbard’s academic work has been focused on tax policy. A fair summary is that he has never seen a tax he would like, particularly one on corporations or the wealthy. He was deeply involved in designing the Bush administration’s tax cuts in 2003, which heavily favoured the wealthy; half of their benefits went to the wealthiest 1 percent of the population.
Hubbard also coauthored an astonishing article (with William C. Dudley) in November 2004. The article, entitled “How Capital Markets Enhance Economic Performance and Facilitate Job Creation”, was published by the Goldman Sachs Global Markets Institute.7 Dudley, his coauthor, was the chief economist at Goldman Sachs at the time. In 2009, when Tim Geithner became Obama’s Treasury secretary, Dudley succeeded Geithner as president of the Federal Reserve Bank of New York. This should not reassure you. But neither should the fact that Glenn Hubbard remains the dean of Columbia Business School.
Their article warrants quotation at some length. It would be kind of funny, if it weren’t deadly serious. Remember, this is November 2004, with the bubble well under way.
• “The ascendancy of the US capital markets . . . has improved the allocation of capital and risk throughout the US economy. . . . [The benefits include] enhanced stability of the US banking system . . . more jobs and higher wages . . . less frequent and milder [recessions] . . . a revolution in housing finance.”
• “The development of the capital markets has helped distribute risk more efficiently. . . . This ability to transfer risk facilitates greater risk-taking, but this increased risk-taking does not destabilize the economy. . . . Thus the capital markets ensure that capital flows to its best uses and that riskier activities with higher payoffs are funded.”
• “The capital markets have helped make the housing market less volatile. . . . ‘Credit crunches’ of the sort that periodically shut off the supply of funds to home buyers, and crushed the homebuilding industry . . . are a thing of the past. . . . The closing costs associated with obtaining a residential mortgage have fallen, and the terms . . . have become less stringent. At times homeowners can obtain 100 percent financing to purchase a home.”
• “The revolution in housing finance has also led to another radical transformation that has been important in making the economy less cyclical.”
• “We believe that the economic performance of the United States over the past decade provides strong evidence of the benefits of well-developed capital markets. That is because the US economic performance has improved over time, both absolutely and relative to other G-7 countries in which capital markets are much less well-developed.”
Hubbard refused to say whether he was paid to write the article. He also refused to provide me w
ith his most recent government financial disclosure form (from 2001, when he entered the George W. Bush administration), which we could not obtain otherwise, because the White House had already destroyed it. Hubbard also refused to identify most of his private consulting clients. He is currently on the boards of MetLife, ADP, Inc., KKR Financial Corporation, and BlackRock Closed End Funds. In 2010, the first three paid him $707,000 in cash and stock.8 Consulting/advisory relationships listed on Hubbard’s CV include Nomura Holdings, Bank of America, Capital Research, Citigroup, Fidelity, Franklin Resources, JPMorgan Chase, Visa, Laurus Funds, Chart Venture Partners, and Ripplewood Holdings. Until January 2009, he was also on the board of Capmark, a major player in commercial property during the bubble that went bankrupt after the crisis.
Hubbard was paid $100,000 to testify for the criminal defence of two Bear Stearns hedge fund managers prosecuted in connection with the bubble, who were acquitted. That assignment came through the Analysis Group, one of the large economic consulting firms mentioned earlier. Hubbard lists the Analysis Group as a consulting client but has not divulged the identities of the ultimate, real clients for whom he has worked via his relationship with the Analysis Group. Nor did his Columbia web page (as of February 2012) list his paid speaking engagements. Both of these omissions represent apparent violations of the new disclosure requirements established by Columbia Business School after the release of my film.9 However, his speaker’s bureau, the Harry Walker Agency, is one of the very few such agencies that lists the names of some speakers’ clients by name, in its “ovations” testimonials. Clients giving testimonials to Hubbard’s speaking abilities include the Alternative Investment Group, BNP Paribas, the Massachusetts Bankers’ Association, and Barclays Bank.10
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