That was 4 July 2008. In October, the banks collapsed, and many of their executives fled to London. Some of them even had to sell their private jets, yachts, and penthouses. Those who have not been arrested seem to be living very comfortably. Some of them, however, have been arrested and are facing trial. Defendants include the former CEOs of two of the three major banks, as well as the former prime minister, Geir Haarde.
Professor Portes’s CV states that he is an adviser to two hedge funds. He is also on the speaking circuit. With no apparent irony, his speaking web page introduces him as follows:
Richard Portes is a distinguished economist celebrated for his global outlook and his penetrating analyses of the financial markets. He is known for his expertise in financial engineering and the exotic and—often toxic—derivatives invented by Wall Street.22
Laura D’Andrea Tyson. Tyson received her PhD in economics from MIT in 1974, and subsequently taught at Princeton, MIT, Harvard Business School, and the University of California, Berkeley. She served as dean of the UC Berkeley Haas School of Business, and then of the London Business School, before returning to Berkeley as a university professor. During the Clinton administration, she was chairman of the Council of Economic Advisers and then director of the National Economic Council. Shortly after leaving government, Tyson joined the board of Morgan Stanley, which pays her $305,000 per year, and also of Ameritech, a regional monopoly telephone company that was later acquired by AT&T; she is now on the AT&T board, as well as several others.
According to SEC statements, as of 2011 she earned approximately $784,000 per year in cash and stock from her four public company directorships.23 Tyson has also been an adviser to Credit Suisse and to an Asian private equity fund and is a member of the same Committee on Capital Markets Regulation that is cochaired by Glenn Hubbard. She was also a principal of the Law and Economics Consulting Group and works with its successor, the Berkeley Research Group. Tyson also serves on many nonprofit boards and advisory committees, including the Peterson Institute, the Brookings Institution, and the Center for American Progress.
Tyson has made few public statements about the crisis; when she has addressed it, she has made vague references to greed, mania, and bubbles.
She too is on the speaking circuit. Her speakers’ bureau (the Harry Walker Agency) names some of her speaking clients. Their web page for Tyson quotes glowing testimonials from past clients including Wescorp, a credit union seized by federal regulators in 2009; the European Petrochemical Association; Northern Telecom; the Commercial Real Estate Women of San Francisco; the Vice President of Government Affairs of Siemens Corporation; Nomura Securities; and Callan Associates, an investment consulting firm.24 UC Berkeley has no public disclosure requirements for outside activities or income, so we do not know Tyson’s speaking income or the identities of any other consulting clients.
Martin Feldstein. Feldstein is one of the most prominent economists in America; a professor at Harvard, he was chairman of the Council of Economic Advisers in the Reagan administration and for nearly thirty years was president of the National Bureau of Economic Research, the economics discipline’s largest and most prominent American research organization.
Professor Feldstein was also on the board of directors of AIG and AIG Financial Products for over twenty years, a relationship that ended only when AIG collapsed and its board was replaced. And although he has written over three hundred papers on a wide variety of topics, you will look in vain for any writing on the dangers of unregulated credit default swaps, financial sector compensation, or lax corporate governance. He too does a great deal of paid public speaking. His speaker’s bureau web page lists him as an expert on the housing crisis, again with no apparent irony; no mention is made of his having been on the AIG board.25
An unedited excerpt from my filmed interview with him, portions of which appear in my film:
CF: Do you think the financial services industry has had too much influence over government policy?
FELDSTEIN: Every industry tries to affect the policies that Washington sets on it. The airlines, the financial services, whatever it may be. No, I wouldn’t say so. I think that the decisions that were made to change, to relax some of the regulations, whether it was the Illinois regulation that you could only have one branch, or it was Glass-Steagall, I think these were things that had widespread intellectual support within the economics profession, so that it wasn’t because of some dark of night lobbying efforts that the financial sector managed to bring these changes about.
CF: Maybe not dark of night, but over the last decade the financial services industry has made about $5 billion worth of political contributions in the United States. That’s a lot of money. That doesn’t bother you?
FELDSTEIN: No.
CF: Do you think the financial services industry has excessive influence over the economics profession?
FELDSTEIN: I would say no. I can’t even think of the root that you might have in mind for that one. I think of my colleagues . . . I can’t even think of how they would be influenced. Most of them have nothing to do with the financial services industry.
Hal Scott. Like Laura Tyson and Glenn Hubbard, Scott is involved with the Committee on Capital Markets Regulation. He’s also on the board of Lazard, an investment bank whose 2010 revenues, small by current standards, were $1.9 billion. Professor Scott frequently testifies in Congress, usually stressing the dangers of excessive financial regulation. In 2011, for example, he urged narrow application of the “Volcker rule”limiting proprietary trading by banks.26
In early 2012 Scott spoke out publicly against the SEC and in favour of the Carlyle Group, when the Carlyle Group had attempted to embed a provision in its public stock offering that would have prohibited shareholders from ever being able to file class-action lawsuits against it. The SEC blocked the attempt, and Carlyle retreated shortly afterwards.27 Scott declined to be interviewed for Inside Job and did not respond to written questions about his outside activities and income.
John Campbell. When I interviewed him for my film in 2009, John Campbell had just become chairman of Harvard’s economics department. He’s a prominent specialist on finance, a former president of the American Finance Association. Campbell is not deeply involved in politics, policy, or power in the fashion of a Larry Summers, Laura Tyson, or Martin Feldstein. He is, rather, an example of the environment produced by pervasive financial sector influence. When I asked him about the causes of the crisis, he gave a long, lucid answer in which the word “deregulation” did not appear even once. Then, when I asked him about the conflict-of-interest issue in economics, he was by turns oblivious and defensive. Here are some excerpts from my interview with him:
CF: So, does Harvard require disclosure of financial conflict of interest in publications?
CAMPBELL: Not to my knowledge.
CF: Do you think it would be a good idea?
CAMPBELL: I’d have to think about that.
And then:
CF: Do you require people to report the compensation they’ve received and the size of the compensation they’ve received from outside activities?
CAMPBELL: No.
CF: Don’t you think that’s a problem?
CAMPBELL: I don’t see why.
And then:
CF: So, you go to your doctor. Your doctor says to you, “Take this drug.” You later learn your doctor receives 80 percent of his personal income from the manufacturer of this drug. This does not bother you at all?
CAMPBELL: I think doctors are in a position that’s closer to the position of regulators. Doctors are doing clinical work, right? They’re in effect making policy on the microscale. I think that’s not the analogy.
CF: Okay, so let’s change it. A medical researcher writes an article saying to treat this disease you should prescribe this drug. Turns out the doctor makes 80 percent of his personal income from the manufacturer of this drug. It does not bother you?
CAMPBELL: I think it’s certainly important to di
sclose the . . . I think that’s also a little different from cases that we’re talking about here, because . . .
CF: Would you let me look at the annual outside activities reports of your faculty?
CAMPBELL: Well, I don’t see them. The dean sees them. I know mine, but I don’t see anybody else’s.
CF: Are they public information?
CAMPBELL: No.
Campbell’s view is the dominant one in American universities, most of which do not disclose the outside activities of faculty members—or even university officials. Major involvement with financial services firms also, increasingly, includes academic administrators and university presidents.
Until 2009 Ruth Simmons, while president of Brown University, was on the board of directors of Goldman Sachs. Her replacement was Debora Spar, president of Barnard College at Columbia University, who remained on Goldman’s board as of 2012. Dr Spar’s earlier academic specialty was the study of international cartels, which must come in useful. Carol Christ, the president of Smith College, was on the board of Merrill Lynch until it was acquired by Bank of America in 2009. Susan Hockfield has been the president of MIT since 2004; in 2012 she announced her intention to resign upon a replacement being found. She has been on the board of General Electric since early 2007. Although General Electric is usually regarded as an industrial company, it relies heavily on finance in two ways. First, its subsidiary GE Capital was heavily involved in the bubble and provided nearly half of GE’s corporate profits during the bubble. During the crisis period, GE Capital lost huge sums, largely due to its bubble-related activities. (In 2004, for example, GE acquired WMC Mortgage, the sixth-largest subprime lender in the US.) Second, GE is one of the most aggressive users of legal and financial engineering to avoid taxes.
Financial services is not, however, the only industry that employs university presidents. Shirley Jackson, the president of Rensselaer Poly-technic Institute, is on seven boards of directors including those of IBM, FedEx, and Marathon Oil.
These conflicts of interest in academia show up with disturbing directness in later appointments to government office. Indeed, most of what we know about academic conflicts of interest comes from mandatory US government disclosures—to the SEC for public companies, to regulatory agencies, and to the government when professors take government jobs. For example, the chief economist of the US Justice Department’s antitrust division is typically an economics professor. Three people who have held that position are Carl Shapiro, Daniel Rubinfeld, and Richard Gilbert, all economics professors at UC Berkeley. All three have done extensive antitrust defence consulting for telecommunications and/or energy companies, both before and after their government service. Rubinfeld and Gilbert were cofounders of the Law and Economics Consulting Group. When Gilbert was appointed to be the Justice Department’s chief economist, he had to sell his large block of LECG stock; but two years later, as soon as he left the Justice Department, he bought it back. A few years afterwards, he and Rubinfeld left LECG to found their own firm, which was acquired by Compass Lexecon, which has become a large and prominent firm, particularly in antitrust consulting. Compass Lexecon also represented Angelo Mozilo when he was sued by the SEC for fraud; the firm’s 2010 newsletter proudly states: “After depositions, the Defendants settled with the SEC on the eve of trial on favorable terms that were widely described as a ‘slap on the wrist’ in the press.”28
America’s largest telecommunications firms—particularly AT&T and Verizon, the two incumbents who still have significant monopoly positions—have been extraordinarily thorough in buying economic support. Prominent economists consulting for them, and often writing and testifying in Congress about telecommunications policy, and/or serving in government, have included Jerry Hausman at MIT, Robert Crandall at Brookings, Paul Macavoy of Yale, Gregory Sidak of Tilburg University, Carl Shapiro of UC Berkeley, Peter Temin of MIT, David Teece of UC Berkeley, and many, many others. A number of years ago, I spoke with senior officials in the Justice Department’s Antitrust Division about possible antitrust action against AT&T and Verizon. They told me that one significant barrier to any such action was that few if any prominent telecommunications economists would be willing to testify for the government, because nearly all of them worked for the incumbents, at pay rates typically ten to fifty times higher than government consulting rates. As we shall see in the next chapter of this book, the telecommunications issue is important. The US currently ranks about twentieth in the world in broadband deployment, and continues to fall further behind other nations in both Europe and Asia. Since broadband deployment is a major driver of future economic growth, as well as critical to reducing greenhouse emissions and dependence on foreign oil, this lag is a significant problem for the US. The inefficiency, structural concentration, and political power of the US telecommunications sector all contribute to this state of affairs. However, economists hired by the industry have consistently defended it against antitrust and regulatory actions that might increase competition.
Other industries that make heavy use of the same techniques, and many of the same people and firms, are energy (of course), several industries related to health care, and software. Richard Schmalensee, a professor and former dean of the Sloan School of Management at MIT, was Microsoft’s chief economic witness in its antitrust trial; in his testimony, he was caught contradicting his own prior academic work. He had testified that Microsoft’s persistently very high profits were not indicative of any monopoly power, when he had previously written precisely the contrary. In 2004 Steven Weber, a professor at UC Berkeley, published a book about the open-source software movement entitled The Success of Open Source. The book described how noncommercial, bottom-up activism in software produced successful open-source products such as Linux. Nowhere did the book mention that much of the open-source movement has been funded by IBM, Hewlett-Packard, Dell, Google, and other large companies as a way of reducing the power of rivals such as Microsoft and Oracle. Nor did the book mention that Professor Weber was, at the time, consulting for IBM on precisely this issue.
The phenomenon of paying professors for policy advocacy has recently begun to expand beyond economics and law into political science and foreign policy. The most extraordinary recent case, though not the only one, involves Libya. In 2006 Muammar al-Qaddafi, Libya’s dictator for more than forty years until his overthrow and execution in 2011, decided that it was time to improve his image. And there was an extraordinary collection of highly prominent British and American academics ready to help him.
Qaddafi’s libya, such a Wonderful Place
ANTHONY GIDDENS IS famous in the academic world. He is a longtime professor at the University of Cambridge and former director of the London School of Economics (LSE) and was an adviser to Prime Minister Tony Blair and “New Labour”. In 2007 Giddens wrote a column for the Guardian, “My Chat with the Colonel”, describing an interview with Qaddafi. To investigate the genuineness of new policy attitudes on Colonel Qaddafi’s part, Giddens says that he “went to Libya with David Frost and Professor Benjamin Barber, a celebrated theorist of democracy, to engage him in debate.” Describing Qaddafi as “an imposing figure, clad in a gold-colour robe,” Giddens concluded:
As one-party states go, Libya is not especially repressive. Gadafy seems genuinely popular. Our discussion of human rights centred mostly upon freedom of the press. Would he allow greater diversity of expression in the country? There isn’t any such thing at the moment. Well, he appeared to confirm that he would. Almost every house in Libya already seems to have a satellite dish. And the internet is poised to sweep the country. Gadafy spoke of supporting a scheme that will make computers with internet access, priced at $100 each, available to all, starting with schoolchildren.
Will real progress be possible only when Gadafy leaves the scene? I tend to think the opposite. If he is sincere in wanting change, as I think he is, he could play a role in muting conflict that might otherwise arise as modernisation takes hold. My ideal future for Libya in
two or three decades’ time would be a Norway of North Africa: prosperous, egalitarian and forward-looking. Not easy to achieve, but not impossible.29
Giddens did not mention the Palestinian medical student and the group of Bulgarian nurses Qaddafi had long been holding under sentence of death on the absurd charge of intentionally infecting hundreds of children with AIDS. But when Qaddafi finally released the nurses later that year, Giddens’s companion, Benjamin Barber, a professor at Rutgers University, in New Jersey,, wrote in the Washington Post:
Written off not long ago as an implacable despot, Gaddafi is a complex and adaptive thinker as well as an efficient, if laid-back, autocrat. Unlike almost any other Arab ruler, he has exhibited an extraordinary capacity to rethink his country’s role in a changed and changing world.
I say this from experience. In several one-on-one conversations over the past year, Gaddafi repeatedly told me that Libya sought a genuine rapprochement with the United States and that the issues of the [nurses]—along with the still-outstanding final payment from Libya to families of the Lockerbie, Scotland, bombing victims—would be resolved. And behold: The nurses are free.30
Later that same year, Joseph S. Nye, a former dean of Harvard’s John F. Kennedy School of Government and a former assistant secretary of the US Department of Defense, also wrote of visiting Qaddafi, who, amazingly, displayed copies of the professor’s latest book, Soft Power. Nye wrote in the New Republic, “There is no doubt that [Qaddafi] acts differently on the world stage today than he did in decades past. And the fact that he took so much time to discuss ideas—including soft power—with a visiting professor suggests that he is actively seeking a new strategy.”31
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