In other words, we are s now paying a very high price for the rise of money-based politics in America. It’s not just unethical, it’s economically disastrous; and it’s not just in financial services.
Money, Politics, and Economic Performance
BEGINNING IN THE late 1970s, America’s major industries discovered, and began to exploit, a critical weakness in the American national system, one that enabled them to escape or at least soften competitive discipline. Stated bluntly, they discovered that buying people off was much easier than doing their job properly. It turned out that American politicians, academics, regulators, auditors, and political parties were highly corruptible. Their governance systems had been designed for an earlier age, and were not equipped to withstand serious efforts to corrupt them.
So, beginning in the 1980s, the senior management of America’s declining incumbents became ever more aggressive in paying off their boards of directors, placing former government officials on those same boards, hiring former politicians as lobbyists, contributing to political campaigns, hiring academic experts to testify in antitrust cases, and so on. They merged with each other, sent production offshore, and cut the wages and benefits of their employees. They sought and obtained weaker antitrust enforcement, exemptions from environmental regulations, tax breaks, favourable accounting standards, protection from foreign competition via domestic content requirements. For example, despite the fact that US corporate earnings reached a historical record of over 14 percent of GDP in 2011, national corporate tax receipts were near historical lows, at less than 1.5 percent of GDP.6 American companies also resisted attempts to strengthen corporate governance. They kept public sector salaries low, thereby increasing their ability to subvert policy through revolving-door hiring. They weakened regulations, enforcement, and penalties for violations, and virtually eliminated any risk of criminal prosecution.
And to accomplish all this, since the beginning of this process several decades ago, America’s largest businesses, banks, and wealthy individuals have sent money into American politics in a completely unprecedented way, first in rivers, then floods, and now in oceans. The money came in several forms: political contributions; lobbying; employment, through the revolving door; sometimes, outright bribery; and, often, access and connections for many purposes, ranging from private schools to personal loans to great parties to rides on private jets.
The money is often nonpartisan, bipartisan, or to use a recent term, post-partisan. Many wealthy individuals now give simultaneously to both parties, and to incumbents regardless of their party. Goldman Sachs has a deliberate policy of maintaining equal numbers of Democrats and Republicans in top management, including one of each at the very top. Companies choose lobbyists and board members from among former government officials of both parties in roughly equal numbers. Democrats now receive nearly as much money from business as Republicans do, although some industries, such as oil, still heavily favour the Republicans.
Here are some numbers.
In 1974 total campaign expenditures by all Senate candidates were $28.4 million. In 2010, they were $568 million. For the House of Representatives, total campaign spending in 1974 was $44 million; in 2010, it was $929 million.7 The presidency has become even more expensive. Campaign expenditures since 1976 are shown in Table 4 below:
Source: OpenSecrets.org, http://www.opensecrets.org/pres08/totals.php?cycle=2008
Furthermore, the sources of the money changed. The rise of money-based politics coincided with rising income inequality, and the two have reinforced each other. Political campaign donations have become highly concentrated. By 2010 approximately 1 percent of 1 percent of the American population—fewer than twenty-seven thousand people—accounted for 24 percent of all campaign donations, totalling $774 million.8
The increase in campaign spending is starting to produce another dangerous effect: weakening media oversight of political dishonesty. Thankfully, America still has a very robust and independent free press. But the media industry, especially television and print, has been under increasing financial pressure as a result of the shift of both audiences and advertising to the Internet. In this period, there has been one sector whose advertising in the media has continued to grow very sharply: politics. In US presidential election years, the combined advertising expenditures of all campaigns, including political action committees and so-called “super PACs”, probably now exceeds $5 billion. As financial services and other large industries have become more concentrated, the advertising spending of individual firms has also grown larger. The combined effect of higher political advertising and more concentrated corporate advertising has begun to generate pressure on big publications and news programmes.
Lobbying has escalated similarly. Here are lobbying expenditures by the finance, insurance, and property industries from 1998 through 2010:
Annual Lobbying on Finance/Insurance/Real Estate
Source: OpenSecrets.org, http://www.opensecrets.org/lobby/indus.php?id=F&year=2011
The personal financial positions of politicians, government officials, and regulators are equally important. Hence the spectacular growth of lobbying expenditures and incomes has a very real utility beyond the job that lobbyists do. Indeed, the lobbying industry’s largest effect on policy probably isn’t that lobbyists really convince anyone of anything. On the contrary, its principal impact derives from the simple fact of its existence, meaning that all senior public officials—whether elected, appointed, or civil servants—now know that if they behave properly, they can land a lobbying job when they leave government. And if they do, they will immediately quintuple their salary simply by moving to the other side. Here, the growth in income inequality, and in the differential between private and public sector salaries, has further worsened America’s political corruption. In some nations, such as Singapore, senior civil servants and regulators earn competitive salaries, sometimes upward of $1 million a year. Not in America.
Here are some statistics on the salaries of public officials and their approximate private counterparts.
The US Bureau of Labor Statistics compiles information on average federal government and private sector salaries for “employees in the securities, commodity contracts, and investments sectors in the US (NIACS 523).” In 1990 the average US government employee in these professions earned $32,437, while the average private sector employee earned $61,047; so private sector employees earned 88 percent more than government employees. By 2010, however, the average government employee earned $45,462, whereas the average private sector employee now earned $196,339; so private sector employees made 331 percent more than government employees. The same was true of other senior government employees, including those most desirable as lobbyists. For example, in 2010, the average chief of staff for a member of the US House of Representatives made less than $140,000; the average legislative director for a House member made less than $90,000. For further comparison, in 2010, US cabinet members made $199,700, and the chairpersons of the SEC, the FTC, and the CFTC made $165,300.9
But these numbers, bad as they are, vastly understate the problem. The private sector numbers include many people in small local financial services companies, and they don’t include lobbyists. Average compensation for all Goldman Sachs employees, for example, has fluctuated between a mere pittance of $433,000 in 2010 and its record high of $661,000 in 2007, when it was still selling mortgage-backed junk but had already started to bet against it as well. Senior Goldman executives make vastly more, and you can be sure that Goldman pays its lobbyists very, very well.
Thus, in the end, by industrial standards it proved shockingly inexpensive to purchase US government policy; and keeping public sector salaries low made it even easier to buy influence. Combining campaign contributions, lobbying, revolving-door hiring, and payments to academic experts, the whole process probably costs no more than $20 billion a year, perhaps 1 percent of total US corporate profits. For this trivial sum, America’s most incompetent and predatory industri
es could obtain favourable political and regulatory treatment, reducing their need to be more productive, honest, or competitive.
In this process, the financial sector first became an enthusiastic follower and then, by the 1990s, the leading user of money-based political strategy. As the financial sector grew more powerful, more concentrated, and more politically active, it arguably became the first major industry to use lobbying and policy primarily for offensive and predatory, rather than defensive, purposes.
It was under the Clinton administration that the really heavy lifting started for financial services. In fairness, Clinton did some very good things in economic policy. He stopped the deficit spending. He initiated the last major antitrust action in the US (against Microsoft, although the Bush administration later ended it with a trivial settlement). He also tried to open the telecommunications industry to real competition, including in broadband services, through the attempted grand bargain of the US Telecommunications Act of 1996. And Clinton did several very productive things to support the Internet revolution, including legalizing commercial Internet services and privatizing the Internet backbone in 1994–95.
However, the Clinton government also tilted decisively toward the wealthy and the financial sector, a fateful choice whose full consequences Clinton himself may not have understood at the time. Then George W. Bush finished the job, completely neutering the regulatory and law enforcement systems. And so America got the bubble and then the crisis.
But then, in 2008, with the global financial system on the brink of collapse, Barack Obama presented himself during his presidential campaign as the reformer who would bring the financial sector under control and restore fairness to America. Instead, he screwed us.
Mr Obama’s Wall street Government
BARACK OBAMA WAS elected with an overwhelming mandate for change, and the best political opportunity since the Depression to achieve it. He won because of reformist and idealistic campaign statements, and the unprecedented popular mobilization efforts they generated. His party obtained overwhelming majorities in both houses of Congress, and he took office with the nation in deep crisis, still on the brink of financial catastrophe and with unemployment increasing by half a percent per month. The banks were still in desperate trouble, and the US government had enormous power over them. The US government owned major pieces of AIG, Citigroup, and Bank of America; it was supporting all the others through TARP and Federal Reserve loans; Goldman Sachs and Morgan Stanley had agreed to become bank holding companies, which made them subject to Federal Reserve and FDIC regulation. Ben Bernanke’s first term as Federal Reserve chairman was ending soon, giving Obama enormous leverage over him, and the ability to replace him if he didn’t perform. If ever there was a chance to do something in Washington, DC, this was it. And yet we got just another oligarch’s president.
The first troubling sign was his personnel appointments. Not a single critic or voice of reform got a job—not Simon Johnson, Nouriel Roubini, Paul Krugman, Sheila Bair, Joseph Stiglitz, Jeffrey Sachs, Robert Gnaizda, Brooksley Born, Senator Carl Levin, none of them.
Instead we got Larry Summers, the man behind nearly every disastrous policy that created the crisis, fresh from making $20 million from hedge funds and investment banks, as director of the National Economic Council. (When Summers left office in early 2011, his replacement was Gene Sperling, who had received a $1 million consulting fee from Goldman Sachs for guidance in its nonprofit work.) Tim Geithner, who had been president of the New York Federal Reserve Bank throughout the bubble, was put in charge at the US Treasury. Geithner chose a former Goldman Sachs lobbyist, Mark Patterson, as his chief of staff. One of his senior advisors was Lewis Sachs, formerly overseer of Tricadia, one of the hedge funds that made billions by helping banks structure mortgage securities for the purpose of Tricadia betting against them. Geithner’s choice for undersecretary for domestic finance was Jeffrey Goldstein, a private equity executive. Geithner’s deputy assistant secretary for capital markets and housing finance (the person most directly responsible for cleaning up the housing mess) was Matthew Kabaker, an executive at Blackstone, America’s largest private equity firm.
The new president of the New York Fed was William C. Dudley, who had been chief economist of Goldman Sachs throughout the bubble, and coauthored with Glenn Hubbard the paper I described earlier, which proclaimed the triumph of financial markets and the role of derivatives in softening recessions. And then, of course, Obama reappointed Ben Bernanke.
Almost all regulatory appointments followed that pattern. Gary Gensler, a former Goldman executive who had previously helped push through the ban on derivatives regulation, became chairman of the Commodity Futures Trading Commission, which regulates derivatives. Mary Shapiro, who had run the Financial Industry Regulatory Authority, the investment banking industry’s worthless and timid self-policing body, moved over to run the Securities and Exchange Commission (after receiving a $9 million severance). For the SEC’s new director of enforcement, Ms Shapiro chose Robert Khuzami, who had been (since 2004) general counsel for the Americas for Deutsche Bank.
Mr Khuzami was a particularly stunning choice, since he must have been deeply involved in the legal approval process for the many unethical actions of Deutsche Bank’s US subsidiary during the bubble. Deutsche Bank didn’t have Goldman Sachs’s laser-focus top-management ruthlessness, but it wasn’t a naive boy scout either. It held a large mortgage portfolio, on which it took some losses, but it hedged aggressively, thereby keeping its losses to under $5 billion. Greg Lippmann, head of the Deutsche Bank CDO trading desk, actively shorted the mortgage market, making $1.2 billion for Deutsche. Lippmann also worked with John Paulson and Magnetar to create deals that they could bet against. (As a joke, Lippmann passed out T-shirts to his employees that said “I’m Short Your House.”) And like the other banks, Deutsche Bank started unloading its junk on the unsuspecting. Indeed, Lippmann himself occasionally continued to sell CDOs to Deutsche customers, in some cases referring to the products as “crap” and the customers as “dupes”. In a June 2007 e-mail message, a Deutsche Bank managing director, Richard Kim, wrote to Lippmann that Deutsche would package unsold pieces of CDOs into a CDO squared, and sell them as a “CDO2 balance sheet dump.”10 The Levin-Coburn report issued in 2011 lists several cases in which risks of CDOs discussed internally were not mentioned in public offering materials. How much did Mr Khuzami know? We don’t know that, but appointing Mr Khuzami certainly sent a very bad signal about the government’s interest in prosecutions. And, indeed, Mr Khuzami’s record has been a depressing validation of that signal.
The same was true of Obama’s choice to run the criminal division of the Justice Department, Lanny Breuer. Breuer had been cochair of the white-collar defence and investigations practice at Covington & Burling, a law firm also heavily involved in corporate lobbying. (Between 2001 and 2007, Attorney General Eric Holder was also at Covington & Burling.) While Breuer and Holder were partners at the firm, its clients included Bank of America, Citigroup, JPMorgan Chase, and Freddie Mac. The firm was also involved in creating MERS, the banking industry consortium now being sued by the state of New York in connection with home foreclosure abuses.11 Other Covington clients included Halliburton, Philip Morris, Blackwater, and Enron executives; Breuer personally represented the Moody’s rating agency in relation to Enron, and has also represented Halliburton. Breuer and Holder have declined to state whether they have been forced to recuse themselves from any financial crime investigations. More recently Covington & Burling has represented many individuals and firms involved in the financial crisis, including Indymac, an unidentified Big Four accounting firm, Sterling Financial/PNC, and others; it has also lobbyied the SEC, on behalf of a coalition of financial firms, to weaken the Volcker rule.12
Eric Holder’s deputy chief of staff, John Garland, and Lanny Breuer’s chief of staff, Steve Fagell, both also came from Covington & Burling, and both have now returned there to work on white-collar defence cases and regulator
y issues. At the US Department of Justice, Fagell had been in charge of coordinating the financial fraud task force. After returning to Covington, he began “representing” (not “lobbying for”—that would be illegal, given how recently Mr Fagell had left the government) a coalition of financial firms in their efforts to persuade the SEC to weaken the whistle-blower provisions of the Dodd-Frank law. Mr Fagell also “represents” various other banks and financial executives in regard to various regulatory, legal, and policy disputes.
Even senior Obama administration foreign policy and national security positions were filled by bankers, including several who had been deeply involved in, and profited from, the financial bubble. Michael Froman, who was appointed to lead economic policy at the National Security Council, had been an executive in Citigroup Alternative Investments, a unit that was deeply involved in the financial crisis and subsequently lost billions of dollars. Froman started working on Obama’s transition team while still employed at Citigroup, and Citigroup awarded him his final bonus after his appointment was announced in January 2009. Under media pressure, Froman gave that bonus to charity. But Froman still made over $7 million at Citigroup. Jacob Lew, who had been CFO of the same Citigroup unit, became the deputy secretary of state and then, in 2010, Obama’s choice to run the Office of Management and Budget. In 2012 he became Obama’s chief of staff when Bill Daley resigned.
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