Inside Job
Page 33
The new deputy secretary of state for management and resources was Thomas Nides, brought over from Morgan Stanley, where he had been chief administrative officer. I had met him there once, introduced by Laura Tyson after our final conversation. Ah, yes, he said, he knew Laura from the Clinton administration; he had been in the government too, “before I sold out.” Yes, he really did say that to me.
Obama’s—or Hillary Clinton’s—undersecretary of state for economic affairs was Robert Hormats, previously vice chairman of Goldman Sachs International. Richard Holbrooke, the State Department’s special envoy to Afghanistan and Pakistan until his death in 2010, had been on the board of directors of AIG and AIG Financial Products. Tom Donilon, Fannie Mae’s chief lobbyist between 1999 and 2005, became deputy National Security Advisor in 2009 and then, in late 2010, the National Security Advisor. The flow in the reverse direction began soon afterwards; Peter Orszag, Obama’s first head of the Office of Management and Budget, resigned in 2010 to become vice chairman of Citigroup.
The fears immediately prompted by this pattern of appointments have proved fully justified. From the outset, Obama opposed serious reform of corporate governance, breaking up the largest banks, or closing legal loopholes. It is still not per se illegal, for example, to create and sell a security for the purpose of betting on its failure. Obama also opposed efforts to reform or control financial industry compensation—even for firms dependent upon US government aid, as almost all of them were in the immediate aftermath of the crisis. There was a long period of total inaction, followed by a weak and ridiculously complicated reform bill (Dodd-Frank). There has been almost no significant action on the foreclosure crisis, and the White House played little or no role in the investigations undertaken by the Senate Permanent Subcommittee on Investigations and the Financial Crisis Inquiry Commission. In fact, the government deliberately kept the FCIC’s budget to a mere $6 million, sharply limited its subpoena power, and scheduled its report to appear only after the 2010 midterm elections.
Most tellingly, the new Justice Department’s complete lack of interest in prosecuting banks and bankers soon became painfully obvious. White-collar and financial crimes were given low priority, and the administration chose not to appoint a special prosecutor, or create a task force, to investigate and prosecute major crimes related to the bubble and crisis. Investigations against Countrywide, Angelo Mozilo, AIG, Joseph Cassano, and others were dropped. The few financial crime cases brought forward, such as those involving Wachovia’s alleged bid rigging and money laundering, were settled with deferred prosecution agreements and fines. As a consequence, as of early 2012 there still had not been a single crisis-related criminal prosecution, of either a firm or an individual senior financial executive, by the Obama administration—literally zero.
The SEC has brought only a handful of civil cases, ending in mostly trivial fines, with neither firms nor individuals required to admit any wrongdoing. In not a single case has an individual executive been required to pay more than a tiny fraction of either his net worth or his gains from the bubble.
In fact, when a few courageous state attorneys general, particularly Eric Schneiderman of New York, tried to get just a little tough with the banks in 2011 (in several civil cases), the Obama administration pressured them to stop. Senior Obama officials and their proxies, including the secretary of housing and urban development, called Schneiderman directly and told him that he should accept the sweetheart deal that the government favoured, whose terms included surrendering all future rights to sue the banks for fraud.
But then came the Occupy movement, a 60 Minutes two-part television investigation in December 2011 on the lack of criminal prosecutions, and, above all, a US presidential election year in 2012. So, suddenly, four years after the crisis, in his January 2012 State of the Union address, President Obama decided to announce a national-local task force focused on financial crime, and that New York state attorney general Eric Schneiderman would co-chair it. The other co-chair, however, is Lanny Breuer, the same head of the same criminal division that hadn’t brought any cases for four years. The task force was assigned a total of ten (yes, ten) FBI agents, and when fully staffed will have a grand total of fifty-five employees.
Shortly afterwards, we saw the predictable political results. Three Credit Suisse traders were arrested for a trivial fraud allegedly committed in 2007, and which victimized Credit Suisse rather than investors or homeowners. Then the state foreclosure cases were settled for $26 billion. Less than a million people who have lost their homes will receive cheques averaging $2,000 each. Another million will receive some degree of mortgage relief. Over twenty million others whose mortgages are underwater, or who have lost their houses to bank repossession, will receive nothing. As of this writing, there have still been no arrests or indictments either of major firms or senior executives related to causing the bubble, the crisis, or subsequent foreclosure abuses.
Obama has been similarly inert with regard to financial compensation, at either the corporate or individual level, even as foreign governments took action. In 2009, Britain enacted a 50 percent tax on banking bonuses. Then in September 2009 Christine Lagarde (then France’s finance minister) and six other European finance ministers published a joint letter in the Financial Times calling for the G20 nations to enact strong measures to bring financial compensation under control, arguing that “the bonus culture must end.” Most of the G20 nations did in fact adopt compensation controls, including mandatory clawbacks of bonuses when losses occur subsequently. The Obama administration had no comment. Later, in 2010, the Federal Reserve and the SEC issued regulations, but they were exceedingly weak and little has changed.
In contrast, in 2012, such clawbacks were in fact implemented in Europe, forcing senior executives of Barclays, Lloyds, and several other European banks to surrender millions of dollars each in prior bonus payments.
Thus far there have been no executive bonus clawbacks by regulators in the US. At both corporate and industry levels, the same major conflicts of interest remain embedded in the financial system. Accounting firms performing audits are still paid by the firms they are supposed to audit. Rating agencies are still paid by the issuers of securities. Traders, executives, and members of boards of directors still receive large amounts of cash relative to stock.
In short, the Obama administration’s policies toward the financial sector are nearly indistinguishable from those of its predecessors, regardless of political party. What happened here?
First, the Democratic Party has changed—not so much its popular base, but its funding sources. For most of the twentieth century, and certainly from the Depression through the 1970s, the Democrats were reliably the party of unions, of working families, and the poor, while the Republicans were reliably the party of business. That divide was dramatized many times during the Great Depression, but it endured for decades afterwards. It showed in 1962, in John F. Kennedy’s confrontation with the steel industry, whose major firms often behaved like a cartel. The Kennedy administration had brokered a labour agreement with the steel unions and was shocked when the companies immediately increased steel prices together, even though Kennedy’s agreement had kept wage costs down. Kennedy held a brief, blistering press conference that forced the companies to back down. The punch line actually drew applause from the reporters:
A few gigantic corporations have decided to increase steel prices in ruthless disregard of the public interest. Some time ago I asked each American to ask what he could do for his country. Today Big Steel gave its answer.
But that was the Democratic Party of the past. In the new Democratic Party, when President Obama hosts a White House State Dinner in January 2011 for Hu Jintao, the president of China, he invites Lloyd Blankfein and Jamie Dimon.13 In fact, Mr Blankfein had visited the White House ten times as of early 2011, including several times during the period that his firm had been charged with fraud by the SEC.
The subordination of mainstream Democrats to the financi
al oligarchy’s agenda first became apparent during the Clinton administration, whose policies, as we have seen, were sharply more favourable towards the wealthy and the financial services sector than those of any Democratic administration in the last century. That the control of the oligarchy became even greater during the Bush administration goes without saying.
But what is perhaps most revealing is that Obama continued in Bush’s footsteps, even though he had an unprecedented opportunity to change course. How to explain this?
America’s Political Duopoly
AMERICA HAS EXPERIENCED a profound realignment of its politics over the last generation, driven by a combination of globalization, American economic decline, and the rising use of money to shape American politics and government policy. The core of this realignment is that the two political parties now compete for money, while colluding to hide this fact. They provide the appearance, and often the reality, of fierce partisan conflict on social and “values” issues, whereas on the issues of critical concern to the financial sector and America’s economic oligarchy, their actions are almost identical. We have, in short, a political duopoly—a cartel formed by the two parties that, between them, control all of American politics.
At first glance, the suggestion that both parties are colluding and under the influence of a single oligarchy seems absurd. There are red states and blue states; the two parties are viciously polarized. And there is real political conflict in America, especially on social issues that matter to the two parties’ bases—abortion, gay marriage, sex education versus religion in schools, creationism and evolution, guaranteed-health-services-as-socialism, taxes-and-government-as-evil, gun control, welfare, drug policy, immigration, environmental policy, the reality of global warming. These are very real, very important issues; and on these issues, each political party can credibly tell its base that defeat would mean real, painful losses.
But that is exactly the point. It’s a brilliant strategy. These social and “values” conflicts serve excellently to divide and distract people who should, and perhaps otherwise would, be dangerously united in feeling that they were being raped by their CEOs, their bankers, their elected leaders, and the political establishment. Thus, each party can continue to command the grudging support of people who fear that if the other side won, they would lose something important, which leaves the two parties free to collude on the most important thing to both of them—money.
Of course, not everyone likes this new arrangement. Even many wealthy people and some major industries are disturbed, and even directly harmed, by this descent into political corruption, financial instability, and economic decline. Information technology, both in Silicon Valley start-ups and major firms, is one example, and it is hardly alone; many industries suffered as a result of the crisis, and continue to do so. But for the most part, even these people and groups dare not resist, or find it not in their interest to do so. The wealthy, and the businesses they own and run, depend upon access to the increasingly separate, private financial system operated for the wealthy by the big banks, hedge funds, and private equity firms. Functions such as private banking, wealth management, estate and trust planning, tax minimization, mergers and acquisitions, initial public offerings, and securities issuance are now dominated by a small number of large financial firms. Moreover, in some regards, such as individual taxation, the interests of senior executives in all industries are aligned with those who run the financial sector. And successful individuals of conscience are not a concentrated, naturally cohesive industry, whereas finance and the ultrarich are, so it’s not really a contest.
Consequently the rational decision is to adjust, rather than try to reform the system. This is particularly true of high technology, which is the only other industry whose wealth and power could potentially rival the financial sector’s.
Consider, for example, the political and lobbying interests of Apple, a firm correctly regarded as a remarkable testament to American high technology. Apple engages in no manufacturing; its manufacturing contractors are Taiwanese-owned companies whose headquarters are in Taiwan, but most of whose operations and employees are in China. (At least Apple still designs its own products; many American electronics companies don’t anymore.) These firms, in turn, use Taiwanese and Chinese engineers and managers, predominantly Chinese manual labour (their factories are in China), and a combination of Japanese, German, Taiwanese, and Chinese capital equipment.
For Apple and others like it, this outsourcing decision is entirely rational; but its economic and political implications are enormous. Apple has approximately 70,000 employees worldwide. Just one of Apple’s Taiwanese-Chinese manufacturing contractors, Foxconn, has 1.3 million employees. While perhaps three-quarters of them are relatively unskilled manufacturing workers, several hundred thousand of them are engineers, managers, accountants, and other professional employees. Moreover, the technology level of Foxconn’s operations (and of Chinese manufacturing generally) is rising rapidly. In 2011 Foxconn announced that due to labour shortages and increasing demand, it was purchasing 300,000 robots for its Chinese factories. The process of selecting, installing, programming, and maintaining those robots will require a large number of highly skilled employees, almost none of them American.
Apple’s decisions in this regard are no longer motivated entirely by labour costs. The infrastructure and skills to manufacture its products no longer exist in the US. American schools no longer produce enough people with enough skill to enable such manufacturing facilities to be designed, constructed, and operated in the US. But Apple doesn’t need its products to be manufactured in the US; in fact, its use of Chinese manufacturing is critical to obtaining full access to the Chinese market. And Apple, like other US high-technology companies, is now far less dependent on the US market than previously. In 2011 less than 40 percent of Apple’s revenues, and less than 20 percent of its growth, came from North America.
So Apple, Hewlett-Packard, and Dell are not going to declare war on Wall Street over the future of the American labour force. Indeed, some high-technology companies share the financial sector’s interest in gutting regulation and antitrust enforcement. Everyone likes lower corporate taxes. Google now holds over 60 percent of the US Internet search market, and its share is growing, so they’re not so excited about strong antitrust policy, either. So American high technology may not always like how the financial sector behaves, but it won’t wage war against it. Similarly, the technology sector isn’t going to go to war over universal high-speed broadband service or public education.
America’s new money-driven political system also has strong self-reinforcing characteristics. The more wealthy, concentrated, and powerful the financial sector and wealthiest families become, the more they affect policy in their favour; the more policy tilts in their favour, the wealthier and more powerful they become. Similarly, the system makes it difficult to mount truly effective third-party challenges or insurgencies within the two major political parties. The US electoral college system in presidential elections makes it difficult for a third party to become the deciding swing vote for the presidency. Nor does America have a parliamentary system that might give a new third party a critical swing vote in choosing a leader. Similarly, very few American cities or states have ranked-order voting, which would prevent third party votes from being wasted. Over the last quarter century, gerrymandering of election districts (engineering their borders to control voting outcomes) has produced increasing “security” of congressional districts, with incumbents rarely unseated. And, as a major fundraiser for the Democratic Party recently told me, the one thing that both parties can always agree on is the undesirability of third parties.
There is still some difference between the two parties. The Democratic Party is still more progressive than the Republicans on matters of individual economic opportunity, education, personal taxation, the social safety net, environmental policy, and safety regulation. And for now, disbelief in evolution, vaccines, and climate change rema
ins a uniquely Republican aberration. But the margin of difference between the two parties, at least on economic issues important to business and finance, as opposed to individuals, has narrowed sharply. As the power of the financial sector and the wealthy has increased, the entire political spectrum has shifted toward the wealthy on economic issues, and the Democrats have shifted along with it.
And thus, American voters are stuck. There is now little difference on where the parties stand towards regulation of Wall Street or other concentrated and regulated industries (telecommunications, energy, the media), or the role of money in politics, including the revolving door. America is increasingly in the hands of a cynical political duopoly whose policies are antithetical to economic progress and fairness.
Obama’s failure to act has been blamed on his inexperience, his unfamiliarity with finance and business, and a personal tendency to avoid conflict (or, to be blunt, on his being a coward). Some, including my colleague Charles Morris, also feel that the political system is now so gridlocked and dysfunctional that transformative policy changes are simply no longer feasible by anyone, so that Obama really couldn’t have done anything even if he had tried. If so, then we’re really screwed. But if anyone had a shot, it was Barack Obama in 2009, and he didn’t try. Admittedly, it would have taken real personal courage, and it would have been a hard fight—Wall Street would not have just rolled over. The logic and incentive structures of America’s political duopoly are such that in taking the path of least resistance, Obama was surely acting in his, and his party’s, rational self-interest. But whatever Obama’s personal motivations, America (and indeed the whole world) will pay dearly for his failure for a long time.
Inequality, Stagnation, and the Decline of Opportunity