In early December 2011, Hollywood executives came to Washington for another meeting with Biden to discuss a full-court press to support the bill. Jim Gianopulos of Fox, Barry Meyer of Warner Brothers, and Sony’s Michael Lynton, along with entertainment industry union bosses, met behind closed doors with the vice president.71 From Silicon Valley’s perspective, this all looked like Armageddon. Piling on, Secretary of State Hillary Clinton wrote a letter to a cosponsor of SOPA to lend her support to the idea of aggressively dealing with online piracy saying the “the rule of law is essential to both Internet freedom and protection of intellectual property rights.”72
But for his part, President Obama played it cool, in perfect double-milker fashion. He told the media he would “probably” sign the bill.73 As Mother Jones reported, “The White House gave no indications that Obama had any problem with the legislation.”74 Yet Obama’s position on the bill was out of character with his general attitude to the high-tech industry. Obama’s stance on online piracy was particularly striking given what everyone regarded as his “deep ties to high tech.”75 And Silicon Valley had been “Obama’s core . . . fundraising base.”76 He dined regularly with high-tech titans at the White House and in Silicon Valley.77 Eric Schmidt of Google was an informal economic adviser of sorts.78
Obama rarely spoke of the antipiracy bill publicly, whether in Hollywood or in Silicon Valley. Might his hints at support have been false?
Silicon Valley had been an early and eager backer of Obama in 2008, pouring money and expertise into his election.79 But by 2011 there was considerable evidence that high tech was cooling to him. “I don’t think they feel the love [for Obama],” said Gary Shapiro, head of the Consumer Electronics Association. “There’s great disillusionment.”80 Rob Endere, a Silicon Valley tech veteran and Obama backer, told Politico on February 2011, “There has been growing disappointment with the President.”81
In the first half of 2011, Silicon Valley had tipped in a paltry $1.7 million in campaign donations for Obama’s reelection.82
Throughout the fall of 2011, the Obama administration continued to signal its support for antipiracy legislation, while it showed up for fund-raisers in high-tech communities. In late September, the president held a fund-raiser outside of Seattle at the 14,000-square-foot house of former Microsoft executive Jon Shirley. With a price tag of $35,800 per couple, the event drew fifty couples who showed up for a chance to question the president.83 Then it was on to Silicon Valley for a visit to the home of Symantec CEO John Thompson and Facebook chief operating officer Sheryl Sandberg. The invitation read that this was an opportunity to “join President Obama in Silicon Valley.” In a stately tent in the front yard of Sandberg’s luxurious home, the price tag was again $35,800 per person. Lady Gaga performed, but as a paying guest.84 For Silicon Valley execs concerned about antipiracy legislation, the high admission fee was a small price to pay.
Mimicking his April trip, Obama went directly to southern California for a $17,900-a-plate dinner with key Hollywood campaign financiers at the Fig and Olive Restaurant on Melrose. Not to be outdone by Silicon Valley, one hundred people showed up and paid full freight.85 Between June and September, President Obama had more fund-raisers in California than in any other state.
The House version of the bill was introduced on October 26, 2011.86 It was essentially a rewrite of the Senate version, which at that point had passed out of committee but had not yet passed the full Senate. Cosponsored by Judiciary Committee chairman Lamar Smith, the House version included dozens of cosponsors from both parties. The hearings held by the House Judiciary Committee in December of 2011 were stacked against high-tech. Of the six witnesses who appeared before the committee, only one was opposed to the bill.87 Discussion was abruptly ended after little more than a day.88 A committee vote was scheduled in January. It seemed certain to reach the House floor.
Panic now set in among tech nerds. There was real fear that the antipiracy bills would fundamentally change the nature of the Internet and create new liabilities for their companies.
In that atmosphere, Joe Biden showed up in Silicon Valley in January 2012 for a dinner with an A-list of high-tech executives at Zibibbo, a tony restaurant in downtown Palo Alto. They dined on baby arugula salad topped with dried apricot and goat’s milk cheese and roasted portobello Wellington.89 Among the diners were people on both sides of the antipiracy debate, including Jeffrey Katzenberg and Eric Schmidt. The dinner was the culmination of a day in which Biden held two fund-raisers, the first in the Bentley Reserve in San Francisco’s financial district, and then a smaller fund-raiser at the same site. Days later he would be heading to Los Angeles to raise money from Hollywood.
The milking worked: the tech industry brought in more than $10 million over the second half of 2011, up from its $1.7 million in the first half. As the Permanent Political Class well knows, panic produces checks. Many in Silicon Valley had succumbed to the realities of the way in which the game was being played, with the rules established by the Permanent Political Class. “Many in our industry believe the way to tip the balance back our way is to simply play the same game, and out-donate the bastards,” wrote John Battelle, a tech leader and cofounder of the Web 2 conferences. “(Lord knows we have the money. . . .)” This was, of course, music to the ears of the Permanent Political Class.90
Hollywood also poured in money. By January 2012, Hollywood had given more than $4.1 million to the Obama campaign, ahead of the $3.7 million it had contributed by the same point in 2008.91
Then suddenly, the Obama administration made a pivot. On January 14, 2012, the White House announced that it had problems with the antipiracy bills.92 In a statement, the White House declared that the president “will not support legislation that reduces freedom of expression, increases cyber security risk, or undermines the dynamic, innovative global Internet.” Members of Congress who had supported the bill initially also suddenly started to backtrack.93 The fact that they had already collected large sums of money from both sides of the issue, and that friends and allies had been signed to lucrative consulting and lobbying arrangements already, made the timing near perfect. The House Judiciary Committee never brought its version to a vote.
Public stories about the two bills focused on grassroots Internet protests, including a blackout by such firms as Wikipedia on January 18. But both sides had passionate supporters.94 Why did the White House flip?
Many in Hollywood, particularly the suits, were bitter at what they saw as a betrayal. “He [Obama] didn’t just throw us under the bus . . . he ran us down, reversed and ran over us again,” one film executive and longtime Obama supporter said to the Financial Times.9595 The White House “tried to play it both ways,” said Marge Tabankin, who advised Hollywood clients on politics. “And this industry said that, for everything we’ve done, it would have been nice if they at least had tried to work out a compromise.”96 Tabankin was largely right, but for one thing: the Permanent Political Class had played it both ways successfully. President Obama had done so on the presidential level, but so had members of Congress on both sides of the aisle.
MPAA chairman Chris Dodd threatened that Hollywood might withhold campaign cash. “Don’t make the false assumption here that because we did it in years past we’re going to do it this year.”97 But the threat was pointless: the Hollywood suits had been outmaneuvered. “Most of us have maxed out [on fund-raising] already, unfortunately,” one exec told the Hollywood Reporter. The Permanent Political Class had largely milked the Hollywood suits until they went dry. And now the suits had no leverage left.98
Not all was lost, particularly for President Obama’s biggest Hollywood supporters. Jeffrey Katzenberg and Steven Spielberg had raised millions in donations for the Obama campaign and had given millions themselves to both the campaign and pro-Obama super PACs. Both were supporters of the antipiracy bills. So when China’s Vice Premier Xi Jinping visited Los Angeles, Vice President Biden negotiated directly with Chinese officials to allow access to the Ch
inese market for American films. Up until this point, only twenty U.S.-made films could be distributed per year in the world’s fastest-growing movie market.99 Biden convinced Beijing to raise the limit to thirty-four, including those shot in 3-D or in IMAX format. Katzenberg was in close contact with Biden and White House officials during those negotiations. And Spielberg attended at least one private event with Jinping. At a public event with Jinping, Katzenberg announced his company’s plans to establish Oriental DreamWorks, a $350 million production studio in Shanghai, a joint venture with Chinese companies. Since Oriental DreamWorks would be a local venture, the quota for American films wouldn’t apply.100
The United States had many trade issues with China, but access for Hollywood films had moved to the top of the list. And with the sensitive joint-venture deal in place, Katzenberg and Spielberg were big winners.101
Still, the biggest victory was won by neither Katzenberg and Spielberg nor Google. By far the biggest winners in this saga were the members of the Permanent Political Class in Washington. After the fight, the high-tech community recognized the new reality in which it was operating. What Microsoft learned in the ’90s, the rest of Silicon Valley had now learned too: they had to become Washington players.
“The high-tech industry moves incredibly fast,” Bob Herbold told me. “Their hands are full just trying to compete. That should be their focus. There are some people in the industry that like this system—they don’t want to see it exposed. But most are innovators and hate it. Problem is, they feel like they have no choice.”102
In September 2012, tech firms formed the Internet Association, a new industry group that included Google, Amazon, and Facebook. The social media giant Facebook signed former Clinton, Bush, and Obama White House aides to lucrative contracts to keep the company out of Washington’s crosshairs.103 In 2012 large high-tech companies dumped record amounts of cash into lobbying.104 Google lobbying spending soared to $16.48 million in 2012, and Facebook spent $3.99 million. The Permanent Political Class is pleased.105
“It’s kind of like trying to get someone hooked on drugs,” says former BB&T chairman John Allison. “It starts on one issue, protecting the company. But then when corporations can figure out what government can do for them, they get hooked.”106
The milking, of course, continues. The piracy problem will be revisited, and the high-tech industry is facing the possibility of new regulations in the video game industry.107 In the wake of the tragic shooting in Newtown, Connecticut, in December 2012, Vice President Biden criticized the industry, arguing that video games contribute to a national culture of violence. (The Connecticut gunman, Adam Lanza, was apparently a fan of the online game World of Warcraft.) Members of Congress from both parties are now lining up. “Connecticut has changed things,” said Virginia Republican representative Frank Wolf in an interview. “I don’t know what we’re going to do, but we’re going to do something.”108
What that “something” might be is open to question. But whatever it is, it creates fear in the gaming industry. President Obama has asked the Centers for Disease Control to study the causes of violent behavior, including any role that movies, television, and video games might play.109 And “something” also includes soliciting campaign donations and other benefits from the video-game industry. The industry was already spending about $5 million a year lobbying in Washington to fend off legislation. Now the Entertainment Software Industry Association, made up of video-game companies like Sony, Nintendo, and Microsoft, is busy expanding its lobbying operations in Washington by hiring the family and friends of the Permanent Political Class.110
6
Slush Funds
Don’t write anything you can phone. Don’t phone anything you can talk. Don’t talk anything you can whisper. Don’t whisper anything you can smile. Don’t smile anything you can nod. Don’t nod anything you wink.
–EARL LONG, FORMER GOVERNOR OF LOUISIANA
THE MOB’S METHOD required brawn and brains. The brawn was needed to extort and “throw fear.” But once the mob had the money flowing in, operations needed to be structured to move the money around, hide it, and funnel funds where needed. Often, the Mafia mingled the operation of legitimate businesses with its criminal activities.
In the history of the U.S. mob, no one did that better than mobster Meyer Lansky, who was known as the “mob’s accountant.” Gangster Al Capone was a master of building his Chicago-based gangland empire around a cluster of criminal “growth industries.” The feds could never get him on his violent activities, so the Treasury Department meticulously investigated the cash flow behind his business and charged him in 1931 for evading taxes. Also indicted were his brother Ralph “Bottles” Capone, Jake “Greasy Thumb” Guzik, and Frank Nitti.
On October 18, 1931, Capone was found guilty of tax evasion and sentenced to eleven years in federal prison. He also paid $215,000 plus interest due on back taxes.1
Seeing what happened to Capone, Lansky set up a sophisticated operation with Lucky Luciano to transfer funds between their various operations. He even bought a bank in Switzerland to launder money through a network of companies.2 When the federal government came after Lansky on tax evasion charges in 1971, it had trouble tracking his money and was forced to depend on the unreliable testimony of a loan shark named “Fat Vinnie” Teresa. Lansky was acquitted. He died in Miami Beach in 1983 of lung cancer.
Today’s Permanent Political Class lacks the colorful nicknames the mob used, but they too have mastered the art of funneling funds. Extorting money in the form of campaign contributions is not simply about getting reelected. Many politicians aggressively fund-raise even though they face little or no opposition for reelection. Politicians have discovered a creative way to transfer donations into subsidies designed to benefit their lifestyles. We have already seen some of the ways in which politicians can shift money around and give themselves sweetheart interest rates. A traditional campaign committee, the primary vehicle for reelection, can also provide a politician with a solid stream of cash. Those candidates who are not in particularly tight races can put family members on the payroll, and they can make unlimited transfers of cash from campaign committees to party organizations and channel donations to colleagues. But politicians will have trouble using their campaign fund for personal benefit apart from high-interest loans. It’s not that they haven’t tried. Congressman Gregory Meeks tried to use $6,230 in campaign funds to pay for a personal trainer. His staff argued that the expenditures were legitimate because they helped him deal with the stress of his “official duties.” The Federal Election Commission didn’t buy it.3
But a leadership PAC is different. Leadership PACs are ostensibly about raising money to help political colleagues hold and win seats. But the FEC has few restrictions on how these monies can be used and does not restrict the “personal use” of such funds. “Congress has never extended the personal-use restrictions to leadership PACs,” says former FEC chairman Michael Toner. “The FEC has looked at this over the years and has determined they don’t have the statutory ability to address this. It will take an act of Congress.”4
How unregulated are these leadership PACs? Consider the case of Ohio Republican Paul Gillmor’s leadership PAC. During a recent election, PAUL PAC spent almost $6,000 on personal expenses: fast food, doughnuts, bar tabs, and golf. The problem? Congressman Gillmor was dead. He had tragically fallen down the stairs months earlier. And yet PAUL PAC was picking up the cost for pizza deliveries, visits to Mexican restaurants, Dunkin’ Donuts, and more. Intrepid Wall Street Journal reporters Brody Mullins and Brad Haynes uncovered the story and asked the PAC manager about the expenditures. He had a simple explanation: the expenditures were necessary because the PAC members had “gathered many times as we were all grieving to help each other with the job search process.” There was apparently nothing illegal about using “grieving funds” to go golfing.5
Seemingly everyone in political office wants a leadership PAC. Joe Kennedy III, elected in 2012, s
tarted his leadership PAC three months after being sworn in.6 Congressman Aaron Schock of Illinois, a rising Republican star, formed his leadership PAC before he was even elected to office in 2008.7
And who can blame them? While they are required to disclose how they spend the money, the disclosures are so cursory and nondescript that they can get away with a lot. They don’t have to spell out who attended a lavish weekend trip at a golf resort. They can simply list, as one senator did:
“PAC EVENT/LODGING/BANQUET/GOLF” 8
“For the most part, it’s really kind of an incumbent racket,” says former FEC commissioner Brad Smith, who usually opposes tighter campaign finance rules. Campaign contributions are supposed to be a way for donors to support candidates and ideas they believe in. To be sure, some leadership PACs do devote a substantial portion of their funds to helping elect members of Congress. Yet many of them spend most of their money on events in swanky five-star resorts, food, and entertainment.9
Here are some of the unwritten rules about how politicians use leadership PAC money. First, “retreats,” “strategic planning sessions,” and other events never occur at a Hampton Inn or a Holiday Inn. They are almost exclusively held at five-star resorts that feature golf and high-end spas. Second, these events are timed for peak tourism seasons. Politicians don’t tend to travel to upstate New York in the winter (unless they are going skiing) or to south Florida in August. Like a family putting together a vacation, members of the Permanent Political Class time these lavish events to conveniently coincide with the best time to enjoy the location. What leadership PACs provide is essentially a second personal bank account, or a second pocket from which politicians can pull money.
Extortion: How Politicians Extract Your Money, Buy Votes, and Line Their Own Pockets Page 10