Inside Job (43 page)

Lobbying has escalated similarly. Here are lobbying expenditures by the finance, insurance, and property industries from 1998 through 2010:

Source: OpenSecrets.org, http://www.opensecrets.org/lobby/indus.php?id=F&year=2011

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 industries 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.

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 regulatory 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.