Crony Capitalism: How The Financial Industry Gets What It Wants
The tilt of American policy in favor of the finance industry -- reflected in the policies of recent Treasury Secretaries Timothy Geithner, Henry Paulson and Robert Rubin -- cannot be attributed to any one person or institution. The industry flexes unsurpassed muscle in the political system, backed by billions of dollars invested in candidates and lobbying, a vast grassroots lobbying network of local bankers, the growing centrality of finance in the national economy, and widespread acceptance among public officials of a pro-market, deregulatory philosophy.
"Both the end-stage Bush and new Obama administrations have been exceptionally fawning in their support of failed bankers," William K. Black, associate professor of Economics and Law at the University of Missouri-Kansas City School of Law, told the Huffington Post. "Crony capitalism is now common in U.S. finance."
Since 2000, the finance sector has funneled a total of $2.84 billion directly into the political system, $961 million in donations to candidates and political parties, $1.88 billion in publicly disclosed lobbying expenditures to influence Congress and the executive branch.
The leading firm in both lobbying dollars and campaign contributions is Goldman Sachs, which not only produced Treasury Secretaries Rubin and Paulson, but which has also begun to emerge from the current financial crisis as the top dog of Wall Street.
In 2008, the largest corporate or trade association source of campaign contributions, including employees, was Goldman Sachs at $6.9 million, followed by J.P. Morgan Chase & Co. at $5.8 million. Citigroup, $5.5 million, came in fourth; Morgan Stanley, $4.3 million, 7th; and the American Bankers' Association (ABA), $3.7 million, 10th. Over the past two decades, Goldman Sachs has been the second largest corporate contributor (including employees) at $30.9 million, beaten only by AT&T, at $40.8 million.
"When we write history books we will wonder why the government seemed to coincidentally do the things that favor Goldman Sachs and somehow in extremis get them out of trouble," Nassim Nicholas Taleb -- author of "The Black Swan" and distinguished professor at New York University Polytechnic Institute -- told the Huffington Post.
The strength of the financial sector and its interlocking allies in insurance and real estate has been repeatedly demonstrated over the past year: Despite near universal agreement that actions of the industry inflicted untold harm on the American and global economies, the Bush and Obama administrations have treated captains of finance with velvet gloves, and Congress, especially the Senate, has consistently deferred to the powerful financial lobby.
Looking over the past decade, Simon Johnson, professor at MIT's Sloan School of Management and former chief economist at the International Monetary Fund, provided a coherent, well-conceptualized description in The Atlantic of the political prowess of the banking community, a subsection of the financial industry and a community that Johnson and co-author James Kwak view as an American oligarchy.
"From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing: * Insistence on free movement of capital across borders; * The repeal of Depression-era regulations separating commercial and investment banking; * A congressional ban on the regulation of credit-default swaps; * Major increases in the amount of leverage allowed to investment banks; * A light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement; * An international agreement to allow banks to measure their own riskiness; * And an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation."
In Congress, the big test of continued banking muscle in the aftermath of the financial collapse came on April 30. That day, the Senate voted 51-45 to kill administration-backed "cramdown" legislation which would have allowed bankruptcy judges to change the terms of mortgages, many of which were originated by what are now recognized as specialists in predatory or sub-prime lending. The Senate in effect chose to support banking interests over the interests of constituents who are in bankruptcy and facing foreclosure on their homes. "The American Bankers Association appreciates the Senate's decision," declared Floyd E. Stoner, the ABA's executive director, declared. "We are thankful that the Senate recognized [our] concerns."
While campaign contributions and lobbying expenditures are reliable measures of the leverage of the financial industry, these figures by no means tell the full story. One of the industry's most powerful tools is the vast network of community bankers who are often key members of local establishments in rural and small town America.
Ten of 12 Democratic senators who voted against the cramdown bill -- Max Baucus (Mont.), Michael Bennett (Colo.), Robert Byrd (W.V.), Byron Dorgan (N.D.), Tim Johnson (S.D.), Mary Landrieu (La.), Blanche Lincoln (Ark.), Ben Nelson (Neb.), Mark Pryor (Ark.), and Jon Tester (Mont.) -- represent states that are disproportionately rural, states in which such bankers are especially influential. Johnson and Kwak, in their May Atlantic article provide crucial additional insight. For one thing, the finance industry in recent years has become a lynchpin of the national economy:
"From 1973 to 1985, the financial sector never earned more than 16% of domestic corporate profits. In 1986, that figure reached 19%. In the 1990s, it oscillated between 21% and 30%, higher than it had ever been in the postwar period. This decade, it reached 41%. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99% and 108% of the average for all domestic private industries. From 1983, it shot upward, reaching 181% in 2007."
These findings are illustrated in the following two charts:
At a more subtle level, Johnson and Kwak describe what amounts to an ideological shift, a shift experienced most intensely in the nation's capital:
"[T]he American financial industry gained political power by amassing a kind of cultural capital-a belief system.Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America's position in the world."
All of which helps to explain Democratic Senate Whip Dick Durbin's outburst on a Chicago radio station last April 27 as he watched the steady erosion of support for the measure allowing bankruptcy judges to alter the terms of home mortgages: "And the banks - [it's] hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. They frankly own the place."