The close relationship between Wall Street and Washington belies their 200 mile separation and theoretically differing goals.
By spending money on campaigns and lobbyists, The financial industry has managed to give itself something of a voice in the halls of Congress, regulators’ offices and even the White House. Of the top ten firms with employees donating to Romney's campaign, eight are big banks, according to Federal Election data cited by Bloomberg. In addition, Wall Street spent more than $100 million last year on lobbying while the provisions for the Dodd-Frank financial reform law were being finalized, according to The New York Times.
But it’s not just money that Wall Street is sending to Washington. It’s people too, with major officials like President Obama’s chief of staff Jacob Lew and top regulators like Commodity Futures Trading Commission chairman Gary Gensler having spent time working at a big bank at some point in their careers.
And the revolving door moves in the other direction as well. As of last year, at least 285 members of Congress were registered lobbyists, according to data from the Center for Responsive Politics cited by the NYT.
The result: An uncomfortably close relationship between the private financial industry and the people responsible with regulating it. Neil Barofsky, the former bailout watchdog, has been an especially outspoken critic, deriding both the Obama and Bush administrations for allowing their relationship with Wall Street to color the results of the bailout. If the message isn’t clear, the subtitle of his recently-released book, “Bailout” is “An Inside Account Of How Washington Abandoned Main Street While Bailing Out Wall Street.”
But Barofsky isn’t the only critic. In an excerpt from his book, “The Payoff Why Wall Street Always Wins,” cited by Simon Johnson in the NYT, former Senator Ted Kaufman notes:
The Blob (it’s really called that) refers to the government entities that regulate the finance industry — like the banking committee, Treasury Department and S.E.C. — and the army of Wall Street representatives and lobbyists that continuously surrounds and permeates them. The Blob moves together. Its members are in constant contact by e-mail and phone. They dine, drink and take vacations together. Not surprisingly, they frequently intermarry.
What’s clear is that Wall Street and Washington are close, but what’s harder to determine is whether that directly affects how laws are written. Lawyers that used to work for the SEC and were hired by private law firms actually had tougher enforcement outcomes than lawyers at the same firms who never worked for the agency, according to a recent study cited by the NYT.
Still, there are plenty of counter examples for critics to point to. One of the SEC commissioners that voted against changing the rules for money market funds, ultimately stopping the reforms from taking effect, was a former mutual fund executive.
Many people walk between Wall Street and Washington -- here are some of the most famous:
Before starting his career in public service, Commodity Futures Trading Commission chairman Gary Gensler spent 18 years working at Goldman Sachs. Gensler's work at Goldman has gotten him into some hot water as the top futures industry regulator. After MF Global imploded into bankruptcy on his watch, losing millions in customer funds, Gensler recused himself from the probe, citing his history at Goldman with Jon Corzine, MF Global's ex-CEO. Senators blasted Gensler and accused him of trying to "avoid the heat."
Before serving as secretary of the Treasury under George W. Bush, Henry Paulson spent 22 years at Goldman Sachs, eventually assuming the position of CEO. Paulson's ties to Goldman followed him to his new job: On multiple occasions in 2008, Paulson met with Goldman executives in informal contexts and shared his opinions about the future direction of the economy. On one occasion, Paulson reportedly explained to at least a dozen Wall Street higher-ups that the government was considering a takeover of Fannie Mae and Freddie Mac, some two months before it actually came to pass -- thus giving everyone in attendance a chance to trade profitably on that knowledge before it became public. -- Alexander Eichler
U.S. Treasury Secretary Timothy Geithner never worked on Wall Street, but given his close relationship with the financial industry it's not surprising many thank he has. Before assuming his post as Treasury Secretary, Geithner was president of the Federal Reserve Bank of New York, a Wall Street regulator that's been heavily criticized for its cozy relationship with the industry. In 2008, during his time as New York Fed president, Geithner became aware that banks were rigging the Libor benchmark rate and recommended that London regulators address the issue, but most of Geithner's suggestions came essentially verbatim from banks. Now more than 15 banks are under investigation for rate-rigging and some critics are arguing that Libor rigging is one of the biggest financial scandals of our time.
Jack Lew, whom President Obama named as his new chief of staff early this year, worked at Citigroup between 2006 and 2009. While there, he served as the chief operating officer of Citi's Alternative Investments unit, a division that oversaw the same kind of proprietary trading activity that the so-called Volcker Rule would later attempt to curtail. At one point, Lew's unit invested millions in a fund run by hedge fund manager John Paulson, who made his fortune speculating on the collapse of the housing market. Later, during his confirmation hearing to lead the Cabinet-level Office of Management and Budget, Lew told a Senate panel that he didn't "believe that deregulation was the proximate cause" of the financial crisis. -- Alexander Eichler
Bill Daley, Obama's outgoing chief of staff, came to JPMorgan Chase in 2004 to serve as Chairman of the Midwest Region. Daley held that position until January 2011, when he departed for the White House. During Daley's time at JPMorgan Chase, the bank accepted a $25 billion government bailout and laid off more than 9,000 workers in a three-year period. The company has since regained its strength, reporting $2.29 trillion in assets as of late 2011, when it overtook Bank of America to become the nation's largest bank. In 2010, Daley's total earnings at JPMorgan came to $8.7 million. -- Alexander Eichler
Mark Patterson, chief of staff to Treasury Secretary Timothy Geithner since 2009, has been moving between politics and finance for the past decade. In 2004 he left a staff position as policy director for Senator Tom Daschle to become a vice president at Goldman Sachs. (Patterson's move to Goldman came a year after he got married to Jennifer Leete, an attorney in the enforcement division of the Securities and Exchange Commission.) While Patterson was at Goldman, his responsibilities included lobbying the federal government, and in 2007 he was part of a group of lobbyists believed to have opposed legislation sponsored by Representative Barney Frank and then-Senator Barack Obama to curb executive compensation on Wall Street. -- Alexander Eichler
Peter Orszag, who served as director of the Congressional Budget Office from 2007 to 2008 and director of the Office of Management and Budget for nearly two years after that, left the Obama administration in July 2010. In December of that year, Orszag took an executive position at Citigroup, where he's now the vice chairman for global banking and a member of the company's Senior Strategic Advisory Group. In 2008, the U.S. government bailed out Citigroup with a $45 billion rescue package. At the time that Orszag's move to Citigroup was announced, loan interest and stock sale proceeds had converted that bailout into a $12 billion profit for the government. -- Alexander Eichler
Before Rahm Emanuel was mayor of Chicago or chief of staff in the Obama White House, he spent time as a managing director with the investment bank Wasserstein Perella, where he made a reported $18 million in less than three years. Once he resumed his career in politics, Emanuel's ties with the business community remained strong. In 2006, when Emanuel, then a member of the House of Representatives, was chairing the Democratic Congressional Campaign Committee, sources in the financial industry contributed more than $5.8 million to the group's midterm election efforts. And in 2008, Emanuel was the number-one House recipient of donations from the hedge funds, private equity firms and the securities and investment industry. -- Alexander Eichler
Robert Steel had a long life with Goldman Sachs before serving as the under secretary of the Treasury for domestic finance under George W. Bush. Steel came to Goldman in 1976 and rose to the position of vice chairman before leaving in 2004. As under secretary of domestic finance, Steel worked closely with then-Treasury secretary and fellow Goldman alum Henry Paulson, and acted as a frequent liaison between the Treasury and the House Financial Services Committee. After leaving his Treasury post, Steel returned to finance -- serving as CEO of Wachovia, and brokering its sale to Wells Fargo in 2008 -- before circling back once more to public service, with a post as New York City's deputy mayor for economic development under Mayor Michael Bloomberg. -- Alexander Eichler
Robert Rubin, secretary of the Treasury under President Clinton from 1995 to 1999, spent time in the financial industry both before and after his political career. Rubin was at Goldman Sachs for some 26 years, rising to the position of co-chairman before joining the Clinton administration as an assistant to the president for economic policy. Following his tenure as Treasury Secretary, Rubin was on the board of directors at Citigroup from 1999 to 2009, during which time the bank greatly increased its risk profile and ultimately had to accept a $45 billion government bailout. Rubin has been criticized for not doing more to regulate the derivatives market, especially the trading of credit-default swaps -- the instruments that would ultimately play a large fole in triggering the financial crisis. -- Alexander Eichler