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Shadow Elite: Are They Responsible For The Subprime Mortgage Crisis?

Posted: 01/15/10 07:30 AM ET

When I came to Washington 45 years ago to work as an investigator for the Senate Antitrust Subcommittee, a senior investigator with years of experience told me that the beginning of any good investigation was a clear understanding of the players. "Everyone you will look at has a history," he explained. "They will have mentors and sponsors. They will have networks of political and business connections. They will play many roles. If you understand those, everything else will fall into place."

The advice was sound and has served me well in years of investigations of corporate wrongdoing, organized crime, money laundering, and securities fraud. My career highlights include serving as Special Counsel to the Senate Foreign Relations Committee and before that as Assistant Counsel to the Senate Antitrust Subcommittee followed by work as a private lawyer representing victims of financial crime and financial institutions on compliance matters.

Despite the desperate need for such an investigative approach, throughout my career I have been constantly perplexed by the reception to it. A frequent response by newspaper columnists and pundits was to dub me a "conspiracy nut." Another common response was to call my evidence "anecdotal," a word uttered with a dismissive sneer.

Janine Wedel's breakthrough "Shadow Elite" shows why "anecdotal" evidence is essential to grasping what is really going on. As an anthropologist who has taken the time to examine how things really work, Wedel provides a bold new frame of reference for those of us who look at things as they are and relationships as they have evolved, as well as the tools to understand the complex interplay of people and institutions that make up modern government. Her framework demonstrates not only why the careful analysis of players' activities, roles, sponsors, and networks is so necessary but how, in the aggregate, these profiles form clear patterns. "Shadow Elite" identifies players who perform overlapping, mutually influencing, and not fully revealed, roles across government, business, think tanks, and national borders in pursuit of their own policy agendas ("flexians," she calls them, and flex-nets"--such players who work together in a network) as an important key to understanding how influence is wielded and why policy decisions are made.

Wedel tracks how elite multipurpose networks function in clear-eyed--not conspiratorial--fashion. Far from mere anecdotes, today's top power brokers operate according to a modus operandi with specific features that she charts.

The current economic crisis is littered with such players. A careful analysis of the mortgage banking crisis using Wedel's tools will produce several "consultants" and industry "experts" who were the key flexians cheering on the mortgage boom from their vantage points in think tanks quietly funded by companies profiting from the boom. These "experts" were then in a position to cheer on the further "financial innovation" which has ruined us all.

To truly understand this phenomenon, you must throw away your political science and economics text books, turn off the talking heads and the cable news political analysts, and consult Wedel's framework. Over the last year I participated in two events involving economists talking about the financial crisis during which many of the presenters demonstrated little, if any, knowledge of the players in the housing industry. Further, they did not know the history of the repeating cycles of fraud and ruin associated with poorly regulated and unregulated mortgage lending.

Over forty years ago, working for the Senate Antitrust Subcommittee, I investigated mortgage fraud in several large American cities including New York and Boston. The fraud involved falsified appraisals, unqualified buyers, "flipping" of properties, and in some cases purchases by non-existent buyers. One of the institutions involved in the New York situation was Citibank--a bank that provided warehouse loans to the mortgage companies involved in the fraud. Needless to say, the same bank and some of the same people have been involved in each of the succeeding cycles of fraud. And, each time the bank has had a squad of lobbyists and "independent experts" selling the idea that continued unregulated mortgage lending was a good idea.

The approach of looking to the roles, activities, sponsors, and networks of players--be they organized crime figures, politicians, experts, influencers, or some combination thereof--is today, more than ever, imperative. Profound changes in government and society have vastly increased the opportunities for agenda-bearing players wearing multiple hats (and often working in close-knit networks) to significantly influence public policy. Such activity is much less transparent to the public eye than when I first began my career. An amazing variety of corporate entities with strange and complex interrelationships today do much of the work of federal government, virtually substituting for it in some arenas. These entities and their sponsors are harder to identify, more insidious, and much more plentiful than the corporate fronts of yesteryear.

If the economists had used Professor Wedel's analytical tools to take a hard look at the flexians and flex nets that have controlled the discussion of mortgage lending regulation instead of their sophisticated equations, they might have had something useful to contribute to the conversation.