THE BLOG
03/18/2010 05:12 am ET | Updated May 25, 2011

For The Shadow Elite Failure Often Guarantees Future Rewards

Far from the old pull-yourself-up-by-the-bootstraps model of acknowledging failure and starting anew, the shadow elite do not admit failure at all. More important, past failure may guarantee their future success. When most of us fail, consequences are not widespread. When the shadow elite fail, it affects all of us because their power is pervasive and they are largely beyond accountability. For confirmation one need only look as far as two of the country's top economic helmsmen, Robert Rubin and Larry Summers.

Rubin and Summers, "flexians" and their "flex nets" , continue to be rewarded--and rewarded big--for their failures. Those rewards extend to giving them the reins of power to shape what our financial system will look like well into the future. The tendency to reward the failure of the top-most flexians has brought us to a dangerous point in U.S. history, in which state and market power are increasingly intertwined.

We have seen the disastrous effects of this for both democracy and the free market before. Take Russia, for instance. A small coterie of Russian and American players, entrusted after the collapse of the Soviet Union with creating a market economy with a legal and regulatory backbone, failed utterly. Instead, they facilitated the opposite: a corrupt bureaucracy that virtually precluded the development of free markets and the expansion of an unaccountable state with a democratic facade. This all took place under Rubin and Summers' watch and with their encouragement and sponsorship, when they were both at the Treasury Department.

A key member of the transnational flex net that orchestrated Russian economic reform was Treasury official Summers's protégé, Harvard economist Andrei Shleifer. He headed the Harvard team, which managed virtually the entire nearly $400 million U.S. flagship economic aid portfolio. Summers helped Shleifer and Harvard gain noncompetitive government awards through arrangements that were highly unusual in foreign aid contracting at the time, according to U.S. officials. And, while itself a chief recipient of aid, the Harvard Institute--the umbrella through which the players received U.S. funding--also was charged with overseeing the portfolio they ran. That is, the Harvard players were to watch over themselves and their competitors.

Shleifer himself played indistinct and overlapping roles as he lobbied in favor of his projects and advised both United States and Russia while presenting himself as independent expert. His investments in Russia, which he does not deny, included securities, equities, oil and aluminum companies, real estate, and mutual funds--many of the same areas in which he was being paid to provide impartial advice. And he helped a wider circle meddle in the spoils of an unraveling resource-rich empire. The endowments of both Harvard and Yale gained access to valuable investments through networks inhabited by Shleifer or his wife, the currency trader and hedge fund manager Nancy Zimmerman. (She had worked at Goldman Sachs in the 1980s for Rubin, who was also a sometime board member of the Harvard Management Company that oversees Harvard University's investment and remained close to him when he was secretary of the Treasury.)

Meanwhile, in Russia, backed by Summers and hundreds of millions of dollars in Western aid and loans from the international financial institutions, the Harvard-Russia partners made end-runs around the democratically elected parliament, operated through top-down decree, and fused their own agendas with that of the state.

This way of operating--locking up should-be official information in private networks, crafting overlapping roles to serve one's agenda, and rewriting both bureaucracy's rules of accountability and businesses' codes of competition--guaranteed the Harvard players their power and influence in the 1990s. It also enfeebled the multiple investigations of their activities, including the one by the U.S. Justice Department that resulted in a negotiated settlement that required the university to pay $26.5 million in fines and Shleifer to pay $2 million for defrauding the US government. When he became Harvard's president, Summers protected Shleifer and virtually succeeded in pushing the affair under the rug. Despite the activities of the Harvard players and their Russian partners having led to the largest law suit against Harvard in its history, as well as the failure of the policies over which they presided, to this day they have largely succeeded in crafting a story of their good works for public consumption. "Truthiness" wins.

Today's flexians and flex nets differ from the powerbrokers of the past such as the "Wise Men" (think W. Averell Harriman, Dean Acheson, George F. Kennan) or the "Best and Brightest" (think McGeorge Bundy, Robert McNamara, Dean Rusk). These company men had clearer allegiances. We know where they stood and they were mainly instruments of the presidents whose policies they pursued. By contrast, the Rubin-Summers-et al. circle sometimes appears to be more in the driver's seat than the administration. Administrations, of course, come and go, but flexians and flex nets persevere, pushing their agendas forward. And, unlike their nerdy influencer forebears boring us with charts and graphs, flexians skillfully use the media to brand their message and embed it in the cultural mind.

Far from paying any price for their joy ride, Summers and Rubin were handed a fleet of limousines. Summers, appointed president of Harvard, in turn appointed Rubin to the Harvard Corporation, the university's all-power executive board. Only after Harvard settled the government lawsuit did Summers resign (in 2006) amid public relations troubles within and outside the university. In true flexian fashion, he landed well, as a university professor at Harvard, a part-time managing director of the investment and technology development firm D. E. Shaw & Co., and columnist for the Financial Times. He has since landed even more smoothly. While fallout from his unpopular performance as Harvard president may have kept him from being renamed treasury secretary and confirmed by Congress, he is now back in the saddle as a crucial economic adviser to President Obama. Neither his Harvard and Russia track records nor his past advice and promotion of deregulation--which has come back to haunt the financial system of the United States, indeed the world--deterred Obama. Though Summers and his followers led both Harvard and Russia into debacles from which they have yet to recover, he is nonetheless praised as "brilliant."

Rubin, for his part, as Treasury secretary between 1995 and 1999, fought (along with Summers and others) to repeal the Depression-era Glass-Steagall act (paving the way for the merger that became CitiGroup) as well as to remove legal obstacles that were keeping Citigroup from investing in the risky derivatives market. That was a significant factor in the economic collapse of 2008-2009. Rubin spent most of the last decade in the top ranks at CitiGroup, leading it to such "success" that it had to be bailed out by the U.S. government. And, as Matt Taibbi pointed out in December, the Obama administration's economic team members have so many connections to Rubin (through his tenure at Goldman Sachs, the Clinton administration, Citigroup, and a think tank he founded to promote his financial philosophy) that "the White House now looks like a backstage party for an episode of Bob Rubin, This Is Your Life!" These of course, include the well-known Summers (head of Obama's National Economic Council) and Treasury Secretary Timothy Geithner, as well as players lesser known, but nonetheless intimately connected to Rubin in other configurations.

I've seen this kind of intertwining of roles and relationships before. They are exactly what you'd find in communist and post-communist societies. The blueprint the players used in Russia is now being followed by the interlocking handful of Wall Street/government policy deciders to wield increasing power and influence for their own benefit. In both cases, operators at the top challenge governments' rules of accountability and businesses' codes of competition, ultimately answering only to each other. In both cases, it's hard to get more "efficient," because inside information and power is confined to very few actors who trust each other. And, because only the players themselves have the information, they can brand it for everyone else's consumption and stay largely out of the reach of government and public scrutiny, meaning you and me.

Today's power brokers are still at the top of their game because they are said to "have the credentials." No matter that they are the credentials of a shadowy elite--and of failure.