WASHINGTON, June 17, 2014 — After his recent unexpected defeat to an unknown, Tea Party-supported economics professor, House Majority Leader Eric Cantor, R-Va., was asked about his future plans.
Cantor, who seems to have spent more time raising money on Wall Street and other venues than serving the constituents in his central Virginia district, had an immediate response.
He might become a lobbyist, he said.
This is nothing new. Also not new is the manner in which top officials leave government to take high-paying positions with the very business interests they had been in charge of regulating. Earlier this year, former Treasury Secretary Timothy Geithner agreed to join Warburg Pincus, a private equity firm, although he had no experience whatever in the private equity field.
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Writing in The New Republic, Noam Scheiber noted that, “It’s hard to believe that Geithner, with no investment or private sector experience, would be worth the millions he will surely earn each year if he didn’t also turn heads at the highest levels of government.”
The financial industry is one of the largest lobbying groups in Washington. It has always pushed for fewer controls, and it has largely succeeded. Two important changes were the Financial Services Modernization Act of 1999, which ended the separation between commercial and investment banking, and the Commodity Futures Modernization Act of 2000, which legally banned the Securities and Exchange Commission from regulating over-the-counter derivatives.
The main lobbyist for the 1999 law, Sanford Weill, then head of Citigroup, now admits that, “I don’t think it’s right anymore.”
Bill Clinton now says that he regrets not having tried to regulate derivatives.
These pieces of legislation, we now know, led to our financial crisis, and the eventual bailing out by taxpayers of failed banks and financial institutions. Eighteen months before the financial collapse, Sen. Charles Schumer, D-N.Y., and New York Mayor Michael Bloomberg issued a report called “Sustaining New York’s and the U.S.’ Global Financial Services Leadership,” which warned that if Wall Street were re-regulated, the financial industry would move to London.
Politically connected banks received larger bailout loans from the federal government during the 2008 financial crisis than banks that spent less on lobbying and campaign contributions. This is the conclusion of an analysis by Professor Benjamin Blau of Utah State University.
His findings were based on data from the Federal Reserve Board and published by the Mercatus Center at George Mason University.
Blau noted that it was “unlikely” that the Fed intended “to provide political favors to banks with the most political connections.”
But the pattern is clear. Banks that received bailout loans spent 72 times more on lobbying in the decade before the meltdown than banks that got no loans. Blau also found that 15 percent of the banks that received loans employed politically connected individuals.
Only 1.5 percent of banks with politically connected employees got no loans.
In the case of Timothy Geithner, says Dennis Kelleher, president of Better Markets, a Wall Street watchdog group, “Geithner’s spin through the revolving door to cash in on his ‘public service’ will enrich himself, further erode public confidence in government, and give the finance industry more access and influence at the highest levels of government worldwide.”
Josh Green of Bloomberg Businessweek wrote that, “For all the criticism directed his way, Geithner was the exceedingly rare example of the idea that you can be a talented, high-level regulator and public servant and exist entirely apart from Wall Street financial interests. That won’t be true any longer.”
Washington, of course, is awash with lobbyists of all kinds, spending literally billions of dollars to get government to do their bidding. Companies spend about $3.5 billlion annually on lobbying at the end of the last decade, a nearly 90 percent increase from 1999 after adjusting for inflation, according to political scientist Lee Drutman in his book, “The Business of America Is Lobbying.”
“A growing number of companies,” says Drutman, “became fully convinced that having a large-scale Washington presence was a good strategic decision.”
According to recent research, lobbying pays off in a major way. Research shows that the more a company spends on influence, the lower its effective tax rate and the higher its stock returns, compared with competitors.
A company called Strategas has developed an index to follow the stock performance of the 50 companies that lobbied the most the previous year. The index outperformed the rest of the market by 30 per cent.
Lobbying, lawyers, and government contractors have fueled the extraordinary prosperity of the Washington area, while the economy in the rest of the country has stagnated. During the past decade, the Washington region, including suburban Maryland and Virginia, added more than 21,000 households to the nation’s top 1 percent. No other metro area came close.
The Washington Post reports that, “The signs of the new Washington are everywhere, from the Tiffany & Co. store that Fairfax County development officials boast is the most profitable in the country to the new Tesla dealership in Tyson’s Corner.
“Every morning on the Beltway, contractors, lobbyists and some of the country’s highest-paid lawyers sit in the nation’s worst traffic. Sports talk radio crackles … with the latest ads from Deltek, a firm that advises companies on ‘capture strategies’ for winning government contracts.”
The revolving door keeps turning, and government keeps growing and keeps serving the interests of those who so generously finance the campaigns of both Democrats and Republicans so that no matter which party is in power, the special interests will have friends to call upon. Wall Street’s investment in politicians has certainly paid handsome dividends, as the bank bailout has made clear to all.
It is, as a result, not too difficult to understand why a private equity firm would hire a former Treasury Secretary with no experience in the field. It is business as usual, as business is now conducted.
In the case of Eric Cantor, whose campaign spent nearly $200,00 on steak dinners (more than his opponent’s entire campaign budget), his allegiance to Wall Street was a key ingredient in his defeat.
The winner, economics professor David Brat, declared, “Eric voted to bail out the big Wall Street banks in 2008. It is no coincidence that the same banks that received TARP bailout funds are also some of Cantor’s largest donors … All the investment banks in New York and Washington, those guys should have gone to jail. Instead of going to jail, they went on Eric’s Rolodex.”
Timothy Geithner was well rewarded by the revolving door. We will see whether Eric Cantor follows suit.