Why we need — but won't get — real limits on bank influence-buying

During the 2008 election cycle, financial firms contributed $200 million to candidates. (The real number may be higher because substantial giving is partially concealed from the public, though probably not the candidate. For example, some fraction of the nearly $37 million given by homemakers and non-income-earners came from spouses of wealthy bankers, and candidates may be informed of the “real” source of such hard-to-trace funds): * Securities & investment firms: $152.3 million * Hedge funds: $10 million * Miscellaneous finance: $19.2 million * Commercial banks: another $9.9 million

Banks have been rewarded handsomely for their “generosity.” The TRILLIONS of dollars the U.S. Treasury and the Federal Reserve have given banks since last year have repaid banks' bribes campaign contributions many, many times over.

And I haven’t even yet mentioned the unspoken offer from banks to government officials who “regulate” them: Be kind to us, and we’ll reward you with a cushy, high-paid job after you leave “public service.” Here’s how Nobel Prize-winning economist Joe Stiglitz puts it:

Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation [for working one day a week!] in the 16 months before he joined the administration… “America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” he said. “Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”

Beyond the problem of implicit bribes to current regulators is the social pressure banks exert on legislators through lobbying by their former friends, colleagues and staffers. Banks have hired former Congressmen, staffers, government officials and bank regulators by the barrel:

Some lawmakers — including Sen. Chris Dodd (D-Conn.), the chairman of the Senate banking committee — have declined to disclose whether they have had contact with former aides now lobbying for the financial sector…

In the past year, top bailout recipients, from Goldman Sachs to Bank of America to JPMorgan Chase, have dispatched more than 100 past congressional staffers and ex-government officials to shape the bailouts to their liking. This crew of well-connected lobbyists includes ex-employees of the congressional committees on banking, finance, and commerce; one-time aides to Democratic and Republican leaders; former Treasury officials; and a past aide to Rahm Emanuel, now the White House chief of staff…

Goldman Sachs, which has more than 30 ex-government officials registered to lobby on its behalf, tapped one-time House Majority Leader Richard Gephardt (D-Mo.) to lobby his former colleagues in Congress on issues related to the Treasury Department’s Troubled Assets Relief Program. Goldman, which paid Gephardt’s firm $70,000 in the last quarter of 2008, received $10 billion in TARP funds. (As a counterparty to AIG’s disastrous credit default swaps, Goldman pocketed an additional $12.9 billion in bailout money given to the insurance firm.) Other insiders lobbying for Goldman include former SEC commissioner Richard Roberts and Faryar Shirzad, once a top economic aide to President George W. Bush.

Ex-staffers for at least 10 members of the Senate finance committee — including the committee’s chairman, Sen. Max Baucus (D-Mont.), and senior Republican member Sen. Charles Grassley (R-Iowa) — have lobbied lawmakers on behalf of big financial firms receiving billions of dollars of government assistance. And at least five members of the Senate banking committee have former aides lobbying Congress on financial matters. These include Dodd and ranking Republican Sen. Richard Shelby of Alabama.

The ubiquitous presence of these former collagues / newly wealthy lobbyists is an ever-present reminder to lawmakers of the pot of gold awaiting them at the end of the rainbow if they play ball with their future employers.

Which brings me (finally) to my point. Bloomberg today says that Washington is finally considering placing some limits on banks that have collectively received TRILLIONS in bailout funds:

For banks that need to deepen their reliance on government capital after the stress tests, officials may set limits on their dividends and political lobbying. While it’s unlikely to influence day-to-day operations, the government won’t be a “hands-off” investor and will take steps to ensure that management is “effective,” Bernanke told lawmakers yesterday.

“It’s obviously not our intention or desire to have long- term government ownership of banks,” Bernanke said at the congressional Joint Economic Committee. Still, he added that it would likely be a “few years” before banks can end their dependence on government capital.

Because Washington is corrupt beyond its ability to heal itself, talk of “limits on political lobbying” is merely public relations. Congress has no intention of cutting its members and staffers off from post-Washington riches. Congress may pass a law barring employees of bailout recipients from contributing to campaigns, but Congress would do so knowing the courts would likely judge the law an un-Constitutional infringement on free speech. And banks will undoubtedly continue employing former Washington insiders to lobby current Washington insiders.

The single most effective action regulators could take is to prohibit banks from hiring former lawmakers, regulators or Congressional staffers (or their spouses, children, etc.) and prohibit those government employees from working in the industry they regulated for at least five years after leaving public service. But don’t expect to see a real ban… precisely because it would be effective. If they write a law, they’ll add loopholes. For example, the limits may expire the minute a bank pays back its government aid. A law with such a loophole won’t constrain a Congressman who’s not planning an immediate retirement.

Posted by James on Wednesday, May 06, 2009