Extortion (16 page)

What about members of Congress who retire with leadership PAC money? Amazingly, they can continue to spend as they see fit, or they can even convert the funds to personal funds (after paying taxes on them). In 2012 the Federal Election Commission called on Congress to expand the ban on the personal use of political committee funds. “The Commission has seen a substantial number of instances where individuals with access to the funds received by political committees have used such funds to make unauthorized disbursements to pay for their own personal expenses,” the FEC’s legislative recommendation said.
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Don’t expect Congress to pass such a law anytime soon. It would mean less golf.

7

Trust Me

You’re Gonna Need to Pay Me

If we walk in the woods, we must feed the mosquitoes.

—
RALPH WALDO EMERSON

T
HERE IS ONE BIG DIFFERENCE
between the Permanent Political Class and the Mafia. In the world of organized crime, the bosses are permanently in opposition to law enforcement. They might use bribery or extortion to control judges, witnesses, and the police, but they are always on the side of crime. If a member of a Mafia family decides to cooperate with law enforcement and become an informant, the Mafia will do anything and everything to kill him. You cross the lines at your mortal peril.

For the Permanent Political Class, by contrast, line-crossing is an art form. The name of the game is to make money and to extract it from the private sector, but you can do that from both sides of the public-private divide. You don’t have to be a member of Congress—you can be a lobbyist or a lawyer. Better yet, you can pass back and forth between political office and this private-public sector of Washington, always working to extract wealth from various industries that fear the laws and regulations you help create.

In 2010 Congress passed, and President Obama signed, the Dodd-Frank Wall Street Reform and Consumer Protection Act. It was allegedly designed to provide new safeguards for financial markets by further regulating investment banks and other financial market participants. The trouble? No one can actually understand it. As one banker, publicly supportive of the law, told
The Economist
, when asked about the “Volcker Rule,” a centerpiece of Dodd-Frank, the rule is “unintelligible any way you read it.”
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Sheila Bair, the former head of the Federal Deposit Insurance Corporation (FDIC), has called the Volcker Rule “extraordinarily complex” and says, “Regulators should think hard about starting over again with a simple rule.”
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But that won’t happen for one simple reason: Dodd-Frank was
designed
to be indecipherable by mere mortals. For the Permanent Political Class, the regulatory minefield creates a lucrative opportunity for extortion.

Part of the problem is the law’s massive size. At 2,319 pages, it is dramatically larger than previous financial reform laws and approaches the monstrous length of the Obamacare bill. By comparison, the Federal Reserve Act of 1913, which established the Federal Reserve banking system and the single national currency, was 31 pages long. The Glass-Steagall Banking Act of 1933, which overhauled the entire banking system in light of hundreds of bank failures, was 37 pages long.

Dodd-Frank is also remarkably complex. Even seemingly basic principles are expanded and twisted to make compliance with them nearly impossible. For example, the so-called Volcker Rule, which grew out of a three-page memo from former Fed chairman Paul Volcker to President Obama in 2009, morphed into a 298-page description with 383 questions that break down into 1,420 subquestions.
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The cost of filling out the complex paperwork is enormous. The forms required by sections 404 and 406 of the law (which require the collection of systemic risk data from private funds, including hedge funds) will cost hedge funds approximately $100,000 to $150,000 to complete the first time, and then $40,000 a year after.
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The law was written to create more rules. As Jonathan Macey of the Yale Law School puts it, “Laws classically provide people with rules. Dodd Frank is not directed at people. It is an outline directed at bureaucrats and it instructs them to make still more regulations and to create more bureaucracies.”
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For example, the law requires 243 rules and sixty-seven studies by eleven different agencies.
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The law also requires the creation of multiple new government entities, including the Financial Stability Oversight Council (FSOC) and the Consumer Financial Protection Bureau (CFPB).
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It’s not that government officials and bureaucrats can’t make things simple. At the height of the financial crisis in 2008, government officials produced a simple two-page application for banks to use in applying for federal Troubled Asset Relief Program (TARP) money. It was “the model of simplicity,” with only four clear, concise bullet points. Federal officials used this document to lend nearly $50 billion to the biggest banks.
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When a true crisis arises and time is precious, Washington
can
cut to the chase.

Government bureaucrats and law-writers can make things simple, but apart from dire emergencies, they generally choose not to. Complexity is a useful and lucrative method of legal extortion for politicians because, as University of London economist Anthony G. Heyes puts it, “it is precisely the complex, opacity and user-unfriendliness which underpin the value of their expertise.” And that translates into “selling advice to those they previously regulated.”
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George LeMieux was appointed to the U.S. Senate to represent Florida in 2009 after Senator Mel Martinez stepped down. LeMieux jumped in quickly and saw immediately the complexity of a lot of bills. “Complexity always creates opportunities for those who know the details,” he told me. “I tried to read Dodd-Frank, and it was incomprehensible.”
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Consider, for example, how lucrative the indecipherable Dodd-Frank law has become for the members of the Permanent Political Class who actually wrote it.

Amy Friend was a chief aide to Senator Chris Dodd in crafting the Dodd-Frank financial reform bill and served as the chief counsel to the Senate Banking Committee. After the bill passed and became law, she left Capitol Hill and became a managing director at Promontory Financial Group, which describes itself as “a premier global financial services consulting firm.”
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This Washington-based consulting firm is headed up by many people like Friend—people who were once responsible for erecting or interpreting arcane financial regulations in public service and then joined the group, where they can charge high fees to help firms interpret and comply with these befuddling regulations. The firm is a “major power broker in Washington,” says
the
New York Times
, “helping Wall Street navigate an onslaught of new rules and regulatory scrutiny” (many of those rules having been written, of course, by those now working at Promontory). Banks complain about Promontory’s high fees, which can run $1,500 an hour. Eugene Ludwig, the former comptroller of the currency under Bill Clinton, reportedly makes $30 million a year running Promontory. He lives in one of the most expensive houses in Washington, a 13,000-square-foot home on a three-acre estate.
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When Ludwig announced that Amy Friend was joining his firm, he boasted about the fact that Friend had played a key role in shaping the Dodd-Frank bill and that at Promontory she would help clients with “the regulatory implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which, at 2,300 pages, is one of the most complex and wide-ranging overhauls of the financial regulatory framework in decades.”
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But Friend was just one of many who crafted the convoluted bill, left government, and now command large fees from firms trying to make sense of it. Daniel Meade was the chief counsel on the Financial Services Committee under Chairman Barney Frank (the Frank of Dodd-Frank). Meade left Capitol Hill for Hogan Lovells, a well-established lobbying firm. When Meade arrived, the firm Hogan Lovells announced that Meade was “a principal draftsperson of substantial portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.” The firm’s publicity explained that Meade would be “representing financial services entities and other entities impacted by the regulation of those entities in connection with a broad range of regulatory and transactional matters, including issues related to the Dodd-Frank Act.”
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It makes all the sense in the world: if you can’t understand a complex new legal regime, who better to help guide you than one of the people who drafted it? But think about it from the perspective of the congressional aide: your future wealth depends on crafting a complex bill.

Senator George LeMieux was surprised by the power that committee staff in particular wield on Capitol Hill. “I was stunned at how committee staff would address even senior senators.” That power came from their grasp of the details, which was not only a source of power but a future source of riches as well.
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One of the most confusing sections of the Dodd-Frank Act concerns options and commodity trading. In the months after the law passed, at least nine employees of the Commodity Futures Trading Commission (CFTC) who helped write that section and establish its regulatory provisions left for lucrative jobs, helping large firms figure out how to comply. They went to positions at JP Morgan Chase, Deutsche Bank, Nomura Securities, PricewaterhouseCoopers, and the white-collar criminal defense law firm Covington & Burling. These firms either are subject to the confusing Dodd-Frank rules or advise other firms on how to comply with them.
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It’s the perfect form of extortion: legal, obscure, lucrative, and impossible to avoid. Financial executives will pay just about anything to avoid legal vulnerability, especially when vulnerability can mean jail time. If they don’t understand what the rules are, they will pay someone who does. Little surprise that Harvey Pitt, the former head of the Securities and Exchange Commission, calls Dodd-Frank “the Lawyers’ and Lobbyists’ Full Employment Act.”
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Companies by and large want to comply with laws and regulations. Executives don’t want to pay fines, or worse, go to jail. Cass Sunstein served in the Obama administration as the administrator of the White House Office of Information and Regulatory Affairs. “As OIRA administrator, I often heard the following plea from the private sector: ‘Please, tell us what you want us to do!’ On many occasions, companies said that they were prepared to comply with the rules, and to do so in good faith, but they needed to know what, specifically, compliance entailed.” Sunstein is no free market libertarian. He is generally liberal, and as a colleague of the president back when Obama was a law professor at the University of Chicago, Sunstein was a known quantity to his boss. Yet even the liberal professor admits that “regulation is often confusing, inconsistent, redundant, and excessive.”
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On top of that, the vagueness of these laws provides opportunities for the government to investigate someone under a wide variety of statutes, even if it isn’t clear that the party committed a crime. Robert H. Jackson, Franklin Delano Roosevelt’s attorney general, warned his prosecutors that federal law books were “filled with a great assortment of crimes” and that a prosecutor “stands a fair chance of finding at least a technical violation of some act on the part of almost anyone.” And that was back when the number of laws and regulations on the books was a fraction of its current number. It’s always a temptation for a prosecutor to be “picking the man and then searching the law books, or putting investigators to work, to pin some offense on him.”
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John Allison recalls instances when his bank hired firms “filled with ex-regulators” to deal with complex regulations. The bank was especially interested in those who had “just left the government. We felt we had to hire certain consultants who had the contacts and relationships.”
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But of course there is no money for the Permanent Political Class in providing companies with simple rules to comply with the law. As Professor Joel Mintz, an authority on regulatory law at Nova Southeastern University, puts it, “Regulatory compliance is quite a different matter than compliance with traffic law.”
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Professor Anthony Heyes of the University of Ottawa’s Department of Economics agrees. “Many firms are unaware of which regulations apply to them, how and when to comply, of when waivers and deferrals might be available, of how to keep and disclose appropriate records in the manner, and of the plethora of unwritten rules and conventions governing the way the regulator likes to do business.”
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John Hofmeister, the former president of Shell Oil, saw how the process worked. “They deliberately write ambiguity into the law. It’s part of a career-building process. If you are a congressional staffer, you spend your career crafting complex legislative language. This equips you to leverage your postgovernment competence.” And complexity begets complexity. “The whole system builds on itself.”
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