Inside Job (44 page)

The new deputy secretary of state for management and resources was Thomas Nides, brought over from Morgan Stanley, where he had been chief administrative officer. I had met him there once,
introduced by Laura Tyson after our final conversation. Ah, yes, he said, he knew Laura from the Clinton administration; he had been in the government too, “before I sold out.” Yes, he
really did say that to me.

Obama’s—or Hillary Clinton’s—undersecretary of state for economic affairs was Robert Hormats, previously vice chairman of Goldman Sachs International. Richard Holbrooke,
the State Department’s special envoy to Afghanistan and Pakistan until his death in 2010, had been on the board of directors of AIG and AIG Financial Products. Tom Donilon, Fannie Mae’s
chief lobbyist between 1999 and 2005, became deputy National Security Advisor in 2009 and then, in late 2010, the National Security Advisor. The flow in the reverse direction began soon afterwards;
Peter Orszag, Obama’s first head of the Office of Management and Budget, resigned in 2010 to become vice chairman of Citigroup.

The fears immediately prompted by this pattern of appointments have proved fully justified. From the outset, Obama opposed serious reform of corporate governance, breaking up the largest banks,
or closing legal loopholes. It is still not per se illegal, for example, to create and sell a security for the purpose of betting on its failure. Obama also opposed efforts to reform or control
financial industry compensation—even for firms dependent upon US government aid, as almost all of them were in the immediate aftermath of the crisis. There was a long period of total
inaction, followed by a weak and ridiculously complicated reform bill (Dodd-Frank). There has been almost no significant action on the foreclosure crisis, and the White House played little or no
role in the investigations undertaken by the Senate Permanent Subcommittee on Investigations and the Financial Crisis Inquiry
Commission. In fact, the government deliberately
kept the FCIC’s budget to a mere $6 million, sharply limited its subpoena power, and scheduled its report to appear only after the 2010 midterm elections.

Most tellingly, the new Justice Department’s complete lack of interest in prosecuting banks and bankers soon became painfully obvious. White-collar and financial crimes were given low
priority, and the administration chose not to appoint a special prosecutor, or create a task force, to investigate and prosecute major crimes related to the bubble and crisis. Investigations
against Countrywide, Angelo Mozilo, AIG, Joseph Cassano, and others were dropped. The few financial crime cases brought forward, such as those involving Wachovia’s alleged bid rigging and
money laundering, were settled with deferred prosecution agreements and fines. As a consequence, as of early 2012 there still had not been a single crisis-related criminal prosecution, of either a
firm or an individual senior financial executive, by the Obama administration—literally zero.

The SEC has brought only a handful of civil cases, ending in mostly trivial fines, with neither firms nor individuals required to admit any wrongdoing. In not a single case has an individual
executive been required to pay more than a tiny fraction of either his net worth or his gains from the bubble.

In fact, when a few courageous state attorneys general, particularly Eric Schneiderman of New York, tried to get just a little tough with the banks in 2011 (in several civil cases), the Obama
administration pressured them to stop. Senior Obama officials and their proxies, including the secretary of housing and urban development, called Schneiderman directly and told him that he should
accept the sweetheart deal that the government favoured, whose terms included surrendering all future rights to sue the banks for fraud.

But then came the Occupy movement, a
60 Minutes
two-part television investigation in December 2011 on the lack of criminal prosecutions, and, above all, a US presidential election year in
2012. So, suddenly, four years after the crisis, in his January 2012 State of the Union address, President Obama decided to announce a national-local
task force focused on
financial crime, and that New York state attorney general Eric Schneiderman would co-chair it. The other co-chair, however, is Lanny Breuer, the same head of the same criminal division that
hadn’t brought any cases for four years. The task force was assigned a total of ten (yes, ten) FBI agents, and when fully staffed will have a grand total of fifty-five employees.

Shortly afterwards, we saw the predictable political results. Three Credit Suisse traders were arrested for a trivial fraud allegedly committed in 2007, and which victimized Credit Suisse rather
than investors or homeowners. Then the state foreclosure cases were settled for $26 billion. Less than a million people who have lost their homes will receive cheques averaging $2,000 each. Another
million will receive some degree of mortgage relief. Over twenty million others whose mortgages are underwater, or who have lost their houses to bank repossession, will receive nothing. As of this
writing, there have still been no arrests or indictments either of major firms or senior executives related to causing the bubble, the crisis, or subsequent foreclosure abuses.

Obama has been similarly inert with regard to financial compensation, at either the corporate or individual level, even as foreign governments took action. In 2009, Britain enacted a 50 percent
tax on banking bonuses. Then in September 2009 Christine Lagarde (then France’s finance minister) and six other European finance ministers published a joint letter in the
Financial
Times
calling for the G20 nations to enact strong measures to bring financial compensation under control, arguing that “the bonus culture must end.” Most of the G20 nations did in
fact adopt compensation controls, including mandatory clawbacks of bonuses when losses occur subsequently. The Obama administration had no comment. Later, in 2010, the Federal Reserve and the SEC
issued regulations, but they were exceedingly weak and little has changed.

In contrast, in 2012, such clawbacks were in fact implemented in Europe, forcing senior executives of Barclays, Lloyds, and several other European banks to surrender millions of dollars each in
prior bonus payments.

Thus far there have been no executive bonus clawbacks by regulators in the US. At both corporate and industry levels, the same major conflicts of interest remain embedded
in the financial system. Accounting firms performing audits are still paid by the firms they are supposed to audit. Rating agencies are still paid by the issuers of securities. Traders, executives,
and members of boards of directors still receive large amounts of cash relative to stock.

In short, the Obama administration’s policies toward the financial sector are nearly indistinguishable from those of its predecessors, regardless of political party. What happened
here?

First, the Democratic Party has changed—not so much its popular base, but its funding sources. For most of the twentieth century, and certainly from the Depression through the 1970s, the
Democrats were reliably the party of unions, of working families, and the poor, while the Republicans were reliably the party of business. That divide was dramatized many times during the Great
Depression, but it endured for decades afterwards. It showed in 1962, in John F. Kennedy’s confrontation with the steel industry, whose major firms often behaved like a cartel. The Kennedy
administration had brokered a labour agreement with the steel unions and was shocked when the companies immediately increased steel prices together, even though Kennedy’s agreement had kept
wage costs down. Kennedy held a brief, blistering press conference that forced the companies to back down. The punch line actually drew applause from the reporters:

But that was the Democratic Party of the past. In the new Democratic Party, when President Obama hosts a White House State Dinner in January 2011 for Hu Jintao, the president of China, he
invites Lloyd Blankfein and Jamie Dimon.
¹³
In fact, Mr Blankfein had visited the
White House ten times as of early 2011,
including several times during the period that his firm had been charged with fraud by the SEC.

The subordination of mainstream Democrats to the financial oligarchy’s agenda first became apparent during the Clinton administration, whose policies, as we have seen, were sharply more
favourable towards the wealthy and the financial services sector than those of any Democratic administration in the last century. That the control of the oligarchy became even greater during the
Bush administration goes without saying.

But what is perhaps most revealing is that Obama continued in Bush’s footsteps, even though he had an unprecedented opportunity to change course. How to explain this?

AMERICA HAS EXPERIENCED
a profound realignment of its politics over the last generation, driven by a combination of globalization, American economic
decline, and the rising use of money to shape American politics and government policy. The core of this realignment is that the two political parties now compete for money, while colluding to hide
this fact. They provide the appearance, and often the reality, of fierce partisan conflict on social and “values” issues, whereas on the issues of critical concern to the financial
sector and America’s economic oligarchy, their actions are almost identical. We have, in short, a
political duopoly
—a cartel formed by the two parties that, between them, control
all of American politics.

At first glance, the suggestion that both parties are colluding and under the influence of a single oligarchy seems absurd. There are red states and blue states; the two parties are viciously
polarized. And there is real political conflict in America, especially on social issues that matter to the two parties’ bases—abortion, gay marriage, sex education versus religion in
schools, creationism and evolution, guaranteed-health-services-as-socialism, taxes-and-government-as-evil, gun control,
welfare, drug policy, immigration, environmental
policy, the reality of global warming. These are very real, very important issues; and on these issues, each political party can credibly tell its base that defeat would mean real, painful
losses.

But that is exactly the point
. It’s a brilliant strategy. These social and “values” conflicts serve excellently to divide and distract people who should, and perhaps
otherwise
would
, be dangerously united in feeling that they were being raped by their CEOs, their bankers, their elected leaders, and the political establishment. Thus, each party can
continue to command the grudging support of people who fear that if the other side won, they would lose something important, which leaves the two parties free to collude on the most important thing
to both of them—money.

Of course, not everyone likes this new arrangement. Even many wealthy people and some major industries are disturbed, and even directly harmed, by this descent into political corruption,
financial instability, and economic decline. Information technology, both in Silicon Valley start-ups and major firms, is one example, and it is hardly alone; many industries suffered as a result
of the crisis, and continue to do so. But for the most part, even these people and groups dare not resist, or find it not in their interest to do so. The wealthy, and the businesses they own and
run, depend upon access to the increasingly separate, private financial system operated for the wealthy by the big banks, hedge funds, and private equity firms. Functions such as private banking,
wealth management, estate and trust planning, tax minimization, mergers and acquisitions, initial public offerings, and securities issuance are now dominated by a small number of large financial
firms. Moreover, in some regards, such as individual taxation, the interests of senior executives in all industries are aligned with those who run the financial sector. And successful individuals
of conscience are not a concentrated, naturally cohesive industry, whereas finance and the ultrarich
are
, so it’s not really a contest.

Consequently the rational decision is to adjust, rather than try to reform the system. This is particularly true of high technology, which is
the only other industry whose
wealth and power could potentially rival the financial sector’s.

Consider, for example, the political and lobbying interests of Apple, a firm correctly regarded as a remarkable testament to American high technology. Apple engages in no manufacturing; its
manufacturing contractors are Taiwanese-owned companies whose headquarters are in Taiwan, but most of whose operations and employees are in China. (At least Apple still
designs
its own
products; many American electronics companies don’t anymore.) These firms, in turn, use Taiwanese and Chinese engineers and managers, predominantly Chinese manual labour (their factories are
in China), and a combination of Japanese, German, Taiwanese, and Chinese capital equipment.

For Apple and others like it, this outsourcing decision is entirely rational; but its economic and political implications are enormous. Apple has approximately 70,000 employees worldwide. Just
one of Apple’s Taiwanese-Chinese manufacturing contractors, Foxconn, has 1.3
million
employees. While perhaps three-quarters of them are relatively unskilled manufacturing workers,
several hundred thousand of them are engineers, managers, accountants, and other professional employees. Moreover, the technology level of Foxconn’s operations (and of Chinese manufacturing
generally) is rising rapidly. In 2011 Foxconn announced that due to labour shortages and increasing demand, it was purchasing 300,000
robots
for its Chinese factories. The process of
selecting, installing, programming, and maintaining those robots will require a large number of highly skilled employees, almost none of them American.