Finance’s Revolving Door: Perfected or Passe?
Washington’s revolving door is legendary. Everyone knows the connections between lobbyists, members of Congress, staffers, and favored firms. They’ve been mapped in health care, oil, agriculture, and many other industries. Finance journalists chronicle a superclass shuttling from beltway to bourse and back. Yves Smith and Matt Taibbi post on “sleazewatches” and $2,200-a-ticket conferences where the regulated schmooze with the regulators.
But what if the revolving door is the wrong metaphor? What if, instead, there has been a fusion of state and corporate authority in the banking sector? What if Peter Orszag never left the government when he dropped the OMB Directorship to make at least ten times as much as a vice chairman at Citibank? Gabriel Sherman suggests as much when he describes a lucrative cursus honorum for DC elites:
The close alliance among Wall Street and the economics departments of the major universities and the West Wing of the White House is the military-industrial complex of our time. That it has an effect on our governance is beyond question. How pernicious and distorting these effects are, how cynical many of its participants might be, and what might be done to change the system are being fiercely debated in Washington. In fact, to the layperson, the most surprising thing might be the degree to which people like Peter Orszag see the government and Wall Street as, essentially, parts of the same industry.
Conservative Kansas City Fed President Thomas Hoenig has already argued that “big banks like Bank of America Corp and Citigroup Inc should be reclassified as government-sponsored entities.” Texas Republican Randy Neugebauer has called eight banks “TSEs,” or taxpayer-supported entities. And at a recent conference on macroeconomics, Steve Randy Waldman made a legal point fundamental to all the economic dilemmas discussed.
Asked about the most important story “missing from the headlines” of the financial crisis, Waldman concluded that few grasped the startling implications of an institution growing “too big to fail” (TBTF). Such entities may be legally distinct from the government, but everyone knows that Uncle Sam will step in to save them if they run into trouble. Waldman argued that a bank like Goldman Sachs stands in the same relation to the federal government as the “variable interest entities” (VIEs), special purpose vehicles, and conduits set up by Citibank before the crisis stood in relation to Citibank. Those entities were “off balance sheet” legally, but everyone knew that Citibank would ultimately support them. As Jennifer Taub explains, this allowed Citi to take on even more leverage, given that its obligations to the conduits were hidden or disclaimed:
Citigroup’s VIEs were . . . highlighted during Financial Crisis Inquiry Commission hearings. Citi had set up some off balance sheet entities and sold mortgages bonds and other assets to them. The funding to buy the assets came from investors who bought short-term debt securities (commercial paper) of the VIEs. In order to help attract investors, Citi’s traders gave investors a “liquidity put.” This guarantee required Citi to buy back the securities at face value if they became illiquid. As a result, in 2007, Citi had to buy back $25 billion worth of the commercial paper at face value when it was trading at about 33 cents on the dollar. This cost the firm $14 billion. Even though Citi had offered this guarantee, the entities were off-balance-sheet when created.
Similarly, as Waldman notes, a Treasury Department and Fed committed to endless financial “deepening” (and stocked full of big bank alums) will not let the big banks fail.
So Goldman, Citi, et al. are the Fannie Mae’s of our day, routing around government pay scales despite the fact that government backing is crucial to their business models. Just as Lyndon Johnson took Fannie Mae off the government balance sheet in 1968 to avoid the budgetary consequences of direct government adoption of mortgage risk, today’s Treasury and Fed are permitting ever more consolidation in the banking sector without requiring either the capital or the real financial support that that level of risk-taking requires. It’s not that far of a leap from OMB to Citi after all.
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