Sidenote: How Political Capture Happens
The corrupt ABACUS fund that Goldman Sachs created for the hedge fund Paulson & Co. keeps creeping back into my reading. I mentioned it as an example of how the big banks were at the center of the financial crisis, though the “Lehman Bro,” Paul Krugman seems to think the big banks are A-Okay.
Sidenote: Matt Taibbi writing in Rolling Stone agrees with me.
Next I read the behemoth of an anti-Bernie screed that suddenly appeared on Medium the day before the New York primary. It was presented as the story of one woman’s journey from potential Bernie supporter to “I can barely stand his face,” because he is so evil, sexist and corrupt.
It turns out the author is a corporate lawyer who makes her living defending banks and hedge funds from the SEC. She was intimately involved in the Abacus case.
Finally, Matt Browner-Hamlin, somebody who understands the crash at all levels, pointed me to this Pro Publica piece examining the inner-workings of the SEC.
The SEC was reluctant to bring charges against anybody at Paulson & Co. and only a mid-level staffer at Goldman, because the lawyer in charge was tired of prosecuting “good people.”
The “Fabulous Fab,” Fabrice Tourre was an easy scapegoat. What’s fascinating is that the SEC didn’t even interview the high-level Goldman executives. The folks at Paulson were asked to hand over relevant documents, but not subpoenaed. It was voluntary!
The real insight into how this political capture system works though is that the SEC didn’t want to investigate anybody they didn’t have hard evidence on — read: Emails.
As the one Quixotic lawyer at the SEC, James Kidney, who wanted to widen the case argued, this was ludicrous given that these high-level executives were too crafty to be bragging on their Blackberry about ripping off investors. When sensitive issues arose over Email they wrote, “LDL.” That means “Let’s Discuss Live.” His boss said there was no point interviewing these guys, because they already knew what they would say. Great investigative work.
The story all this tells isn’t simply about incompetence at the SEC. It’s a window into how these systems work, how corrupt behavior is such a part of the DNA that it’s impossible to find the real smoking gun.
There isn’t one moment of conspiracy where old white men sat around smoking cigars and outlining their plan to create a rigged investment fund and lie to the investors on the other side of the bet. There certainly are no emails. It’s ingrained.
It’s naive to think that a single political contribution or revolving door between the public and private sector is the cause of the SEC going soft on Goldman. It’s even more naive to think it all doesn’t add up to an environment where the big banks (or any big industry) have “captured” and controlled the government institutions that are supposed to be investigating their actions.
Jesse Eisenger explains the summation of the problem by the longtime SEC lawyer Kindey:
In his view, regulatory capture is a psychological process in which officials become increasingly gun shy in the face of criticism from their bosses, Congress, and the industry the agency is supposed to oversee. Leads aren’t pursued. Cases are never opened. Wall Street executives are not forced to explain their actions.
I’m with Trevor Timm, who sees Hillary Clinton as a barometer of progressive politics and their relationship with big money:
Democrats have a decision to make: do they think money in politics is a corrupting force that influences the decisions made by elected officials, or not?
We do have a decision to make. And as long as we refuse to act without a smoking gun we are failing this test. Big money and big companies will continue to influence every sector of government and the quid pro quo that exists will either simply be understood or LDL.
I plan to develop this note into a more comprehensive piece about political (or “regulatory) capture and the 2016 election. Please leave notes on this or a “Response” if you have anything to add. Disagreement also welcome.
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