Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Wednesday, March 30, 2016

Campaign Funding in the US Presidential Elections and Conflicts of Interest: What the Financial Crisis Inquiry Commission (FCIC) Said in the Context of the 2008 Financial Crisis?

Ramesh S Arunachalam


We tend to have short memories and that is why I am writing this post as a series on the US Presidential Elections and its implications for political/electoral governance, transparency and accountability. Nothing better than trying to learn from live elections and I have always been enamoured by the US Presidential election process. Those of you who missed the first post may look at it - Electoral & Political Governance, Transparency and Financial Regulation: Why Potential Law-Makers Like Hillary Clinton Need to Release Their Wall-Street Speeches Urgently?. This post builds on the first one and touches aspects like campaign funding, conflict of interest and so on.


Recently, Bernie Sanders - who is competing for the democratic presidential nomination with Hillary Clinton - made a very strong statement about the campaign finance system and I quote from Independent[i]:

“Bernie Sanders has blasted as "corrupt and obscene" a $353,400-a-ticket fundraising dinner for Hillary Clinton featuring George and Amal Clooney. Amid ongoing claims that Ms Clinton has too many links to corporate and wealthy single donors, the Democrat hopeful is charging more than a third of a million dollars for two seats at the head table at a San Francisco fundraising event in April. In return, the donors will have the chance to dine with the presidential hopeful and her guests of honour – the Clooneys. The top-table tickets to the event cost eight times the average annual income in America, which was $44,570 last year. The following night, guests are invited to a dinner in the Clooneys' Los Angeles home. Each ticket to that event will cost $33,400 (£23,580).  ...

Speaking to CNN, Mr Sanders said it was ‘obscene that Secretary Clinton keeps going to big-money people to fund her campaign.’ Ms Clinton's main rival for the Democratic presidential nomination made it clear his ire was reserved for the super-rich individuals and corporations buying up seats at her fundraising events, rather than the celebrity hosts. ‘I have a lot of respect for George Clooney. He’s a great actor. I like him,’ Mr Sanders said. ‘But this is the problem with American politics. It’s not a criticism of Clooney. It’s a criticism of a corrupt campaign finance system, where big money interests... have undue influence on the political process.’”[ii]


While I would NOT call Hillary’s strategy as obscene, I would however like to emphasize the fact that when someone pays so much money to share a table with Hillary Clinton, George Clooney and Amal Clooney[iii], there could be conflicts of interest[iv] at play here. As all of us would agree, typically, there is no free lunch and therefore, people who buy those seats could expect favours from Hillary Clinton, if she were to become the President of the United States. Please note the use of the word could, which is why such situations are better avoided and for illustrative purposes, I quote from the Final Report[v] of the Financial Crisis Inquiry Commission which talks about CAMPAIGN FUNDING, LOBBYING and the 2008 Financial Crisis. You would find it very interesting!


Talking about Fannie and Freddie, the FCIC final report (Dated January 2011 and Pursuant to Public Law 111-21) notes,


“Fannie and Freddie accumulated political clout because they depended on federal subsidies and an implicit government guarantee, and because they had to deal with regulators, affordable housing goals, and capital standards imposed by Congress and HUD. From 1999 to 2008, the two reported spending more than $164 million on lobbying, and their employees and political action committees contributed $15 million to federal election campaigns.[vi]” (FCIC Report)

Please note the amounts that Fannie and Freddie spent on lobbying and the amounts contributed by their employees and political action committees (PACS) to the federal election process. That is not all. Read on and I quote from the FCIC report...

“The ‘Fannie and Freddie political machine resisted any meaningful regulation using highly improper tactics,’ Falcon, who regulated them from 1999 to 2005, testified. “OFHEO was constantly subjected to malicious political attacks and efforts of intimidation.”[vii] James Lockhart, the director of OFHEO and its successor, the Federal Housing Finance Agency, from 2006 through 2009, testified that he argued for reform from the moment he became director and that the companies were “allowed to be . . . so politically strong that for many years they resisted the very legislation that might have saved them.”[viii] Former HUD secretary Mel Martinez described to the FCIC “the whole army of lobbyists that continually paraded in a bipartisan fashion through my offices. . . . It’s pretty amazing the number of people that were in their employ.”[ix] (FCIC Report)

That is indeed sad because what Fannie and Freddie did was akin to cutting a big branch of tree while sitting at the edge. They had to fall and there was no other way...and their political clout (acquired through lobbying and election support to candidates) meant that they resisted the very legislation that could have ironically saved them. Sadly, the “invisible hand” that was to regulate them was never visible at all, let alone act when something went wrong. Conflicts of interest that were at play were indeed very powerful...it seems...

OK, let us move on and look deeper into the FCIC report. As the report argues,

“In the spring of 1996, after years of opposing repeal of Glass-Steagall, the Securities Industry Association—the trade organization of Wall Street firms such as Goldman Sachs and Merrill Lynch—changed course. Because restrictions on banks had been slowly removed during the previous decade, banks already had beachheads in securities and insurance. Despite numerous lawsuits against the Fed and the OCC, securities firms and insurance companies could not stop this piecemeal process of deregulation through agency rulings.[x] Edward Yingling, the CEO of the American Bankers Association (a lobbying organization), said, ‘Because we had knocked so many holes in the walls separating commercial and investment banking and insurance, we were able to aggressively enter their businesses—in some cases more aggressively than they could enter ours. So first the securities industry, then the insurance companies, and finally the agents came over and said let’s negotiate a deal and work together.’[xi]

“In 1998, Citicorp forced the issue by seeking a merger with the insurance giant Travelers to form Citigroup. The Fed approved it, citing a technical exemption to the Bank Holding Company Act,[xii] but Citigroup would have to divest itself of many Travelers assets within five years unless the laws were changed. Congress had to make a decision: Was it prepared to break up the nation’s largest financial firm? Was it time to repeal the Glass-Steagall Act, once and for all?

As Congress began fashioning legislation, the banks were close at hand. In 1999, the financial sector spent $187 million lobbying at the federal level, and individuals and political action committees (PACs) in the sector donated $202 million to federal election campaigns in the 2000 election cycle. FROM 1999 THROUGH 2008, FEDERAL LOBBYING BY THE FINANCIAL SECTOR REACHED $2.7 BILLION; CAMPAIGN DONATIONS FROM INDIVIDUALS AND PACS TOPPED $1 BILLION.[xiii]

In November 1999, Congress passed and President Clinton signed the Gramm-Leach-Bliley Act (GLBA), which lifted most of the remaining Glass-Steagall-era restrictions. The new law embodied many of the measures Treasury had previously advocated.[xiv] The New York Times reported that Citigroup CEO Sandy Weill hung in his office “a hunk of wood—at least 4 feet wide—etched with his portrait and the words ‘The Shatterer of Glass-Steagall.’”[xv] (FCIC Report)

Note the fact that the FCIC, which was the statutory commission inquiring into the 2008 financial crisis strongly highlighted the FACT that PACS and Lobbying indeed played a HUGE role in the shattering of Glass-Steagall-era restrictions.  Again, it was the same old story...and conflicts of interest were at play, according to the FCIC report!

So, what happened in the end as per the FCIC report? Read on and I quote from the FCIC report:

“Now, as long as bank holding companies satisfied certain safety and soundness conditions, they could underwrite and sell banking, securities, and insurance products and services. Their securities affiliates were no longer bound by the Fed’s 25% limit—their primary regulator, the SEC, set their only boundaries. Supporters of the legislation argued that the new holding companies would be more profitable (due to economies of scale and scope), safer (through a broader diversification of risks), more useful to consumers (thanks to the convenience of one-stop shopping for financial services), and more competitive with large foreign banks, which already offered loans, securities, and insurance products. The legislation’s opponents warned that allowing banks to combine with securities firms would promote excessive speculation and could trigger a crisis like the crash of 1929. John Reed, former co-CEO of Citigroup, acknowledged to the FCIC that, in hindsight, “the compartmentalization that was created by Glass-Steagall would be a positive factor,” making less likely a “catastrophic failure” of the financial system.[xvi]

To win the securities industry’s support, the new law left in place two exceptions that let securities firms own thrifts and industrial loan companies, a type of depository institution with stricter limits on its activities. Through them, securities firms could access FDIC-insured deposits without supervision by the Fed. Some securities firms immediately expanded their industrial loan company and thrift subsidiaries. Merrill’s industrial loan company grew from less than $1 billion in assets in 1998 to $4 billion in 1999, and to $78 billion in 2007. Lehman’s thrift grew from $88 million in 1998 to $3 billion in 1999, and its assets rose as high as $24 billion in 2005.[xvii]

For institutions regulated by the Fed, the new law also established a hybrid regulatory structure known colloquially as “Fed-Lite.” The Fed supervised financial holding companies as a whole, looking only for risks that cut across the various subsidiaries owned by the holding company. To avoid duplicating other regulators’ work, the Fed was required to rely “to the fullest extent possible” on examinations and reports of those agencies regarding subsidiaries of the holding company, including banks, securities firms, and insurance companies. The expressed intent of Fed-Lite was to eliminate excessive or duplicative regulation.[xviii] However, Fed Chairman Ben Bernanke told the FCIC that Fed-Lite “made it difficult for any single regulator to reliably see the whole picture of activities and risks of large, complex banking institutions.”[xix] Indeed, the regulators, including the Fed, would fail to identify excessive risks and unsound practices building up in nonbank subsidiaries of financial holding companies such as Citigroup and Wachovia.[xx]

The convergence of banks and securities firms also undermined the supportive relationship between banking and securities markets that Fed Chairman Greenspan had considered a source of stability. He compared it to a “spare tire”: if large commercial banks ran into trouble, their large customers could borrow from investment banks and others in the capital markets; if those markets froze, banks could lend using their deposits. After 1990, securitized mortgage lending provided another source of credit to home buyers and other borrowers that softened a steep decline in lending by thrifts and banks. The system’s resilience following the crisis in Asian financial markets in the late 1990s further proved his point, Greenspan said.[xxi]

The new regime encouraged growth and consolidation within and across banking, securities, and insurance. The bank-centered financial holding companies such as Citigroup, JP Morgan, and Bank of America could compete directly with the “big five” investment banks—Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns—in securitization, stock and bond underwriting, loan syndication, and trading in over-the-counter (OTC) derivatives. The biggest bank holding companies became major players in investment banking. The strategies of the largest commercial banks and their holding companies came to more closely resemble the strategies of investment banks. Each had advantages: commercial banks enjoyed greater access to insured deposits, and the investment banks enjoyed less regulation. Both prospered from the late 1990s until the outbreak of the financial crisis in 2007. However, Greenspan’s “spare tire” that had helped make the system less vulnerable would be gone when the financial crisis emerged—all the wheels of the system would be spinning on the same axle.”

Sadly, we are still suffering from the impact of the 2008 financial crisis that affected the United States primarily and thereafter impacted several other countries globally. And clearly as the FCIC report strongly argues, ‘the financial crisis in the United States was (primarily) caused by lax and laissez-faire regulation coupled with banning of regulation (through legislation) resulting from regular and continuous lobbying as well as huge contributions made by the financial sector to PACS of potential presidential candidates! Please read the quote from the FCIC report below:

“We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets. The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of financial institutions to effectively police themselves. More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe. This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets. In addition, the government permitted financial firms to pick their preferred regulators in what became a race to the weakest supervisor. ...

Changes in the regulatory system occurred in many instances as financial markets evolved. But as the report will show, the financial industry itself played a key role in weakening regulatory constraints on institutions, markets, and products. It did not surprise the Commission that an industry of such wealth and power would exert pressure on policy makers and regulators. From 1999 to 2008 the financial sector expended $2.7 billion in reported federal lobbying expenses; individuals and political action committees in the sector made more than $1 billion in campaign contributions. What troubled us was the extent to which the nation was deprived of the necessary strength and independence of the oversight necessary to safeguard financial stability.” (FCIC Report)

And this is what happens when there is a campaign financing system ridden with conflicts of interest – as I said before, there is no free lunch. If large business interests and/or people with vested interests contribute to the PACS and/or the campaign funding, then, they are bound to extract their pound of flesh surely. And the same argument holds good, when a ‘couple’ pay close to a 3rd of a million dollars to share a seat with two celebrities and a potential presidential candidate, as part of the candidate’s fund raising process. Without any doubt, conflicts of interest are indeed being created by a campaign financing strategy that is fundamentally FLAWED and we all saw from the FCIC report[xxii] on what happens when these conflicts of interest are at play! There can be no two doubts about the fact that Hillary Clinton’s fund raising strategy (in using George and Amal Clooney as mentioned earlier in this article) is also seriously UNSOUND. And furthermore, it is my humble opinion that such fund raising strategies are better avoided as they create UNNCESSARY CONFLICTS OF INTEREST, which are better avoided, if the candidates desire to be perceived as ‘transparent candidates’ by the American public. I rest my case...


[iii] I like George Clooney as an actor and hugely respect the kind of work he has done for the UN and the like. I also admire Amal Clooney’s track record of wonderful human rights work.
[iv] A ‘conflict of interest’ is a conflict between the duty, roles and responsibilities and private interests of any official, which could improperly and unfairly influence the performance of his/her official roles and responsibilities. Private interests would include financial, pecuniary and other interests which generate a direct personal benefit to the public official as also personal affiliations, associations, and family ties, that could (practically be considered as likely to) improperly and unfairly influence the official’s performance of his/her roles, duties and responsibilities. Defined in this way, conflict of interest has the potential to undermine the proper functioning of institutions (public, private, not-for-profit), governments and the like by: a) Weakening adherence by officials to the ideals of impartiality, objectivity, fairness and legitimacy, in decision-making; and b) Distorting the rule of law, the development and application of policy, the functioning of organizations and markets, as well as the allocation of resources. 
[vi] Senate Lobbying Disclosure Act Database (www.senate.gov/legislative/Public_Disclosure/LDA_reports.htm); figures on employees and PACs compiled by the Center for Responsive Politics from Federal Elections Commission data.
[vii] Falcon, written testimony for the FCIC, April 9, 2010, p. 5.
[viii] James Lockhart, written testimony for the FCIC, Hearing on Subprime Lending and Securitization and Government-Sponsored Enterprises (GSEs), day 3, session 2: Office of Federal Housing Enterprise Oversight, pp. 4–8, 17 (quotation).
[ix] Senator Mel Martinez, interview by FCIC, September 28, 2010.
[x] Securities Industry Association v. Board of Governors of the Federal Reserve System, 627 F.Supp. 695 (D.D.C. 1986); Kathleen Day, “Reinventing the Bank; With Depression-Era Law about to Be Rewritten, the Future Remains Unclear,” Washington Post, October 31, 1999.
[xi] Edward Yingling, quoted in “The Making of a Law,” ABA Banking Journal, December 1999.
[xii] Senate Lobbying Disclosure Act Database (www.senate.gov/legislative/Public_Disclosure/LDA_reports.htm); figures on employees and PACs compiled by the Center for Responsive Politics from Federal Elections Commission data.
[xiii] FCIC staff computations based on data from the Center for Responsive Politics. “Financial sector” here includes insurance companies, commercial banks, securities and investment firms, finance and credit companies, accountants, savings and loan institutions, credit unions, and mortgage bankers and brokers.
[xiv] U.S. Department of the Treasury, Modernizing the Financial System (February 1991); Fed Chairman Alan Greenspan, “H.R. 10, the Financial Services Competitiveness Act of 1997,” testimony before the House Committee on Banking and Financial Services, 105th Cong., 1st sess., May 22, 1997.
[xv] Katrina Brooker, “Citi’s Creator, Alone with His Regrets,” New York Times, January 2, 2010 -  http://www.nytimes.com/2010/01/03/business/economy/03weill.html?_r=0
[xvi] John Reed, interview by FCIC, March 24, 2010.
[xvii] FDIC Institution Directory; SNL Financial.
[xviii] Fed Governor Laurence H. Meyer, “The Implications of Financial Modernization Legislation for Bank Supervision,” remarks at the Symposium on Financial Modernization Legislation, sponsored by Women in Housing and Finance, Washington, D.C., December 15, 1999.
[xix] Ben S. Bernanke, written testimony before the FCIC, Hearing on Too Big to Fail: Expectations and Impact of Extraordinary Government Intervention and the Role of Systemic Risk in the Financial Crisis, day 1, session 1: The Federal Reserve, September 2, 2010, p. 14.
[xx] Patricia A. McCoy et al., “Systemic Risk through Securitization: The Result of Deregulation and Regulatory Failure,” Connecticut Law Review 41 (2009): 1345–47, 1353–55.
[xxi] Fed Chairman Alan Greenspan, “Lessons from the Global Crises,” remarks before the World Bank Group and the International Monetary Fund, Program of Seminars, Washington, DC, September 27, 1999.
[xxii] As an illustration, I gave an example from the financial sector. Media, fossil fuel companies and other large corporations are no exceptions to the conflict of interest phenomenon.