Evidence of the revolving door between Wall Street and the federal government produces two seemingly contradictory reactions: outrage and indifference. Take the reports that President Obama is considering JPMorgan Chase (JPM) exec Bill Daley as his new chief of staff.
On the one hand, big whup. Corporate honchos have been going into public service for decades, just as former government officials routinely cash in by going to work for companies they once dealt with as legislators or regulators. On the other, are you kidding me?
Fine, such round-trips have a distinguished history in finance -- and not always for the worse. Joseph Kennedy, a former bootlegger who later made millions on Wall Street, did a good job overseeing the securities industry after FDR appointed him in 1934 as the first chairman of the SEC.
More recently -- and regrettably, for advocates of financial reform -- Obama of course tapped former Federal Reserve Bank of New York chief Tim Geithner to lead the Treasury Department, while ex-Goldman Sachs (GS) chief Henry Paulson headed the same agency for the Bush administration. Another Goldman alum, Robert Rubin, burnished his legend running the Treasury under Bill Clinton and later became vice chairman at Citigroup (C) after leaving government. And this year alone we've seen former Obama administration official Peter Orzag alighting at Citi, while ex-New York Fed regulator Theo Lubke and former New York Attorney General's office and SEC staffer David Markowitz both joined Goldman.
Also spinning through the door are financial industry lobbyists. Goldman's top fixer is Faryar Shirzad, who was a top national security and economics adviser for President Bush, just to name one example. Daley, who co-chaired Obama's inauguration, parlayed his job as Commerce Secretary under Clinton into senior positions at Evercore Capital Partners, a leading private equity firm, and at JPMorgan in the bank's government relations unit.
This is SOP. As of May 2009, some 243 lobbyists working for six big banks and their trade associations were former federal government employees, according to the SEIU, a labor union. Of these, 202 worked in Congress, mostly as aides to lawmakers, while the rest were in the White House, Treasury or another government agency.
For all the talk of "Government Sachs," it's worth noting that financial firms are in some ways less wired into government than other industries (click on adjoining chart, courtesy of the Center for Responsive Politics, to expand). But because Wall Street firms are too big to fail and because financial policy has a disproportionate impact on the U.S. economy, the thin membrane between banking and government is especially alarming.
Why? That seems obvious, but it's still worth stating: Public and private interests often diverge. As recent history makes all too clear, what's good for Wall Street isn't necessarily (or perhaps even usually) good for Main Street. As a result, surrounding the president with advisers from the banking world represents a potential conflict of interests, especially given the likelihood of those same advisers trooping back to the Street once their stint in Washington is over.
It's also important to recall Wall Street's political influence. Congress, which controls how financial regulatory agencies are funded, lives off corporate campaign contributions. That arrangement gives big banks enormous leverage even without former industry execs occupying important government posts.
The standard defense for having a resolving door is that you need people with industry experience to police industry. No doubt. But that doesn't have to mean inviting politically connected investment bankers or financial lobbyists into the halls of government. Rather, it can mean enlisting astute investors, academics and fraud investigators -- experts who, while possessing a deep knowledge of finance, are less likely to share the usual institutional loyalties of your typical Wall Street CEO. Or who even just see the world differently than the average financial baron.
The Daley news looks like a trial balloon. The White House has interest in gauging public opposition to another ex-banker joining the administration. Obama, pondering his reelection, may also see value in buttering up bankers by selecting one of their own as a key adviser. If so, that's a deeply cynical ploy.
Images from Wikimedia Commons and morgueFile