Before last night’s debate, Jeff Connaughton, former chief of staff to Senator Ted Kaufman and longtime aide to Joe Biden and President Clinton, offered some advice to Mitt Romney. He thought Romney should go after Barack Obama’s biggest weakness: the failure to prosecute Wall Street crimes.
In actuality, Romney only submitted a glancing blow with respect to Wall Street, claiming that the Dodd-Frank financial reform law “designates a number of banks as too big to fail, and they’re effectively guaranteed by the federal government… There’ve been 122 community and small banks have closed since Dodd- Frank.” I believe he’s talking about the designation of a systemically important financial institution (SIFI), and that’s not really a designation of too big to fail, but a designation that forces the institutions to write up living wills and hold more capital. And it’s not just five banks, but insurance companies like AIG and others who have been hit with the SIFI label, which leads to more regulation rather than less. I don’t think it changes the dynamic of too big to fail – the systemic risk council can still proceed with bailouts, though they supposedly have “more tools” to wind down failing firms – but the SIFI label really has nothing to do with what Romney was saying.
However, the lack of discussion about the financial crisis, and the crimes committed, and the lack of accountability was palpable. Connaughton’s advice wasn’t taken. And that puts him in a familiar position. For two years, Connaughton worked in the Senate trying to force the political class into getting to work on reforming the banks and singling out the wrongdoers. And he ran into a brick wall. Or rather, “the blob,” the mass of consultants and lobbyists and fundraisers and hangers-on that envelop policymakers and narrow what they consider to be their alternatives. “When it comes to Wall Street, we don’t have a two-party system. We have an ongoing Wall Street contribution party,” Connaughton told me in an interview yesterday about his book, The Payoff: Why Wall Street Always Wins. He has a particular insight into this, having spent his career on both Wall Street and Capitol Hill, having worked as a lobbyist and a fundraiser and a White House lawyer before making one last-ditch effort to reform the system as chief of staff to Sen. Kaufman.
Below is an edited transcript of our conversation, which covered financial reform, money in politics, and the insidious grip of Big Money over Washington.
FDL News: Tell me what takeaway you want people to get from your book The Payoff.
Jeff Connaughton: Let me start with the main reason I wrote it and work my way back to your question: I was furious at the Justice Department. You want to trust these people, I had known them all for years. But by the end of our two years, you had to recognize that they misled and gamed us the whole way. You can call lobbyists any name you want, I am a lawyer, I worked in the White House. I’m not stupid. The Justice Department was either so inept or so in the tank, I just thought I’m going to call them on it. And then at that point I might as well do something on SEC and Senate.
That was the anger, the spark. And then Occupy came along, this is the same anger that motivated me. Everyone gave Obama benefit of the doubt, then within a couple years people were occupying public spaces. The book has a major chord and minor chord. The major chord is Ted’s term in office. We decided we would go after three major things: the prosecution of Wall Street crimes from the Justice Department, the structural problems in the financial system like high frequency trading, and then too big to fail. And it’s now a cliche to say it, but I felt cognitive dissonance. Why aren’t people seeing things the same way Ted and I are? It seemed obvious to us. If you want to prevent the next crisis, you had to stand up to the Fed and the Treasury, and break up the banks.
FDL News: And yet you saw all this resistance.
Connaughton: I felt like the system is not responding the way it should. Not that I was naive. I even say in the book I should have known more than everybody. But I thought you had enough of a regulatory system that we shouldn’t have had the blatant fraud that we did. And once the scales dropped from my eyes, it so shocked me conscience, I couldn’t go back and be part of the system. Ted said to me after we got out of the Senate, hey let’s start a not-for-profit and work on reform. I said, we’ve just had our Pogo moment, I don’t know if anyone remembers Pogo, but it was, “we have met the enemy and it is us!”
I said, Ted, haven’t we known the Vice President for 70 years put together? I don’t want to write an op-ed, call Joe Biden and get me to do something about it!
It took the failure of government to respond to this crisis to realize that over the course of my career in DC, that I had been an eyewitness to how Wall Street and Washington are just so close together. Neither party is willing to do anything about investigating Wall Street. And I said this at a talk in New York, and he said to me, “not only are you right, but everyone in New York knows you’re right!” I didn’t think I lived in that kind of America.
FDL News: So why do you think it is? I always go back and forth on this. Is it that there’s so much money in the system, and everyone just wants to get paid to advance their career? Or is it a mindset, where everybody around the policymakers just rubs off on them?
Connaughton: It’s both. When I first started working for Joe Biden in 1987, trial lawyers, the Nader public interest types and unions, that was the Democratic camp. That was a countervailing force in Washington. And then Nader said in 1996 we have two corporate political parties, and I didn’t believe him at the time, I was working in the White House. Now I think Nader’s right. It’s incredible how much money and power have grown in DC in my 20 years. And when the benefits explode, and the norms and ethics erode, people start making different rational choices.
The other thing you say is part of what I call the Blob. The Blob is made up of the people who continuously surround Treasury, the SEC, the Banking Committee, Wall Street. They’re the financial technocrats. I talked to Eliot Spitzer before going on his show the other day, he said it was the social glue of Washington. I mean, I’ve known Lanny Breuer for 10 years, at first it was hard to criticize him in print! The public interest has become so outgunned that the only people you hear from in Washington, I mean somebody quantified this, 95% submitting comments about the Volcker rule to federal agencies were Wall Street people.
It’s about money, power, mindshare. You can now make big money in Washington. People have kneed me in the ribs because I made money as a lobbyist. But look at the consequences of deciding to step outside the establishment. For me, I was thinking about this, maybe I’ll enjoy being a local trial lawyer. I don’t think I can ever again come back to Washington. And people have to make that choice, and rationally, they say, it’s time to go make some money.
FDL News: It’s like the way the MEK got themselves taken off the State Department’s terror list, they just hired a bunch of Washington hands, Tom Ridge, Ed Rendell, and threw all kinds of money at them, and there they go, off the list.
Connaughton: Somebody called me up the day that Tim Pawlenty was put in charge of the Financial Services Roundtable, and they said to me, “It’s like the perfect coda to your book.” Look at Evan Bayh, he goes out the door writing this high-minded op-ed. And then he cashes in. At our caucus meetings, Bayh would sit by himself at tables. He never interacted with anyone. And when you look at speeches on the floor, of course Ted gave more than everyone, his last two years Bayh gave like 2 speeches. Pawlenty and Bayh are perfect examples. Pawlenty was almost Vice President, Bayh was almost Vice President. You get as far as you can go in the political game, and then you say screw it, I’ll be comfortable. And there’s Tom Daschle showing them all how it’s done.
When you become someone with substantial authority in government, you can test drive Porsches in your final days in office.
FDL News: What would you say about the failure to prosecute? Is this just a big coverup?
Connaughton: I go back to that speech Eric Holder just gave at Columbia. He tallied up 2,000 prosecutions for mortgage fraud and said that the Department’s record “has been nothing less than historic.” He’s talking about peons. This just avoids the central question, the one we asked all the time. “Did the Justice Department organize a timely, purposeful, concerted investigation of Wall Street executives?” And the answer is just no. Obama admitted the answer was no when he put together the second task force.
Lanny Breuer told us in 2009 that he’s dependent on the pipeline to bring him cases. I couldn’t believe it. Totally passive, he’s just waiting for the cases to materialize. And then we started calling the US Attorneys in November 2009, they said they just heard from Justice, asking around, right after we talked to them. It’s just like the CEOs of a listing bank, covering everything up with lies. I’m very outraged by it.
FDL News: My impression is that you don’t see any answers to this.
Connaughton: No, I mean, before I wrote the end of the book, I rewatched Mr. Smith Goes to Washington. He didn’t just go back to Montana or whatever, he stayed and fought. In my epilogue, I did lay out, here are my suggested reforms. Ban lobbyists for being bundlers. Put together a full movement. The non-financial part of corporate America needs to realize we need financial stability. Some other stuff. I don’t totally remember (laughter).
FDL News: Like I said, it seems like you have a much better handle on the problem than the solution.
Connaughton: Obama had an opportunity to work on this when the banks were weak after the financial crisis. But I don’t know, after Citizens United, how do you really get money out of politics? We do have this perpetual money machine and I don’t know how to put it in reverse. Ted and I said, it’s probably going to take another financial crisis, and another Teddy Roosevelt or FDR coming along. Simon Johnson, when we were working with him, said it’s the beginning of a 10-year reform movement. You work every day, and we’re starting to see some interest on breaking up the banks. It’s like, red rover, red rover, send Sandy Weill over.
But there are no easy answers, because it has become so deeply cultural in Washington. People have just compartmentalized the financial crisis away from Obama versus Romney, and that’s what both parties want. It’s not a part of the national conversation right now. We’re in this tribal period. And the persuadables are not being targeted by either party on these issues because they want to raise money from Wall Street.