Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, recently penned an op-ed in the New York Times questioning how the biggest financial firms that survived the financial crisis had grown 20 percent larger than they were prior. How could Washington, in its financial reforms, allow too big to fail to continue?
Hoenig answered this himself:
How is it possible that post-crisis legislation leaves large financial institutions still in control of our country’s economic destiny? One answer is that they have even greater political influence than they had before the crisis. During the past decade, the four largest financial firms spent tens of millions of dollars on lobbying. A member of Congress from the Midwest reluctantly confirmed for me that any candidate who runs for national office must go to New York City, home of the big banks, to raise money.
There is no bigger contributor to political campaigns than the financial sector. Since 1999 the financial sector has contributed more than $1.8 billion to federal candidates for election. As Hoenig notes, much of that sector is located in New York City.
Overall, over the past six election cycles, New York state residents employed in the finance, insurance and real estate sector have sent more than $50 million to congressional candidates running for office in a state other than New York, according to data from the Center for Responsive Politics. This is a crucial source of money for congressional candidates, particularly those in high-cost Senate races. (The animated map linked in the image below shows where those contributions went over time.)
Out of state Democrats accounted for over half of the money contributed by individuals in the New York State financial sector. Democrats received over $30 million to the slightly more than $16 million received by Republicans. The Independent candidacy of Connecticut Sen. Joe Lieberman pulled in more than $11 million.
The Sunlight Foundation's Party Time database of political fundraisers shows a total of 37 fundraisers held in New York City for congressmen and senators who do not represent New York State. (These numbers are incomplete and the number of fundraisers is almost certainly higher.)
There are 12 fundraisers listed in 2010, including a recent one for Rep. Charlie Dent (R-PA). In October Rep.-elect Mike Fizpatrick (R-PA) held a fundraiser with incoming Financial Services Committee chairman Spencer Bachus (R-AL). (Bachus raised nearly 63% of his 2010 contributions from the finance sector.) Other fundraisers are for lawmakers from California, Oklahoma, Kentucky and various other states spanning the country. (View all 37 of these Party Time fundraisers here.)
Hoenig's example of fundraising in New York is just one anecdote in the larger story of the financial sector's influence in Washington. Since the 1998 election cycle the finance sector has spent nearly $2 billion on campaign contributions to federal political candidates. Over the same period of time the sector has spent more than $4.2 billion on lobbying in Washington.
This leads to a total of more than $6.2 billion spent by the finance sector over a thirteen year period to influence outcomes in Washington. The finance sector has spent almost $1 billion more than any other economic sector on federal campaign contributions and lobbying combined. (The motion chart on the right shows the accumulation of contributions and lobbying over time. The green dot is the finance, insurance and real estate sector.)
Former IMF economist Simon Johnson in an article for The Atlantic last year explained that Wall Street "gained political power by amassing a kind of cultural capital--a belief system." People in Washington believed that those in Wall Street knew what they were doing and believed that the accumulation of wealth in the financial sector was a national good, Johnson argues.
That belief system was aided by the $6.2 billion investment that Wall Street made in Washington. The sector invested in staffing agencies and congressional committees and in financing the increasingly costly campaigns. Those investments were then cashed out as staffers and lawmakers flocked to lobbying firms and cushy Wall Street gigs.
The New York Times wrote in April that “more than 125 former Congressional aides and lawmakers are now working for financial firms as part of a multibillion-dollar effort to shape, and often scale back, federal regulatory power, data shows.” These included former Rep. Michael Oxley, the most recent former chairman of the Financial Services Committee, and former Rep. Richard Baker, who previously chaired the Financial Services Subcommittee on Capital Markets.
Other powerful former lawmakers recently registered to lobby for the financial sector include Senate Majority Leaders Trent Lott and Bob Dole, House Majority Leaders Dick Gephardt and Dick Armey and Speaker of the House Dennis Hastert.
The particular target of Hoenig's ire in his above quoted NYT op-ed is the 1999 passage of the Gramm-Leach-Bliley Act, which tore down the wall between investment and commercial banking. The bill was named after its three main cosponsors: Sen. Phil Gramm, Rep. Jim Leach and Rep. Thomas Bliley. Since retiring from Congress, Gramm went on to become the president of the Swiss bank UBS AG and Bliley works as a registered lobbyist, often for financial interests. (Leach serves under President Obama as the Chairman of the National Endowment for the Humanities.)
Now, recently departed Office of Management and Budget head Peter Orszag is jumping ship to Wall Street. Orszag, following in the footsteps of former Treasury Secretary Bob Rubin, is slated to join Citigroup as a high level executive with a multimillion dollar salary. Recently, President Obama's counsel Greg Craig left the White House and joined Goldman Sachs. It is unclear if either of them will register as a lobbyist.
Even without Orszag and Craig registering to lobby, the industry has more than enough clout. The Center Responsive Politics reports 1,390 former government employees working as lobbyists for the financial sector.
Another prime spot for investment by the financial sector has been the House Financial Services Committee.
The majority party in the House of Representatives often puts favored freshmen and sophomore lawmakers on the House Financial Services Committee, the committee that oversees the financial sector, so that they can raise piles of money from Wall Street.
The Huffington Post's Ryan Grim and Arthur Delaney explained how this worked under the outgoing Democratic majority:
The banking committee is the second-largest in Congress -- the Transportation and Infrastructure Committee has three more members -- and is known as a "money committee" because joining it makes fundraising, especially from donors with financial interests litigated by the panel, significantly easier.
The Democratic leadership chose to embrace this concept, setting up the committee as an ATM for vulnerable rookies. Eleven freshman representatives from conservative-leaning districts, designated as "frontline" members, have been given precious spots on the committee. They have individually raised an average of $1.09 million for their 2010 campaigns, according to the Center for Responsive Politics; by contrast, the average House member has raised less than half of that amount.
Meanwhile lawmakers and staffers keep cycling in between the financial sector and Washington. Delaney and Grim showed that, as of the end of 2009, “almost half of the 126 people who [left the Financial Services Committee] registered as lobbyists, mostly for the financial services industry.” Also, “[s]ixteen of the committee's 86 current staffers -- including a good chunk of the senior staff -- worked as lobbyists before coming to the committee.”
The committee will soon be headed by a lawmaker, Rep. Spencer Bachus, who received nearly 63 percent of his campaign and political action committee contributions from the finance sector. Bachus recently stated his philosophy for governing the committee, "In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks."
The freshmen congressmen appointed to the committee include the largest recipient of finance sector contributions among freshmen and a former bank lobbyist.
Meanwhile, the Senate Banking Committee is set to be chaired by Sen. Tim Johnson, whose state of South Dakota is home to the credit card industry. Johnson recently hired Dwight Fettig, a lobbyist for the American Bankers Association, JPMorgan Chase and Freddie Mac, as a senior adviser. Fettig will likely become the next staff director for the Banking Committee.
The entirety of this enterprise—the doling out of campaign contributions, revolving in between the public and private sector, spending money to influence policy-makers—is entirely legal. That system, however legal it is, is structurally unjust and unsound. As James Fallows notes in a post bemoaning Orszag's revolving door spin, "When we notice similar patterns in other countries -- for instance, how many offspring and in-laws of senior Chinese Communist officials have become very, very rich -- we are quick to draw conclusions about structural injustices."
The intense amount of organized money and human capital has succeeded in making Washington captive to the financial sector. All of this at a low cost when compared to the soaring profits they enjoyed at the height of the boom and the trillions of dollars in aid they received when the bottom fell out.
Ultimately, the $6 billion investment in Washington was the least risky one that the financial sector made over the past twelve years. The firms that survived the storm are bigger than ever and ready to spend billions more to keep their investment afloat.