Sen. Elizabeth Warren kicked off a firestorm last month when she said that she would not support Antonio Weiss, President Barack Obama’s nominee for undersecretary for domestic finance at the Treasury Department. Her reason was that Weiss made his career at Lazard, an asset management company that has taken the lead in structuring corporate inversions, the practice of relocating a corporation’s headquarters abroad to escape U.S. taxes.
In addition, Lazard planned to give Weiss $20 million in deferred compensation, which he was not actually owed, as a parting gift. This practice of promoting public service with large payments of deferred compensation to those taking on government positions is apparently common among Wall Street banks. But Warren, the AFL-CIO and others have criticized it: Being awarded large amounts of money before becoming public servants could make these bankers more positively disposed toward their former employers in the same way as an outright bribe.
Not everyone is so skeptical. Foremost among those defending the practice was New York Times columnist and DealBook editor Andrew Ross Sorkin, who characterized Warren’s objections as “misplaced rage.” He later wrote a piece in which he praised the willingness of Lazard and other Wall Street firms to reward public service and bemoaned the fact that not all businesses followed the same practice.
If we had not just witnessed the worst economic disaster since the Great Depression — a setback from which we have yet to fully recover — Sorkin and his allies might be granted a sympathetic hearing. However, given the current reality, the real scandal is that any serious person would be making Sorkin’s arguments.
Is there any question that we have a very serious problem of financial regulators who serve Wall Street and not the general public? Our financial regulators sat on their hands as a housing bubble grew ever more out of line with the fundamentals of the market, as anyone with open eyes could see.
The bad loans that were driving this explosion in house prices were also no secret. The National Association of Realtors reported that 43 percent of first-time homebuyers in 2005 put no money down. The term NINJA loan — meaning no income, no job or assets — became common in the real estate and banking industry.
The warning signs were everywhere, but where were the regulators? Timothy Geithner, who was president of the New York Fed from 2003 until he became treasury secretary in 2009, told the Senate Banking Committee during his confirmation hearings that he had never been a regulator. This is in spite of the fact that one of the main responsibilities of the New York Fed is to regulate the Wall Street banks.
In his autobiography Geithner repeatedly tells us that his guiding principle in the financial crisis was that there would be no more Lehmans; in other words, no more big banks would be allowed to fail. He even ridiculed the Old Testament morality of those who thought that the banks and bankers should be forced to pay for their reckless and often illegal actions. By contrast, he had much less sympathy for underwater homeowners, many of whom he blamed for getting houses that they could not afford.
Unfortunately Geithner’s attitude is typical among the regulators in Treasury and elsewhere. They appear to hold the view that their job is serving the big banks and that in doing so they are somehow serving the larger public.
Sorkin certainly seems to agree that the country has been well served by the regulators that we have gotten from the financial industry. In his defense of deferred compensation for public service, he wrote, “For years, for example, Goldman Sachs has managed to recruit some of the brightest liberal arts majors from top universities, in part by being able to point not just to the work at the firm but to the former executives who worked in senior government posts later.”
But as a practical matter, it is entirely irrelevant how bright public servants are; the question is what sort of job they do. Despite their allegedly sterling pedigrees, they have done a horrible job in the last two decades.
The crash in 2008 was not a natural disaster like a hurricane or earthquake; it was a massive failure of economic and financial regulation. As a result, we are still close to 7 million jobs short of what would be needed to restore the prerecession employment rate. Furthermore, the weak labor market has prevented most workers from seeing any real wage increase during the recovery. More than 10 million homeowners are still underwater, owing more on their houses than they are worth. And a huge cohort of middle-income baby boomers is hitting retirement with virtually nothing but Social Security and Medicare to support them.
Geithner and many others in his circle have repeatedly circulated the Second Great Depression boogeyman, as though somehow we should be thankful because things could be worse. Of course things could always be worse, but the simple reality is that our financial regulators have done a terrible job for everyone except the people they are supposed to be regulating.
Warren and the AFL-CIO are right to raise questions about the ties between nominees at Treasury and the financial industry. That may exclude from government some top liberal arts grads, but it would likely mean that we would get better regulators of the financial sector.