Welcome Jeff Connaughton (JeffConnaughton.com) and Host, William K. Black (UMKC) (NewEconomicPerspectives.org)

The Payoff: Why Wall Street Always Wins

“Mad, Blind, or a Coward”: Jeff Connaughton channels Camus’ The Plague

Jeff Connaughton has authored a powerful, and chilling insider’s perspective on the financial crisis and the pathetic governmental response to it. The second part of his title sums up the result and the first half explains why Wall Street always wins. Many, perhaps most Americans are likely to agree with both parts of Connaughton’s title so this book will not transform the public’s view of the issues. The public largely has this set of issues correct. Connaughton gives the readers unique access to the facts because he had a front row seat to many of the key discussions and he has the analytical abilities and expertise to explain the significance of those facts.

Reading Connaughton’s account evoked in me the comments of Dr. Rieux in Albert Camus’ The Plague.

All I say is that on this earth there are pestilences and there are victims — and as far as possible one must refuse to be on the side of the pestilence.

[W]hen you see the suffering and pain that it brings, you have to be mad, blind or a coward to resign yourself to the plague.

Connaughton shows us that the leaders of both parties were – and are – mad, blind, and cowards. They have sided with those that caused the pestilence and resigned our nation to a series of financial and moral plagues.

Readers who pick up The Payoff should buckle up first – it will be a bumpy ride regardless of your political affiliations. There are a few heroes, but the title warns that Wall Street Always Wins even when the folks with courage and a commitment to the public interest stand up to the banksters. Hannah Arendt famously described the “banality of evil” during the Holocaust. Connaughton describes the banditry of the banal. Connaughton shows that the system is so rotten, so rigged in favor of Wall Street, that evil individuals are unnecessary to produce catastrophe. No one has to be (formally) bribed. Theoclassical economic dogma has led to regulatory and prosecutorial leaders committed to not regulating and not prosecuting the banksters.

Dogma is so dangerous because it is the death of true reasoning. It excludes alternatives so fully that the alternatives are no longer even understood to exist. The most critical assumptions are implicit. Explicit assumptions should inherently prompt the question of whether they are justified. We are not even aware that we are making assumptions when we make them implicitly. Neither the author nor the reader can feel any need to question whether an unrecognized implicit assumption is justified.

Connaughton is a superb guide because he has such varied career. He’s got an MBA and a JD from two of the top schools in the world and did so well that he achieved one of the juiciest judicial clerkships. He’s worked as an investment banker with two top firms. He ran a lobbying firm. He was an important aide to (then) Senator Biden, President Clinton, and Senator Ted Kaufman. He is also candid. Republican and Democrats alike will cringe as they read his account of why Wall Street always wins.

For the sake of brevity I will only discuss two examples from the book. The clearest examples of an insanely dangerous and destructive policy that any rational system would eliminate are the systemically dangerous institutions (SDIs). The SDIs are treated as “too big to fail.” Eliminating SDIs would provide a win-win-win-win. They pose a systemic risk of global collapse. They make “free” markets impossible for the implicit federal guarantee of their general creditors means that they can borrow at a significantly lower interest rate than their smaller competitors. I had the privilege of hosting the book salon for the three (very conservative) NYU Stern School authors of Guaranteed to Fail. Their simile for the extent of the competitive advantage this implicit federal subsidy provides is that it is “like bringing a gun to a knife fight.” The NYU authors’ conclusion was that there was nothing “free” about housing finance markets due to the SDIs. A wide range of scholars have used the same phrase to describe the inherent degradation of democracy caused by SDIs – crony capitalism. The additional good news is that the SDIs are far too large to be efficient. We would make finance more efficient if we shrank the SDIs to the point that they no longer posed a systemic risk. Progressives, conservatives, and libertarians often share this four-part indictment of the SDIs, so one needs Connaughton’s insider perspective to understand why an essential action with so many vital benefits not only did not occur but is not even an issue. Neither major party proposes to do anything about the SDIs. Connaughton provides a telling vignette that shows that “serious” officials consider any crack down on the SDIs to be illegitimate.

“Senator Diane Feinstein … asked [Senator] Durbin … ‘What’s this [Brown-Kaufman amendment to end the SDIs]’? [Durbin replied]: ‘To break up the banks.’ Giving the thumbs-down sign, Feinstein said bemusedly: ‘This is still America, isn’t it?’”

Serious, experienced Democratic Senators like Feinstein and Durbin consider any effort to protect Americans from global systemic crises and our democracy from crony capitalism to be un-American. In the name of “free” markets we must allow the inherent elimination of any possibility of “free” markets. To propose the one reform that would be any real financial regulator’s top priority is to be treated with contempt by the Senate Democratic leadership. Yes, political contributions from the finance industry are important and Connaughton repeatedly shows us why this is so. But anyone who has met with prominent American politicians knows that the degree of acceptance of the mantra “what’s good for Wall Street is good for America” among the leadership of both parties is our nation’s most important barrier to fixing the catastrophe that is Wall Street. Connaughton shows us that this absurd identification remained intact despite widespread fraud by Wall Street elites who grew wealthy by driving the greatest economic crisis since the Great Depression. He shows that a purportedly “reform” administration led by a “progressive” president acted to protect the elite frauds from sanctions and to make them even wealthier through bailouts.

As a former financial regulator and Justice Department attorney (my spouse, June Carbone, was also a DoJ attorney) the pages that were most painful for me to read were Connaughton’s explanation of how the professionals who run DoJ and the SEC were repeatedly complicit in providing de facto immunity to the Wall Street elites who drove the crisis. Connaughton confirms the insider views of Neil Barofsky and Sheila Bair in their recent books about the important and pernicious role that Treasury Secretary Timothy Geithner played in securing that immunity as a deliberate policy.

Connaughton’s tale is vastly more damning because he, as a legal professional working for years as a leading staffer for the Senate Judiciary Committee understood the institutions and the key people. He emphasizes a point I have often made – our nation is blessed with something that is rare globally. We have scores of prosecutors and investigators who are willing and able to take on the most elite white-collar frauds and corrupt officials. They routinely take on the best criminal defense lawyers in the world with unlimited budgets – and generally win. Biden, Kaufman, and Connaughton know these people on a first name basis, which makes Connaughton’s book an essential reading for anyone who wishes to understand the financial crisis and why our response to the Great Recession has been a national disgrace.

Our nation is also blessed with hundreds of experienced financial regulators who are nearly unique globally because of their willingness and skill in taking on elite frauds and their lawyers and allied professionals. Connaughton makes it clear that the Bush and Obama administrations have overwhelmingly refused to take advantage of this talent in order to hold accountable the elite Wall Street frauds who grew wealthy by driving the financial crisis and the Great Recession. Connaughton takes us inside the SEC to see why that agency’s leadership has adopted policies that guarantee failure. We owe him a great debt for his service to the nation and for making his account of what went wrong public in this book.

[As a courtesy to our guests, please keep comments to the book and be respectful of dissenting opinions. Please take other conversations to a previous thread. – bev]

William Black

William Black