Mike the Mad Biologist

Obama has finally gotten around to choosing a replacement for Larry Summers, and named Gene Sperling director of the National Economic Council (why he didn’t prioritize this with nearly 10% U3 unemployment is puzzling). This has been controversial since Gene Sperling, like many of Obama’s closest advisors, has ties to Wall Street. David Corn describes those ties:

At some point, according to a source familiar with the episode, Goldman Sachs approached Sperling for advice on globalization. He took this opportunity to pitch the company an idea in sync with his nonprofit work: the firm ought to invest in social capital in poorer nations. He suggested it focus on business education in developing countries. Goldman Sachs asked for a proposal. He worked one up: devoting $100 million for business training for 10,000 women in these nations. Goldman Sachs, via a foundation it operates, went for the idea and eventually asked Sperling to implement it. On the advice of friends, he requested that he be paid what the investment firm might pay a top lawyer or dealmaker: $70,000 a month. And that’s what he earned for a year or so. He did no commercial work for the investment bank.

And there’s been some controversy:

Progressive blogger Ezra Klein observes that Sperling’s Goldman Sachs haul was problematic: “You tend not to get paid that much for offering guidance to charitable endeavors. It is very hard to believe that Goldman Sachs wasn’t attempting to buy influence with a politically savvy economist who had good relations–and would later go to work for–the incoming Democratic administration.” Dean Baker, of the liberal Center for Economic and Policy Research, chimes in: “I don’t think it’s a question of outright corruption. It’s a question of orientation. Most people hear you got almost a million dollars for a part-time job, and they think there’s a problem there. But people on Wall Street say, a million bucks is chicken feed.” Democratic and Republican administrations–including Obama’s–do tend to be filled at the top with lawyers and corporate officials who have raked in millions of dollars annually for years in the private sector. Sperling is not on par with these folks. Due to his past service as NEC chief, he was able to pull in far more money than the average do-gooding Washington policy wonk. But he was no Gordon Gekko.

Felix Salmon has also criticized Sperling. For me, the issue is related to what I’ve called the Congressional Retirement Plan:

It’s simple: it’s about life after politics. One of the dirty secrets about many, if not most, congressmen and senators is that they like Washington, D.C., rhetoric notwithstanding. They want to stay in town after they leave (or lose) office. Once you’ve tasted the Capital of the Free World, do you really want to go back to Pierre, South Dakota? (Tom Daschle comes to mind…). It’s funny how many politicians, having made a career out of bashing War-Shing-Tun, don’t…seem…to…ever…leave.

I can’t blame them: I moved to Boston, and would be very happy to stay here. Places do grow on you. The problem comes, for politicians, when they have to find a job. For an ex-politician, there aren’t that many ‘straight paths’ to getting your next job: lobbyist and corporate board member are the easiest and the most lucrative.

But if you get a reputation as someone who opposes large business interests, what chance do you have of getting either of these types of jobs?

Justin Fox writes about the Wall Street revolving door:

With that kind of pay differential, Wall Street inevitably begins to emit a giant sucking sound as it hoovers up smart, self-interested people. This is apparent at top business schools, in physics Ph.D programs — and in Washington, where smart out-of-office (or just burned-out) government officials who want to secure their family’s financial future before either retiring or heading back into public service now flock to Wall Street jobs. Larry Summers did. Rahm Emanuel did too. John Snow did. Bill Daley did. Phil Gramm did. Harold Ford Jr. did. Peter Orszag is doing it. Heck, I’d probably do it if I were in their shoes. Gene Sperling, to be fair, didn’t go so far as to become a banker. But on the whole, if you believe that people respond to economic incentives, you have to believe that Wall Street’s artificially high pay scales have come to have a big impact on decisionmaking in Washington — and that this is an unhealthy development for our democracy and our economy.

As Fox notes, would someone whose quality of life dramatically improved due to a corporation be biased towards that corporation? The question I would ask Sperling is, “If a policy that could cripple or destroy Goldman-Sachs were the advice given to you by your advisors, could you fully support it?” Because, like it or not, these guys paid him a lot of money, and, while they might not expect him to support him on everything, they probably hope he would do what he could to stop their destruction.

Even if that’s what’s best for the country.

Comments

  1. #1 David vun Kannon
    January 12, 2011

    Because, like it or not, these guys paid him a lot of money, and, while they might not expect him to support him on everything, they probably hope he would do what he could to stop their destruction.

    Even if that’s what’s best for the country.

    Full disclosure, I worked at Goldman for the first 14 years of my professional life.

    1 – I find it sad that we have become so cynical about the ability of people to enter public service and truly serve the public, upholding the implicit and explicit ethical principles we expect. I know only a handful of people who have gone from Wall St to DC, and none of them struck me as ever finding it difficult to make the right decision, without worrying where their paycheck was going to come from when they left office.

    2 – As if breaking up Goldman would ever rise to the top of a policy agenda. Like breaking up IBM and AT&T worked out so well. Goldman has stayed at the top of a difficult industry for a very long time, due mainly to the quality of its people. When I was there, the compliance and risk management culture was extremely strong. The people who used to work at Goldman end up running the country far more often than going to jail because the reputational risk filter works most of the time, and criminality does not thrive in an atmosphere of excellence.

    As good as Goldman is at what it does, there is a lot of capital in the world, a lot of people renting a piece of the cloud for their algo trading and gunning to take their place.

    I’m all for firewalls in the markets, such as the Glass-Steagall Act was. They apply to all participants equally. If you want to target someone just for being good, you might as well agitate for breaking up Harvard, or the journal Nature.

  2. #2 Roman
    January 13, 2011

    @DuK

    $70,000/month is a lot of money even by Wall St. standards. Note that this wasn’t a bonus, it was base. I agree there is something fishy about paying someone so much for consultancy about a (let’s be honest) a semi-charity activity.

    GS is used to hiring people from politics just to tap in their social networks. In Europe, they hired an ex-prime minister of Poland (Kazimierz Marcinkiewicz) in an advisory role. The guy was widely considered an idiot in his country, so there is no question of him offering valuable expertise — it was all to get his contact list and insider info (he was advising GS when they got involved in East European privatization deals).

    So sorry, but — as much as I admire the professionalism of Goldman Sachs people — don’t tell me that GS business practices are a shining beacon of integrity. I have friends in other banks telling me that after GS turned up to pitch to their clients the very same securities they were shorting, people in the market are not as eager to trade with them anymore. Guess why?

  3. #3 Roman
    January 13, 2011

    @Mad Biologist

    On the other hand, the question to Sperling “could you ruin your ex-employer?” is silly. A lot of people change jobs on Wall St every year. They have no problems competing with their ex-colleagues (and having a beer with them after the markets close).

  4. #4 David vun Kannon
    January 13, 2011

    @roman – I’m not defending every person or practice of Goldman, but my personal experience there was one where the firm was very strict in its self policing. And yes, Sperling’s salary as a base does seem excessive. If he’s got friends that pushed him to ask for compensation as a percent of assets under management, he’s got sharp friends! That Goldman agreed does reflect a bid for influence by the firm.

    Goldman has a few black eyes during its long history. It figures in Galbreath’s book “The Great Crash”, the Penn Central bankruptcy, etc. They’ve also had policies such as not doing hostile takeovers which set them apart.

    But ‘breaking up Goldman’ doesn’t strike me as realistic as a policy choice Gene Sperling will ever be called upon to consider as director of the NEC.

  5. #5 Roman
    January 13, 2011

    @David

    When it comes to persons, all people from Goldman Sachs whom I met were smart and looked honest. But the practices of the institution may diverge from the character of its employees, because institutions acquire their own character. GS got a lot of undeserved bashing, but some of it was deserved.

    About breaking up GS: time will tell. Some things which happened after 2007 would be seen as impossible before that.

  6. #6 Consumer Unit 4012
    January 14, 2011

    From where I sit, talking on my cellphone while using my PC to access the Internet, breaking up AT&T and IBM seems to have worked out pretty well.

  7. #7 Roman
    January 15, 2011

    Is there *any* market where GS has a monopoly?

  8. #8 David vun Kannon
    January 16, 2011

    @consumer – cell phones, cheap PCs, the internet – those are the counter-arguments to the idea of breaking up IBM and AT&T. Those new markets and opportunities made previous dominance of other markets irrelevant.
    The government originally began pursuing IBM over its dominance of the mainframe computer market. IBM dominates this market even more today than it did in the 80′s, but who cares? That is why the Justice Dept abandoned the breakup of IBM, after decades of spending your money, and forcing IBM to misallocated its own capital.
    On cell phones, exactly how did breaking up the landline operating companies, which then re-integrated, affect the growth of cell services? If AT&T were one company, it could have bought only one license for spectrum use of multiple that the FCC was letting companies bid for. The result? Instead of one national provider named AT&T and one named Verizon (originally a Baby Bell), one of those would be a different company.

    In any case, what you like about cell service has been driven by handset innovation and playing catch-up to Europe and Japan in mobile technology. You could argue that the Bell Labs innovation engine was killed by the breakup, since it needed a large corporate parent to support it.

    Incumbency effects are even lower in finance. GS has been a leader but never a monopoly in its chosen markets.

  9. #9 Roman
    January 16, 2011

    @David vun Kannon

    “Incumbency effects are even lower in finance. GS has been a leader but never a monopoly in its chosen markets.”

    Monopoly no, but I think that oligopolies do exist. As far as I know, the FX markets are dominated by a small number of big players. GS, at least in the past, was told to be able to command the trends in the market without dominating the volume of the trading — just due to the sheer respect other traders had for them.

    On the other hand, market data can be and are monopolized. For example, Markit Group has a monopoly on credit derivatives data.