Janine Wedel - Unaccountable - How Elite Power Brokers Corrupt Our Finances, Freedom, and Security

Perhaps the scholars are taking their cues from those at the top of their institutions, college and university presidents. In 2010, the New York Times examined what it called the “Academic-Industrial Complex”—namely, the vast numbers of university presidents serving on corporate boards, lending their prestige for a tidy fee even when they have little expertise to add. The list included the then-president of Brown University, Ruth Simmons, who served on the board of Goldman Sachs in the years leading up to the financial crisis, earning more than a quarter million dollars a year. 27As one critic assessed, some of these presidents were brought on because they had no expertise in the relevant subject and couldn’t ask tough questions. 28

Nearly all of these players will say they are doing good and possess unique expertise. Some may be, and many do. Whatever the case, they risk abrogating responsibility to more than one institution.

And, whatever the case, it is reasonable for us to ask: Where is the genuine leadership? In the old world, prestige was earned by excellent performance and working one’s way up the ranks. Today, enduring social respect may be giving way to momentary popularity.

Case in point: General David Petraeus, whose skillful cultivation of the media helped catapult his career to the stratosphere of stars and celebrity. He was widely lauded for his war-strategy acumen. 29His charm offensive with the media earned him glowing coverage across it, from glitzy publications like Vanity Fair to sober musings in Foreign Policy . 30That was, of course, until the exposure of a personal affair with his biographer forced him to relinquish his position as CIA director. Only then did the mainstream media begin to question his aggressive nurturing of them, his taste for lavish parties and sycophants seeking their own publicity. And, crucially for the public interest, only then did his war strategy undergo serious scrutiny by the mainstream media, now belatedly questioning whether tactics that appeared to “work” in Iraq made sense for Afghanistan.

Celebrities are still celebrities, though, even when they stumble or fall. Within a year of his resignation, ostensibly with both his personal and professional reputations battered, Petraeus went to work in the private equity firm Kohlberg Kravis Roberts, in a newly created “KKR Global Institute” (note the impartial, scholarly-sounding name). 31He also weighed numerous university offers. Not only did he “fail up,” he is teaching (at least by example) others how to do the same, having landed additional jobs mentoring ROTC members at the University of Southern California and serving as a visiting professor at Macaulay Honors College at CUNY.

Supporters credit Petraeus for fresh thinking and shaking up a lumbering military bureaucracy. Still, it’s reasonable for us to ask: What does his intense focus on burnishing his own image augur for the public interest? When people at the top use their positions to launch their own platforms to accrete brand recognition or personal wealth, at the possible expense of an organization that has entrusted its mission to them, does this not kindle public distrust in these same entities?

And yet, this is also a statement about society. What is one to make of the supposedly disgraced General Petraeus and his post-scandal career? Why would a private equity firm want to employ a retired general, especially one whose much-vaunted acumen had been called into question? According to Forbes contributor and author George Anders, Petraeus was recruited to lend intellectual prestige to the KKR “brand” in the “thought leadership” business. 32

Is this truly the kind of leadership we need?

IN (UNACCOUNTABLE) NETWORKS WE TRUST

While players like Petraeus bask in the limelight, many public-policy influencers sidestep the media spotlight and regulatory scrutiny. In arenas from finance to foreign policy, policymaking gravity has been shifting away from the old hubs. Formal procedures, hierarchies, and bureaucracies that have stood the test of time are giving way to trust-based informal social networks and ad hoc organizations. Losing ground are formal and legal modes of operating within and across organizations. Losing ground, too, are formal policymaking bodies altogether. Gaining ground is informality. Today’s informal, under-the-radar way of doing business is not illegal, of course. It also is by no means necessarily corrupt and may even be, in some cases, the only way business can be accomplished. Nonetheless, it is unaccountable and lacks democratic oversight.

This modern-day informal, yet power-charged, policymaking comes in several forms.

One form is when officials in government agencies who are also members of a power clique—an influential, close-knit network—exclude other officials from participating in crucial public-policy decisions—that is, colleagues who are outside the informal network but who should be included because of their expertise and job descriptions. Yet, at the same time, these new-style officials bring in members of their power clique who occupy private roles.

Let’s look, for instance, at a Washington-Wall Street clique that established just who was included—and excluded—from a policy that would have a huge impact on the global economy—and would bear significant responsibility for the global financial crisis: decision-making in the Clinton administration about the regulation of exotic derivatives trading. An example of exclusion is Brooksley Born, in the late 1990s chair of the Commodity Futures Trading Commission. She stood well outside the Wall Street-Washington power clique that believed generally in financial “innovation” and specifically in blocking a proposed regulation of a new kind of exotic derivative that she thought (correctly, as we now can’t deny) was dangerous. One would think that running the CFTC—which had played a role in regulating early derivatives but also had created a wide loophole prior to her tenure—would give one some formal power.

By many accounts, Born did not like to be pushed around and, when pushed, tended to dig in her heels. In one particularly notable episode that began in early 1998, she stood up against the clique, which was led by Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, his deputy Lawrence Summers, and Securities and Exchange Commission Chairman Arthur Levitt, Jr. 33Their advocacy of both unregulated derivatives and a repeal of the Glass-Steagall Act in 1999 would have a devastating effect on the global economy (though it would take years for many people to catch on). Banks, liberated from Depression-era restrictions on the kinds of activities they could engage in, were able to accelerate an already frenetic era of creating and trading in toxic derivatives. 34

But, despite Born’s apparent best efforts, the informal power of the clique overwhelmed hers.

Born may have lost that battle, but she continued to fight the clique, hoping the collapse months later of the hedge fund Long Term Capital Management (with not one but two Nobel laureate economists as the company’s braintrust) could serve as a wake-up call on the risk of unregulated derivatives. 35She reported that risk to the House Banking Committee—one of at least seventeen times she testified before Congress. Her warnings fell on deaf ears. In 1999, she returned to her old law firm before retiring to advocacy and overseeing pro bono work at the firm.

And the four members of the clique that stonewalled her? Each went on to take a role at a Wall Street firm, bank, private equity firm, or hedge fund that made bundles on . . . unregulated derivatives. The explosion of “innovation” scarcely benefited those beyond Wall Street, Washington, or other bastions of privilege.