Sandra Navidi - SuperHubs - How the Financial Elite and Their Networks Rule our World

But PIMCO’s large bets, “confidence in its trading,” and consistently outsized returns attracted attention, particularly in view of the fact that it enjoyed close relationships with the Fed through its advisers, specifically former Fed chairman Alan Greenspan, New York Fed advisory committee member Mohamed El-Erian, and Bernanke confidante Richard Clarida. During the time in question, Greenspan had two confidential meetings with then Fed chairman Ben Bernanke. Bill Gross, CEO of PIMCO, used his close Fed connections as a selling point. He stated that his goal was to “shake hands with the government” and bragged about his access and foresight. Transactions were subjected to retroactive scrutiny as far as possible and no evidence of illegality or impropriety was found.

The Benefit of Connections in Tumultuous Times

Former U.S. treasury secretary Tim Geithner is one of the best-connected executives on Wall Street. As the head of the New York Fed, the young-looking, affable, and athletic Geithner was popular with subordinates and superiors alike. Although he had never worked in banking, he possessed a privileged background and began his career at Kissinger Associates, run by policy gurus Henry Kissinger and Brent Scowcroft. At the venerable New York Fed, located at the heart of the financial district, he oversaw many of the U.S.’s biggest financial institutions, including Citigroup. He often communicated with Wall Street executives, as evidenced by his official calendar, in an effort to gather intelligence on the market. His personal life also overlapped with many executives of the institutions he oversaw. Later, he was criticized for his failure to realize that so many institutions under his watch were sliding into crises, along with the entire financial system. In the opinion of renowned economist Willem Buiter, the New York Fed under Geithner was compromised by the financial industry.21

An MIT study titled The Value of Connections in Turbulent Times, coauthored by noted Wall Street critic Simon Johnson, examined the financial firms with ties to Tim Geithner during his term as U.S. treasury secretary to see if they derived any special benefits during the crisis. Johnson defined connections as friendships, professional associations, and other interactions such as charity collaborations. The study revealed that in the run-up to his appointment, shares of financial firms whose executives had connections with Geithner increased significantly in value relative to the firms with no such connections. When Geithner’s nomination became less certain due to his personal tax issues, the same firms saw abnormal negative returns versus unconnected firms. However, the study found no evidence that these jumps in stock price were due to any illegal or unethical collusion between Geithner and those firms.

There were no indications that Geithner was in any way corrupt. He has been widely criticized for his policies but not for a lack of integrity. He did not need to bribe financial firms to obtain lucrative positions in the private sector because all doors had already been open to him when he left the New York Fed. Since he did not seek political office, he did not need to court donors. Rather it turned out that in times of crisis when fundamentals were skewed, panicked investors looked for any clues that would give them an edge. Accordingly, the study found that price jumps resulted merely from the market’s expectation that connected firms would have better access, the so-called “social connections meets the crisis” interpretation. This expectation was correct because Geithner did hire people whom he trusted since “during times of crisis and urgency, social connections are likely to have more impact on policy.”22 Urgent situations necessitate sidestepping bureaucratic processes and relying more heavily on trusted established personal connections. So Geithner’s hiring choices were the result of an established pattern of human behavior, according to which people prefer to work with those whom they know and trust. Most likely, anyone in a job with extraordinarily high stakes would prefer hiring familiar and loyal people with whom they are comfortable rather than total, albeit perfectly qualified, strangers.

Due to Wall Street’s and Main Street’s tight interconnections and complexity, policy makers seek advice from Wall Street peers who have relevant expertise, are informed, and have decision-making power. While this seems expedient, especially since there are few alternatives, it is doubtful if anyone—even given their best efforts—can completely escape the bias of self-interest or cultural capture. “Cultural capture” in this case means that the financial industry indirectly influences regulators by subtly convincing them that the interests of the financial sector are identical to those of the general public. The assumption is that if policy makers hang out long enough with Wall Streeters, they begin to relate to them, subconsciously adopting their viewpoints and giving them preferential treatment. Politicians will always be influenced by the people they talk to; hence the success of the thriving lobbying industry. The study concludes that the benefits for connected firms were temporary and a result of the crisis atmosphere: “Once policy discretion declines and the speed with which important decisions have to be taken slows down, these connections become less important.”23

Thought Leaders—Superhubs of Valuable Information

Thought leaders are their own individual think tanks. They provide analyses on various aspects of finance and the economy and, as a result, influence the way we view the world. What exactly do they do, how great is their influence, and why have they become so popular?

I had the privilege of working with such a thought leader during the height of the financial crisis: Nouriel Roubini, a noted economics professor at New York University’s Stern School of Business and chairman of the consultancy firm that bears his name. Of Jewish Iranian heritage, he was born in Turkey and grew up in Italy. After earning a PhD in economics at Harvard University, he worked at the IMF, served as senior economist for the Council of Economic Advisers, and subsequently became a senior adviser to Tim Geithner at the U.S. Treasury Department. He has authored numerous books and been granted various honors and distinctions. Roubini was prominently featured in the Oscar-winning documentary Inside Job, and in a cameo in the movie Wall Street 2 by famed film director Oliver Stone, which earned him a coveted invitation to the Cannes Film Festival.

Roubini is a professor right out of central casting: Not particularly vain, he is usually dressed in a slightly disheveled shirt, with collar and tie perennially askew. In an otherwise rather dry industry, he is one of the more colorful characters, making headlines with both his professional and personal life. His connections encompass the academic, policy, financial, and corporate world, and he is influential not only because of his academic credentials but also because of his central network position.

Working with Roubini was a fascinating learning experience and provided exposure to some of the most interesting and powerful people in the world. At the same time, it was also exhausting due to the never-ending financial crisis and his extremely busy schedule.

He was one of the few forecasters who had presciently and accurately predicted the U.S. subprime crisis and its dramatic consequences for the global financial system several years in advance. If the system was on the brink of failure, you would not have known it at the WEF in Davos in the beginning of 2007. There, blissful optimism prevailed.24 For instance, Laura Tyson, then dean of the London Business School and former chief of the U.S. Council of Economic Advisers, said that she was betting on “another Goldilocks year.” Jacob Frenkel, then vice chairman of AIG International, said that the “perma-bears”—those who were negative about the future of the economy—would be proven wrong in the course of the year.25 Critics such as Roubini were in the minority, regarded as attention-seeking doomsayers and subject to vociferous criticism. However, when the dominos began to fall, the pendulum swung to the other extreme: Suddenly, the previously dismissed were feted as sages. Roubini quickly became a sought-after adviser and was flown around the globe to speak to presidents, central bank governors, and CEOs of global companies. Many of these meetings were return trips to the inner sanctum of power where he had once worked: the White House, the Treasury, and the IMF.