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

Purchasing Political Protection

If you feel that some firms are less scrutinized than others, it may not be your imagination. The discretion possessed by the SEC opens it up to the possibility of manipulation. A study from the London Business School illustrates that politically connected firms are on average less likely to be involved in an SEC enforcement action and face lower penalties if prosecuted. The study further substantiates statistically that the more a company spends on political donations, the more lenient the treatment. It follows that the SEC has focused not on the worst but on the least-connected offenders. Unsurprisingly, financial contributions are most efficient if made to high-ranking politicians from the majority party and those setting the SEC budget or sitting on oversight committees.26

Critics argue that buying influence in a democracy borders on legalized corruption and that the lucrative financial sector prevails at the expense of the common good. This argument makes sense for a variety of reasons. While it is completely legitimate to represent one’s interests to the powers that be, there are few restrictions and checks and balances when it comes to purchasing favors in Washington. Former officials have been critical as well, among them Sheila Bair of the FDIC. In her book Bull by the Horns, she criticizes the “undue influence of the financial services lobby.”27 In her opinion, the relationship between Washington and Wall Street had become too cozy, and too many of the people involved in handling the crisis—at both the senior and staff levels—had been responsible for some of the regulatory errors and missteps that had brought us the crisis to begin with.”28

But this argument also works in the reverse: Regulators with private-sector experience have a much better understanding of financial institutions’ operations. Since these institutions are staffed with highly qualified, highly incentivized, and highly creative people—many of whom are world-class experts in circumventing legal provisions—this can come in handy. Case in point: Robert Khuzami, who has traversed between the public and private sectors several times. After working as general counsel for Deutsche Bank, including during the years of the financial crisis, he joined the SEC, arguing that his experience in the private sector would improve his enforcement results. When he left the SEC in 2013, he accepted a $5 million offer from the law firm Kirkland & Ellis and complied with a one-year “cooling off period” before joining his new employer.29

RELATIONSHIP POWER: DIFFUSING THE EURO TIME BOMB

During the course of the financial crisis, the role of policy makers and politicians became crucial, and relationships were put to the test. Washington D.C., temporarily replaced New York City as the financial capital of the U.S.; in fact, many laid-off bankers moved south for jobs in the Capitol. Politicians all over the world were out of their element and lacked the financial acumen to manage the complex situation. In addition, politicians were first and foremost committed to their own constituents, while preserving the international financial system required cross-border measures. Therefore, they were forced to compromise in a highly uncertain situation where the value of their concessions was impossible to calculate. The euro’s design defect had contributed to the fundamental fragility of the financial, economic, and political system, which made cooperative goodwill even more important.

In the spring of 2010, Greece became increasingly more cash-strapped while violent social unrest erupted on the streets. As a result, international financial markets started to panic and became extremely volatile. Within just five days, one of the smallest economies in Europe had sparked a crisis that threatened to spread to Portugal and Spain, leading to fears of a currency breakup with incalculable consequences. A disorderly currency implosion, or only the fear thereof, triggering a run on the banks and a market crash was everyone’s worst nightmare.

Following the traumatic collapse of Lehman Brothers in 2008, the U.S. administration was particularly worried about contagion in the global financial system spreading to U.S. shores. Therefore, it took the liberty of volunteering unsolicited advice and exerting gentle pressure on Europeans. From the perspective of their own more unified system and proactive mentality, they could not understand why the Europeans seemed so lethargic. Meanwhile, the Greek situation grew much worse very fast, and within days it became clear that—for the very first time—one of the eurozone states needed rescue. Heads of state such as Angela Merkel, Nicolas Sarkozy, and Silvio Berlusconi hurriedly assembled with finance ministers and central bank governors over the weekend to search for a solution, while the public was kept in the dark. A “time bomb” was ticking: On Monday morning, Asian markets would open, and if they crashed, they would likely take the global markets down with them. The leaders of Europe feared that the euro was in acute danger of unraveling.

With the cooperation of IMF chief Dominique Strauss-Kahn, central bank governors—under the guidance of Jean-Claude Trichet, the president of the European Central Bank; Mario Draghi, the Head of the Central Bank of Italy; and Fed chairman Ben Bernanke—took a leading role in coordinating measures. It was extremely difficult to align seventeen different eurozone countries and many other leading nations around the world within just a few days, as opposing ideologies and competing interests clashed. While their overarching mutual interest—the integrity of the financial system—provided a strong motivation to reach an agreement, there were many legal, political, and logistical hurdles to overcome. Nerves frayed, and contentious discussions ensued.

In the end, their cooperation was effective because so many of the policy makers knew and understood one another. Bernanke, Draghi, and Trichet had a close bond and could speak in shorthand. Strauss-Kahn was respected and had a good working relationship with virtually everyone, so his word carried weight. Many of the politicians had built relationships over the years, were familiar with one another’s idiosyncrasies; and knew how to push the right buttons, build alliances, and negotiate to reach a mutually beneficial solution. Germany and France were close because Angela Merkel and Nicolas Sarkozy were close. Together, they corralled other leaders into their corner and reined in more-difficult characters such as Berlusconi. Eventually, they came to an agreement once vociferously opposed by the Germans: government funding by printing money. Bernanke provided a swap line, and Strauss-Kahn generously contributed money on behalf of the IMF, even though it exceeded his authority and necessitated retroactive approval by the IMF board.30

In the end, the eurozone created a rescue mechanism that amounted to a total of EUR 750 billion. The solution was hastily stitched together and had many flaws, but it prevented the system from breaking apart. Such complicated negotiations would have been exceedingly difficult and likely less constructive if the participants hadn’t had—at least for the most part—close relationships.

SUPER-ENTITY: THE CAPITALIST NETWORK THAT RUNS THE WORLD

The key players in the financial sector are also closely intertwined with members of the corporate sector.31 Global corporations are mega-power centers. In terms of economic entities, many of the world’s largest corporations rank higher than countries when measured by returns and GDP and many of these corporations are financial firms. Only 737 shareholders retain at least 80 percent of the control over these corporations. A study from the Swiss Federal Institute of Technology reveals the network of their interwoven ownership structures. Researchers started out with a database comprising 37 million economic actors, which they narrowed down to 43,060 transnational companies. They then modeled the cross-holdings and discovered that a tightly knit group of 1,318 companies hold a large portion of the corporate control in the world. The inner core consists of 147 companies, which are the most powerful and essentially all own parts of one another.