Worse than a jet, or an office

It’s fashionable to complain about CITI’s bailout-funded jet or Merrill’s bailout-funded office. But a far more troubling are Wall Street’s bailout-funded lobbyists:

Robert Reich’s Blog: How You and I Are Paying Wall Street to Lobby Congress to Go Easy on Wall Street
The new administration and Congress are busy preparing the second tranche of bailout money for Wall Street — TARP II — at the same time they’re developing a new set of regulations to make sure Wall Street doesn’t get into this kind of mess again. But will the old politics intrude?

Wall Street is one of the biggest campaign contributors to both parties, and the Street’s contributions have increased considerably over the last several election cycles. According to the Center for Responsive Politics, by the 2006 elections, Wall Street contributions to the Democratic Party had caught up with its rising contributions to Republicans.

Yet what’s happened to the Wall Street campaign contributions and to the lobbyists? They’re still going strong. We now know that many of the financial giants that have been bailed out by taxpayers continue to finance a platoon of Washington lobbyists, who are at this moment trying to influence TARP II and the next attempt to regulate Wall Street. In effect, your money and mine, and that of all other taxpayers, is paying these lobbyists to push Congress in a direction we have every reason to believe is not in our interests but in the continued interests of Wall Street. Citigroup, the recipient of $45 billion of taxpayer money so far, is still fielding “an army” of Washington lobbyists, according to the New York Times. Its lobbyists are working on a host of issues, including the bailout. In the fourth quarter of 2008, when it got its first infusion of bailout money, Citi spent $1.77million on lobbying fees. During the last three months of 2008, at least seven other firms receiving bailout funds (American Express, Capital One, Goldman Sachs, KeyCorp, Morgan Stanley, PNC and Bank of New York Mellon) lobbied the government about the bailout.

It is dangerous to the country that Washington is giving failed banks money with which to extract political favors from Washington.

Six months ago, if I would have been asked what the largest, most politically connected, corrupt, and insolvent banks were, I would have guessed names like Industrial and Commercial Bank of China, and China Construction Bank: not Citi and Bank of America.

It would be better to allow the banks to be nationalized than keep funding this aristocracy of pull.

(Hat-tip to Economist’s View.)

6 thoughts on “Worse than a jet, or an office”

  1. I love great reporting and the results it can produce:

    http://www.huffingtonpost.com/2009/01/27/obama-officials-tells-cit_n_161202.html

    Unfortunately, the lobbyist issue is just another example of empty promises of change from Obama. Much like his allegedly indispensable DOD undersecretary who just has to receive an ethics waiver from Obama to serve.

    We need Paulson and his cronies under oath in Congress or (better yet) a federal courtroom ASAP. This did not happen without their knowledge.

  2. The CitiJet is a non-issue. Like executive bonuses, it serves only to mask issues such as the very large losses Citi incurred, and the reason for these losses (poor choices by executives chosen by a bord elected by shareholders).

    Preventing shareholders from profiting from the Bush-Pelosi bail-out is far, far more important than whether or not some executive named by the board chosen by the shareholders gets to fly in a jet while he works there.

    The CitiJet probably plays really well for the Lou Dobbs and Huffington Post crowds. But again, it’s a non-issue.

    The shareholders lost billions on bad investments, and want to be saved by the Treasury. That’s far, far more systemically important than a travel itinerary of some high-ranking employees.

  3. Agreed.

    I fear some failed mix of nationalization, insurance and small Band-Aids with expensive price tags.
    The mortgage crisis is far from over (now affecting the other half of bad mortgages, the option-arm and Alt-A’s that primarily affect the middle class and formerly wealthy) and all I see are ever more complicated schemes to evade fixing it.

  4. Thank you. I had not heard of the Principal-Agent Problem before. Very applicable to my developing understanding. I gather the behavior of certain unions (UAW) could fall under this?

  5. Glad I could be of help!

    In my antilibrary is The New Industrial State, which dwells on where the agency problem ultimately leads.

    In the old days, when chief executives were paid salaries and had perks (but that’s it), the CEO really doesn’t care about profitability so long as the company does not go bankrupt and he is not actually booted by the board. Liberals saw this as an opportunity: you did not have to encourage CEOs to be productive with tax breaks (since they didn’t care about shareholder value anyway), and you could encourage them to do as you like by varying rules and regulations. In this model, the CEO cares about the size of his office, not the shareprice.

    Shareholders eventually recognized this, and began granting CEOs pay based on share price performance, or stock options, or stock grants, or the like. An agency problem still exists, however. While the old-style CEO did not care about shareprice, except insofar as it allowed him to keep his job, the new one had an incentive to ramp-up short-term share price (while it was still under his influence) and discount true net present value. So if a company’s share price was 50, a new-style CEO has an incentive to ramp it up to 150 and cash out, even if this results in a true net-present value of 0 (say, it guts the company, involves shady accounting practices, etc).

    [1] http://en.wikipedia.org/wiki/The_New_Industrial_State

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