Throw Them All Out

by Peter Schweizer

  If you work anywhere in America—a corporation, the government, or the nonprofit sector—there are whistleblower laws to protect you if you report financial crimes. In 1989, federal ethics rules protected whistleblowers from retaliation if they exposed financial corruption in government. The Sarbanes-Oxley Act of 2002 extended those same protections to corporate America and nonprofit organizations. If you see your boss engaging in insider trading or fraud, you can report him to the authorities and you will be protected from retaliation. But Congress conveniently exempted itself from those requirements. Its members are effectively the only group of powerful people in America who can retaliate against whistleblowers who expose their financial crimes.

  Another example: extortion, a crime defined as a person getting or attempting to get money, property, or services from someone through coercion. That coercion may include the threat to harm someone, physically or otherwise.

  When ordinary Americans engage in extortion, they get arrested. Consider the case of a Bradenton, Florida, businessman who owned a tanning spa. One customer claimed that she was burned by his tanning lamps, and she sued him. The case was settled by his insurance company. The businessman was upset, however, and after the settlement he sent a letter to her two attorneys demanding $5,000 from them or else he would send complaint letters to local and state agencies, the state bar association, and the attorney general's office. The attorneys called the police. The businessman was arrested for attempting to "extort money" from the lawyers.21

  Politicians have the power to extract wealth and favors based on their ability to help or harm people. While not as explicit as the extortion by the tanning spa owner, congressional extortion goes on regularly in Washington. When they want campaign contributions or preferential treatment, members of Congress may threaten businesses or individuals with harmful legislation. There is a name for this type of coercion: "juicer bills" or "milker bills," designed to "juice" and "milk" campaign contributions and favors from businesses and industries. Professor Fred McChesney, who teaches law at Northwestern University, says this is nothing short of "political extortion." Politicians threaten to tax something or regulate something in order to extract a campaign contribution, or even for personal financial gain.22

  How powerful is this weapon? The mere threat of adverse legislation can affect a company's stock price. Two academics looked at thirty cases in which businesses were threatened with political action and the threats were later retracted. The study found that those threats "significantly" affected the stock prices of companies.23

  Milker bills are often introduced in the area of taxes, says McChesney. Members of Congress threaten to impose a new tax and then withdraw the bill after campaign contributions flow in. Of course, the contributions were the point in the first place.

  In the summer of 2006, Senate Majority Leader Harry Reid announced that he wanted a tax hike on hedge funds. At the time those funds were taxed at the capital gains rate of 15%. Reid declared that Democrats would put at the top of their agenda taxing hedge fund profits as regular income rather than as capital gains, meaning rates of 25% or higher. So they began working on legislation.

  In late January 2007, shortly after the Democrats had captured both houses of Congress, Senator Charles Schumer sat down to dinner with a number of top hedge fund managers at Bottega del Vino in Manhattan. The net worth of the managers at the table totaled more than $100 billion. As the New York Times recounted, hedge funds up to this point had spent very little money on lobbying and campaign contributions. They were quite content to be left alone by Washington. But Schumer, who headed the Democratic Senatorial Campaign Committee, wanted to change that. And with the threat of a tax increase, suddenly the hedge funds became very generous. According to the Federal Election Commission, over the course of the next eighteen months, hedge funds dumped nearly $12 million into campaign accounts—with 83% of the money going to Democrats. John Paulson, one of the most successful hedge fund managers, held fundraisers for the Democratic Senatorial Campaign Committee. James Simons, a hedge fund manager who made $1.7 billion in 2006 alone, donated $28,500 to the DSCC, and Schumer raked in $150,000 for his campaign chest. Bain Capital and Thomas H. Lee Partners, both Boston-based investment houses with hedge funds, gave generously to Senator John Kerry.

  PAY UP, OR ELSE

  The political class also profited indirectly, because the hedge funds hired lobbyists, often the friends and former aides of politicians, to fight the bill. The Blackstone Group, which manages a huge hedge fund, had previously spent $250,000 a year on lobbying. Now Blackstone hired a number of Democratic Party lobbyists, including Schumer's former staff counsel, and spent more than $5 million on lobbying in 2007 alone. The Managed Funds Association, a lobbying group for hedge funds, also hired Democratic Party lobbyists, including a firm that employed Schumer's former aide for banking issues. Overall, dozens of former Democratic congressional staffers were hired with lucrative contracts to fight the bill.

  Then, in the late fall of 2007, Senator Reid and his colleagues suddenly changed their tune. The Senate schedule, it seemed, was just too crowded to deal with the issue. The threat of a tax increase for hedge funds was withdrawn.

  Politicians are so good at throwing their weight around that the banking industry had to lobby for legislation that would prohibit banks from lending to congressional candidates during election time. Why would they do that? Presumably out of fear that politicians would pressure them for special deals.

  In our system of government, the legislative branch polices itself and the President is allowed to skirt conflict of interest laws because, well, he's the president. It is time for that to change.

  9. WHY THIS MATTERS

  Government is a trust, and the officers of the government are trustees, and the both, the trust and the trustees, are created for the benefit of the people.

  —HENRY CLAY

  THERE'S A STORY about a politician who returns from Washington to his home district to run for reelection. When his constituents learn that he is not yet a millionaire, they promptly vote him out of office. He must be stupid.

  There seems to be only one sure-fire way to prevent the Permanent Political Class from getting drummed out of power: maintain extremely low standards. We have come to accept minor indiscretions, financial malfeasance, and profiteering on the taxpayer dime as regular occurrences. And as those indiscretions and crimes (for the rest of us) mount up and become more common, we become even more tolerant of them. The standards become lower still. To steal a phrase from the late Senator Daniel Patrick Moynihan (on a different subject), we have defined deviancy down in Washington. The quality of our leadership is so low because we expect so little.

  The political class is able to exploit honest graft because they have been given a position of privilege and power, and they work very hard to persuade us that their well-being is necessary for our well-being. They work very hard to persuade us that they, and only they, are capable of "running" the country, or "managing" the economy. This, of course, is the classic appeal of the con: I may be a rogue, but I'm indispensable. George Washington Plunkitt made a similar appeal for Tammany Hall. Without the political machine in place, he warned, "it would mean chaos. It would be just like takin' a lot of dry-goods clerks and settin' them to run express trains."1

  At the root of the Permanent Political Class is a profound sense of arrogance. A good military commander should never consider himself to be irreplaceable, but many politicians in Washington believe precisely that of themselves. It is an ugly form of elitism, less overt than what we would see from the royalty of Europe in the seventeenth and eighteenth centuries, when the Sun King could proclaim, "I am the state." The modern, subtler version of this arrogance is the politician's belief that if we restrict his ability to engage in legal graft, the nation will suffer, because we won't be able to attract bright people (like them!) to run the country.

  Over the past forty years we have been governed by the best-educated political c
lass in our history. Today, debts mount, the financial markets are in turmoil, the economy is in terrible shape—and the Washington games continue. The problem is not a lack of smart people in Washington. There is no "smart gap." There is, however, a "character gap." Like the financial crisis on Wall Street, the root of the problem is not ignorance but arrogance.

  The Permanent Political Class tells us: We need them. Only they can dissect the entrails of the latest bill or understand the complexities of financial reform. They are making so many sacrifices on our behalf, they say. They are smart and well educated and could be making a lot more money somewhere else, they claim. We should tolerate a little honest graft on the side, or the occasional financial indiscretion, like failing to report income on their tax returns.

  Yet, of course, the political class is hardly the only group of people in the country making a sacrifice for public service. Our soldiers are underpaid. Those who enter West Point, the Air Force Academy, or Annapolis, or those who go through ROTC at a rigorous school, are just as smart. They certainly could be doing something else with their time. They choose the armed forces as an act of service; they are not looking to get rich as officers. Enlisted soldiers are not looking to cash in by joining the infantry. In the military they will never earn anything close to what they might earn in the private sector. And many of our best leaders over the last century or more have come out of our armed services. These are individuals who could have been running large corporations or institutions for far more money. Two-, three-, and four-star generals make less than a freshman member of Congress, even though they may be responsible for the safety and operation of more than 100,000 troops. If today we had a five-star general like Dwight Eisenhower—and we don't—he would still be paid less than a freshman congressman.2 And yet it is impossible to imagine that the military brass would ever argue that they deserve to make a little "on the side" as indirect compensation for their service.

  Indeed, in the early 1980s, when the United States was in the midst of another (smaller) budgetary crisis, President Ronald Reagan released to the public letters he had received from American soldiers serving in Europe. They weren't griping about possible cuts. Just the opposite: they offered to take a pay cut if it would help the country. When was the last time you heard a member of the Permanent Political Class offer to do that?

  When Gordon England was appointed to become deputy secretary of defense in 2006, members of the Senate committee that would hold hearings and vote on his confirmation had a simple and blunt request: You must give up the lucrative stocks and options you have in companies that do business with the Pentagon. Such divestment had been a requirement of the Senate Armed Services Committee of senior Pentagon appointees for decades, designed to eliminate any "military-industrial complex" conflict-of-interest concerns that might arise. The restriction was not limited to just missile manufacturers or companies that made bullets. "We're not allowed to buy Coca-Cola stock because military guys drink Coke," said England, "and we couldn't have stock in cereal companies because military guys eat cereal."3

  And who were the senators sitting across from England at those hearings? The same senators who wrote the defense bills, added earmarks, determined which military systems were bought or rejected. The same senators who were privy to private conversations with contractors and Pentagon officials, and received classified briefings on defense contracts, military systems, and Pentagon strategy. In other words, the very people who controlled the federal budget. They were free to buy and sell as many shares of defense stocks as they wanted to. Indeed, 19 of the 28 senators on that committee at the time held stock in companies that do business with the Pentagon.

  The Permanent Political Class tells us they are concerned about financial corruption and financial crimes. They applaud legal crackdowns on corporate criminals and berate corporate executives for their huge salaries and tax shelters. The Permanent Political Class believes that everyone needs to be policed on this front. Everyone, that is, except for themselves. Why did the Tammany Hall political machine gain so much power in New York City? Why was it a dominant force for more than a century? You could point to the patronage system, or the payoffs. But in the end the machine survived because the public came to accept it. New Yorkers came to tolerate the idea that you could use "legal graft" to get rich from "public service" because that was just the way things were done. Sadly, the same attitude holds true today when it comes to crony capitalism. We get outraged when members of Congress or the President breaks the law, but we ignore the legal graft that is far more prevalent.

  As long as the Permanent Political Class gives us what we want, we are happy. This was precisely the goal of Tammany Hall: make people dependent on us. Plunkitt explained that the fondest dream of bosses like himself was a situation where "the people wouldn't have to bother about nothin'. Tammany would take care of everything for them in its nice quiet way."4

  America is supposed to be a nation ruled by laws, not by men. Central to that idea of America is the notion that we are equal before the law. That means that the laws should apply equally to everyone.

  For one of the chief architects of the Constitution, this notion of equality before the law was the "genius of the whole system." As James Madison wrote in Federalist No. 57: "I will add, as a fifth circumstance in the situation of the House of Representatives, restraining them from oppressive measures, that they can make no law which will not have its full operation on themselves and their friends, as well as on the great mass of society. This has always been deemed one of the strongest bonds by which human policy can connect the rulers and the people together. It creates between them that communion of interests and sympathy of sentiments, of which few governments have furnished examples; but without which every government degenerates into tyranny."

  Why do the American people feel detached from Washington? Why are they fed up? Why do they feel little connection to their elected leaders? Why do our lawmakers in Washington seem to show so little urgency? Part of the answer lies in the fact that politicians are allowed to operate by a different set of rules. And that is a dangerous place for a representative government to find itself.

  The Permanent Political Class is unresponsive to our concerns and needs because it is partly immune to the economic realities the rest of us face. Its business has, in a phrase popular with money managers, downside protection and guaranteed upside potential. For crony capitalists, there is a business cycle, but they control it and can make money no matter how and when it turns. This means socialism for the Permanent Political Class and its friends—and capitalism for the rest of us.

  The Permanent Political Class offers all sorts of arguments to justify its special status and its exemption from conflict-of-interest and insider trading laws. Members of Congress will argue, for example, that they are required to disclose their financial transactions and assets, and voters can boot them out at the ballot box. Never mind that those financial disclosure forms are often filled out incompletely or incorrectly. According to the congressional newspaper Roll Call, 25% of them contain significant errors.5 The point is, many lawmakers believe they must be kept above the fray, beyond the reach of the executive branch. They regularly exempt themselves from the level of scrutiny placed on other national leaders. They have even exempted themselves from Freedom of Information Act (FOIA) laws and open-document requirements. Their documents are as legally inaccessible as secret documents of the CIA—in fact, they are more difficult to obtain. At least some CIA documents become declassified and see the light of day. Congressional records never do. Congress passed the FOIA in 1966 because it believed that informed citizens would be better watchdogs. But Congress didn't want them looking into its own backyard.

  Financial disclosure forms are required for elected state legislators, state judges, and county or city commissions around the country. But public officials are also required to abide by conflict-of-interest and insider trading laws and restrictions. If elected state judges, for example, were held onl
y to the standards of federal lawmakers, they would be free to rule on cases in which they had a financial stake, as long as they faced reelection and filed financial statements. Would anyone like that idea?

  In forty-five states, one or both state legislative bodies have a requirement that if a financial conflict of interest exists, a member legislator "shall not vote on the matter."6

  American city councilors and county commissioners often have stricter rules than members of Congress, even though they have far less power and influence. In California, for instance, if you serve on a city council or county commission, you are subject to conflict-of-interest laws. As the state defines it, "You have a conflict of interest with regard to a particular government decision if it is sufficiently likely that the outcome of a decision will have an important impact on your economic interests." California has an oversight body, the Fair Political Practices Commission. One of the standards it uses is the "personal financial effect." If voting on a bill will cause you to gain or lose $250 or more in a twelve-month period, you should abstain.

  The commission offers this hypothetical example: "The Arroyo City Council is considering widening the street in front of council member Smith's personal residence, which he solely owns. Council member Smith must disclose on the record that his home creates a conflict of interest preventing him from participating in the vote. He must leave the dais but can sit in the public area, speak on the matter as it applies to him and listen to the public discussion."7 In other words, he can voice his opinion like any other citizen, but he cannot help make a ruling on the matter.

  For members of Congress, not only are they allowed to vote in similar circumstances, they can also quietly insert an earmark into any big bill in order to widen the road in front of their house. As long as one other person lives on that road, the ethics committee will sign off on it.