Extortion: How Politicians Extract Your Money, Buy Votes, and Line Their Own Pockets

by Schweizer, Peter

  But Friend was just one of many who crafted the convoluted bill, left government, and now command large fees from firms trying to make sense of it. Daniel Meade was the chief counsel on the Financial Services Committee under Chairman Barney Frank (the Frank of Dodd-Frank). Meade left Capitol Hill for Hogan Lovells, a well-established lobbying firm. When Meade arrived, the firm Hogan Lovells announced that Meade was “a principal draftsperson of substantial portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.” The firm’s publicity explained that Meade would be “representing financial services entities and other entities impacted by the regulation of those entities in connection with a broad range of regulatory and transactional matters, including issues related to the Dodd-Frank Act.”14 It makes all the sense in the world: if you can’t understand a complex new legal regime, who better to help guide you than one of the people who drafted it? But think about it from the perspective of the congressional aide: your future wealth depends on crafting a complex bill.

  Senator George LeMieux was surprised by the power that committee staff in particular wield on Capitol Hill. “I was stunned at how committee staff would address even senior senators.” That power came from their grasp of the details, which was not only a source of power but a future source of riches as well.15

  One of the most confusing sections of the Dodd-Frank Act concerns options and commodity trading. In the months after the law passed, at least nine employees of the Commodity Futures Trading Commission (CFTC) who helped write that section and establish its regulatory provisions left for lucrative jobs, helping large firms figure out how to comply. They went to positions at JP Morgan Chase, Deutsche Bank, Nomura Securities, PricewaterhouseCoopers, and the white-collar criminal defense law firm Covington & Burling. These firms either are subject to the confusing Dodd-Frank rules or advise other firms on how to comply with them.16

  It’s the perfect form of extortion: legal, obscure, lucrative, and impossible to avoid. Financial executives will pay just about anything to avoid legal vulnerability, especially when vulnerability can mean jail time. If they don’t understand what the rules are, they will pay someone who does. Little surprise that Harvey Pitt, the former head of the Securities and Exchange Commission, calls Dodd-Frank “the Lawyers’ and Lobbyists’ Full Employment Act.”17

  Companies by and large want to comply with laws and regulations. Executives don’t want to pay fines, or worse, go to jail. Cass Sunstein served in the Obama administration as the administrator of the White House Office of Information and Regulatory Affairs. “As OIRA administrator, I often heard the following plea from the private sector: ‘Please, tell us what you want us to do!’ On many occasions, companies said that they were prepared to comply with the rules, and to do so in good faith, but they needed to know what, specifically, compliance entailed.” Sunstein is no free market libertarian. He is generally liberal, and as a colleague of the president back when Obama was a law professor at the University of Chicago, Sunstein was a known quantity to his boss. Yet even the liberal professor admits that “regulation is often confusing, inconsistent, redundant, and excessive.”18 On top of that, the vagueness of these laws provides opportunities for the government to investigate someone under a wide variety of statutes, even if it isn’t clear that the party committed a crime. Robert H. Jackson, Franklin Delano Roosevelt’s attorney general, warned his prosecutors that federal law books were “filled with a great assortment of crimes” and that a prosecutor “stands a fair chance of finding at least a technical violation of some act on the part of almost anyone.” And that was back when the number of laws and regulations on the books was a fraction of its current number. It’s always a temptation for a prosecutor to be “picking the man and then searching the law books, or putting investigators to work, to pin some offense on him.”19

  John Allison recalls instances when his bank hired firms “filled with ex-regulators” to deal with complex regulations. The bank was especially interested in those who had “just left the government. We felt we had to hire certain consultants who had the contacts and relationships.”20

  But of course there is no money for the Permanent Political Class in providing companies with simple rules to comply with the law. As Professor Joel Mintz, an authority on regulatory law at Nova Southeastern University, puts it, “Regulatory compliance is quite a different matter than compliance with traffic law.”21 Professor Anthony Heyes of the University of Ottawa’s Department of Economics agrees. “Many firms are unaware of which regulations apply to them, how and when to comply, of when waivers and deferrals might be available, of how to keep and disclose appropriate records in the manner, and of the plethora of unwritten rules and conventions governing the way the regulator likes to do business.”22

  John Hofmeister, the former president of Shell Oil, saw how the process worked. “They deliberately write ambiguity into the law. It’s part of a career-building process. If you are a congressional staffer, you spend your career crafting complex legislative language. This equips you to leverage your postgovernment competence.” And complexity begets complexity. “The whole system builds on itself.”23

  Corporations and even investors themselves often hire consultants who wrote the law or rule in question. Those with detailed knowledge of what the Dodd-Frank law actually means can command salaries as high as $1 million from hedge funds. “Lawyers with Dodd-Frank Act and regulatory expertise are being wooed by private equity firms and hedge funds in need of an in-house compliance team,” reported the New York Law Journal in 2012.24

  For congressional staffers used to making 10 percent of that, it’s a huge payday. Senator Ron Johnson was first elected to the U.S. Senate in 2010 from the state of Wisconsin. A businessman and entrepreneur, he has hired plenty of people over the years. When it came to hiring congressional staffers for his new job, he was struck by a phrase that some applicants used during the interview process: “cashing in.” As in, “I want to work in public service for a while, before cashing in.” “I had never heard that term before when hiring someone in the private sector,” Johnson says. Time spent working at a lobbying firm or at a consultancy is “cashing in.” Some people work on Wall Street until they have enough money to “cash out.” In Washington, they set themselves up for those jobs in order to cash in.25

  It’s not just Dodd-Frank. Laws and regulations have become far more complex in every area. Why not? They’re moneymakers for those who write them. Often, those rules and regulations are not written by elected officials and their staffs but by bureaucrats in government agencies. “Often the details of a regulation are too complex to sensibly be enriched in law, so Congress delegates rule-writing authority,” explains Professor John Cochrane of the University of Chicago.26 The Occupational Safety and Health Act (OSHA), for example, though passed by Congress, provided little about the rules and standards governing specific workplace settings. Instead, the law empowered OSHA bureaucrats to write safety laws based on their interpretation of the law and their own expertise. Other government agencies, like the Department of Housing and Urban Development, the Fish and Wildlife Service, and the Department of Agriculture, have similar opportunities. They also have judicial officers who essentially function as administrative judges.

  In 2011 American businesses were required to comply with no fewer than 165,000 pages of federal regulations.27

  High-powered and expensive consulting firms in Washington are littered with former regulators who are eager, for a nice fee, to clarify the confusing rules they once wrote. A former SEC senior associate director now at the power firm Murphy & McGonigle offers a “financial services advisory” practice. His bio notes that he “was responsible for the development and administration of Regulation M, Regulation SHO, and the SEC’s interpretive guidance on Section 28(e) of the Securities Exchange Act of 1934.”28 In a press release the firm issued in 2011, it highlighted his “extraordinary breadth and depth of experience” and noted that he “will significantly enhance our ability to
serve our financial services clients . . . particularly during this period of rapid regulatory change.”29

  Another senior SEC official, who served as deputy director of trading and markets, went to work for the high-octane New York law firm Davis Polk to advise “on regulatory and compliance matters.”30 At the SEC, he “helped lead the development and implementation of investor protection policies, rules, and interpretations governing broker-dealers, securities markets, clearance and settlement systems, and transfer agents.” At Davis Polk he would now be advising “on regulatory and compliance matters involving securities and derivatives for financial institutions.”31

  One SEC commissioner resigned his post in 2007 and joined Cooley Godward Kronish LLP, where he worked in the business litigation practice. His expertise? The opaque and convoluted Sarbanes-Oxley Act, which made executives potentially criminally liable for their actions. This ex-commissioner could help clear away the confusion (for a hefty fee) because he was “one of the key policy makers and architects of the SEC rules implementing SOX [Sarbanes-Oxley]. During his two terms, he helped lead the SEC in the study and crafting of the Commission’s regulations implementing SOX.”32

  The D.C. power firm Skadden, Arps, Slate, Meagher & Flom LLP hired a deputy director of the SEC to help firms navigate through complex rules, boasting that he “assisted the commission with its consideration of significant rule amendments in a number of areas” and “advised the SEC’s office of legislative affairs on a number of regulatory reform matters that were adopted in the Dodd-Frank Act.”33

  These are just a few of the dozens of executives who have made the same transition—and not just in the realm of financial regulation. This sort of legal extortion occurs in every aspect of economic life.

  Health care regulations—which affect doctors, hospitals, drug companies, device makers, and insurance companies—provide another lucrative area for extraction. Part of the problem is that there are so many laws and regulations that doctors don’t even know about, some of which could put them in jail. “The list of physicians subject to all-too-easy indictment for violations of federal laws is long because the governing statutes and regulations are deceptively easy to violate,” says criminal defense attorney Harvey Silverglate. “These laws are not readily understood by medical practitioners operating in good faith because they are vague, complex, and often self-contradictory. If one adds up the number of physicians who are threatened by this state of affairs, it constitutes nearly every physician practicing medicine today.”34

  In 2004 the Department of Health and Human Services (HHS) was setting up rules for a massive expansion of the Medicare and Medicaid programs. At the center of that effort was Thomas Scully. A former Senate aide, White House official, and onetime head of the Federation of American Hospitals, he had been appointed by President George W. Bush in 2001 to head the Centers for Medicare and Medicaid Services. Never heard of this government body? You should know it: CMS is a government agency that oversees more than $600 billion in annual spending of taxpayer money on health care. In 2003 Congress passed, and President Bush signed, a prescription drug benefit plan for seniors. It was the largest change in government health care policy involving seniors in a generation. Given the rules and parameters of the program written by HHS officials, it was also incredibly confusing and difficult to digest. Health care companies, insurance companies, pharmaceutical firms, and medical device manufacturers had a difficult time understanding it. Which is probably just how it was designed to be. Shortly after the law passed and the regulations were written, Scully quit his job and inked a deal with Alston & Bird, a powerful Washington, D.C., lobbying and consulting firm. He also signed on with Welsh, Carson, Anderson & Stone, a New York–based investment firm. His fees were reportedly $1,000 an hour.35 His job? Advising “clients on how to navigate the complexities of the new Medicare law.”36

  The Affordable Health Care Act (aka “Obamacare”) is a massive bill of more than two thousand pages. There are also thousands of pages of additional “rules.” For example, HHS recently published just one 189-page rule setting out the regulations for doctors to form so-called accountable care organizations. Doctors complain that the requirements are “too complex and convoluted for them to understand.”37

  One of the key architects of the law was Elizabeth Fowler, who served as the chief health policy counsel to Senator Max Baucus, chairman of the Senate Finance Committee. It was Baucus’s committee that took the lead in drafting the bill. As Politico put it at the time, “If you drew an organizational chart of major players in the Senate health care negotiations, Fowler would be the chief operating officer.” After Obamacare became law, Fowler went to the Obama White House to oversee implementation of the law. She served as a special assistant to the president for health care and economic policy at the National Economic Council. After she oversaw much of the infrastructure developed for the law’s implementation, however, she cashed in, moving to the health care giant Johnson & Johnson, where she would lead “global health policy.”38

  The Affordable Health Care Act was passed in 2009. Another of its key draftsmen was Tom Daschle, the former senator from South Dakota who served as congressional point man on the bill for the Obama administration.39 After Obamacare passed, he cashed in, working full-time at a lobbying and consulting firm, representing a new batch of health-related companies eager to know exactly what the law would mean for them. Daschle says that he is not a lobbyist but rather provides “strategic advice on public policy matters”—to a law firm that is one of the most powerful lobbying operations in Washington.40

  Senator Arlen Specter’s health care policy specialist, John Myers, left public service after the bill passed to work for the Glover Park Group, a consultancy and lobbying firm. He now represents health insurance and pharmaceutical companies.41 Liz Engel, who was the health policy director at the Senate Democratic Policy Committee, joined him there.42 Other congressional staffers, from Nancy Pelosi’s top health care aide to staffers at the Senate Health Committee, House Democratic Policy Committee, and the powerful House Ways and Means Committee, also joined the consulting and lobbying business.43 It’s good and profitable work for those who crafted a bill that people still don’t fully understand.44

  Every aspect of regulatory life is now involved in the extortion racket. There is an “explosive growth of consultancy firms offering specialist advice on energy saving/compliance.”45 The Environmental Protection Agency (EPA) has passed a series of “self-audit” regulations that require businesses to monitor their own activities to ensure that they are in compliance with complex regulations. That, of course, requires regulatory expertise—jobs for ex-regulators.46 One government official explained in 2009, “The best opportunities should be in consulting services . . . in response to a growing demand for professionals to prepare environmental impact statements.”47 Many regulators suggest that businesses hire a consultant given the fact that they must deal with “complex environmental regulations.”48 There are even instances where a government agency like OSHA forced companies to hire “OSHA-approved safety directors” to comply with ‘voluntary’ guidelines.49 Talk about a jobs bill! How about a closed-shop jobs bill for the ultimate insiders union?

  When some banks were recently charged with foreclosure abuse, government regulators threatened to throw the book at them. To clean the mess up, they forced the large banks to hire expensive consultants—usually from firms that included their former colleagues. “The government insisted that the banks hire expensive consultants to do a review of every foreclosure that took place in 2009 and 2010,” writes Joe Nocera in the New York Times.50 The firm that Amy Friend joined, Promontory, made huge sums of money off the deal. “Promontory was a big winner, one of a couple of firms that earned more than $1 billion in fees.”51 A nice payday for those who are supposed to be helping victims. In the total settlement over foreclosures, only $3.3 billion actually went to people who were apparent victims, and most of them received an average of $868 per fo
reclosed home.52

  Some regulators have been caught running dubious “side businesses,” acting as regulators but also providing “advisory services” to corporations to help them get their environmental permits approved. In Utah, for example, a top regulator was sued by a company that claimed he was “extorting” money from it.53

  Complex regulations create opportunities for bureaucrats and politicians in certain industries, who put ex-regulators on their boards of directors as a form of protection. Researchers have found, for instance, that when the natural gas industry was heavily deregulated, the number of new board members with a political background decreased by 35 to 58 percent.54

  Paying an ex-regulator or bureaucrat is important not only for compliance efforts but also for the process of obtaining the exemptions, waivers, and loopholes that are now routinely included in some regulations. Often these exemptions are granted at the discretion of government officials. Hire a former colleague or boss and your chances of getting an exemption go up dramatically. Regulations are often ambiguous and confusing, and regulators have an immense amount of discretion in deciding how and whether certain regulations will be enforced, according to a study by Michael J. Licari, a professor at the University of Northern Iowa.55

  Complex and obscure regulations are enormously profitable for the Permanent Political Class. But they are enormously damaging to the rest of us—like any extortion scheme. Alan Siegel has spent decades pushing for greater simplicity in communications and has consulted with major corporations on simplicity in branding. Dubbed “Mr. Plain English” by People magazine, Siegel says, “Complexity robs us of time, patience, understanding, money and optimism.” He goes on: “The United States was founded and governed for over two centuries on the basis of a document that is six pages long. That is 0.1 percent of the length of the current income tax code, which currently runs a whopping fourteen thousand pages.” (Even IRS commissioner Douglas Shulman admitted on C-SPAN that he can’t do his own personal tax return anymore because “it’s just too complicated.”)56 Law professor Michael Waggoner at the University of Colorado argues that “laws must be specific enough to solve a problem . . . suspicion is likely to grow among citizens that long and nearly unreadable laws are hiding things, a suspicion that may often be valid.”57 According to Waggoner, the trouble is that complicated laws enrich those who make the laws while making the rest of society poorer.58