Notes from the Left Coast

Drummond Pike’s Blog

Like many, I’ve been entranced with the unraveling scandal involving Illinois’ governor and his crude attempt to leverage his power to appoint a replacement for the President-elect’s former Senate seat. US Prosecutor Fitzgerald, well known for his successful conviction of Scooter Libby, has adopted all the proper outrage that Blagojevich would so crassly seek recompense for this appointment. And it was crass. Stupid might also describe it, since he had quite publicly been the target of investigations for years. Evidently hubris can overwhelm almost any elected person, or so it seems. 

What’s missing from the debate, though, is a little realism. We have an electoral system that is so dependent on big fundraising as to be absurd. Senators from big states, it has been estimated, must raise $20,000 per day in office in order to finance their reelection campaign. This is not a friends and family affair, folks. People in office raise money from anyone they can just to survive, hoping they miss the taint of someone crooked in the process. The problem with Blagojevich is that he said it just so directly. But does anyone out there think that people write big checks for the fun of it? No, they write checks because they want something. 

Now, sometimes what they want is is better policy on an issue. I have a friend who is a big donor in politics. What she cares about passionately is that we end the “drug war” and all of its terrible effects on communities of color who bear the greatest burden of incarceration despite the fact that drug use is roughly the same across racial lines. She simply wants a voice for reason in a debate that is full of knee-jerk responses from politicians too scared of being attacked for being “soft” on crime when what we are dealing with is a public health problem fueled by a criminally controlled black market. 

But for every person like my friend who wants to do some good, there are legions of selfish, private interests trying to change policy for their own benefit or that of their businesses. Anyone who doesn’t try to connect money in politics and the 1990’s deregulation of the financial industry is just being foolish. Blagojevich’s scam to get others to contribute to his electoral funds is minor and almost innocent compared with the influence wielded by Big Oil, the defense industry, and Detroit over the years. They used money and influence to foster war, privatization, and unbelievably short-sighted fuel efficiency standards, all of which are costing us billions. 

Let’s be real. Politics is a dirty game and no one can figure it out. Conservatives on the Supreme Court ruled years ago in the Buckley v. Valeo case that spending money equated free speech in politics and could not constitutionally be constrained. Since that decision in 1976 during the aftermath of Watergate when efforts to reform political giving were active, it’s been a steady downward spiral.  The fact of the matter is that there are no real constraints on how the game is played. 

The political world is full of quid pro quo arrangements. People just don’t talk about them in that way. If any of us think that Harry Reid or Newt Gingrich never asked any of their supporters to support another politician’s campaign, you are in denial. If you think that by delivering dollars to those politicians Reid or Gingrich did not benefit, you are also in denial. Backs get scratched in politics. If Blagojevich had just publicly said he was “considering” appointing someone and then gone to every major supporter of that person, asking them to have a fundraiser for his Gubernatorial Committee, do you doubt that they would have delivered big time? Of course they would have. You just aren’t supposed to talk about it.

President-elect Obama,

Many of us in the progressive community are waiting to see how you shape the team to deal with the economic crisis that is affecting so many. So far, it’s not looking all that great, and I think we owe it to you to say so. You see, we all have so much hope that you will truly change the nature of politics in America. Your very election has been historic, but it will only become heroic if you face down those who have gotten us into this economic mess.

When you were elected President of the United States, you may not have realized that you were also elected CEO of the largest private equity “distressed asset” purchaser in the history of the world. You make those hedge funds guys pale in comparison to the kind of money you will be able sling around, and you can really make a difference if you do it right. The first thing, of course, is to realize that this is going to be half your job for the next 4 or 8 years. To do it well, you will need to begin by structuring these deals well. So far, on the other guy’s watch, that hasn’t really been the case.

Watching your appointments, I have to say I’m growing a bit worried. A buyer of troubled assets does a couple of basic things: one fires the managers, infuses the enterprise with equity or convertible debt, wipes out the shareholders, negotiates debt or other obligations, and then sells off, retools, or reforms the different parts of the enterprise. Those that are sold help pay for what the rest need. You install new management with clear accountability and metrics.

But with AIG, Citibank, and other deals being done right now, this is not what is being done. Instead, senior management is being left intact, shareholders remain largely undiluted, and even stock options are largely unaffected by the bailout packages. Where is the accountability in that? Big poorly run financial companies are using bailout money to purchase sounder, better run regional banks. Shouldn’t the opposite be happening?

Last July, Rob Johnson spoke to our Momentum conference and set forth an analysis that remains the best I’ve ever heard on the subject of how the bailout occurred. In a nutshell, it boiled down to big players chasing money in an unregulated environment, convincing themselves to overvalue complex assets in the process. Another friend, a former bank regulator, told me recently that one cannot penetrate these unregulated complex instruments to find the underlying mortgages to see whether Gertrude Stein’s there is actually there. In Johnson’s words, “it’s as though they put all these mortgages, or parts of them, into a blender and then told you that what resulted was good for you.” Anyway, it all makes me more than a bit worried about what you have to deal with.

More than anything, I hope that you find the kind of independent minds that can dispassionately analyze what they see and propose remedies without regard to their impact on themselves or those they know well. Many of those you have thus far recruited have better credentials for their contributions to what created the problem than ideas for how to remedy the results.

Why, for instance, are you all leaving Joe Stiglitz at Columbia undisturbed? Many suggest his is the most sanguine voice on both the problem and the solutions you might consider.