Ted Kaufman is something of a hero to people like me. He is the longtime Joe Biden aide appointed to fill Biden’s Senate seat in 2008, who used the opportunity to make Wall Street squirm. His signature proposal was the Brown-Kaufman amendment to the 2010 financial reform bill, which would have split each of the country’s three biggest banks roughly in half. The proposal died after a tough fight in the Senate, but it established Kaufman as one of the most serious-minded reformers in Washington.
I spoke to Kaufman and his chief of staff Jeff Connaughton a number of times while reporting my book on the Obama administration, and I always came away impressed with their knowledge of the financial system. So I was eager to read Connaughton’s own book, The Payoff, when it came out a few weeks ago, and I wasn’t disappointed. (The hard cover version is due out next week.)
Connaughton shares new details from the Brown-Kaufman crusade, which will be gripping to anyone interested in taming overgrown banks. But the book’s most important contribution, I think, is to tell the story of corporate influence over financial policymaking dating back several decades. You can pretty much feel the acid gushing into your stomach as you read it.
Connaughton has real authority as a narrator: He worked in a succession of investment banking jobs after earning an MBA at the University of Chicago in the 1980s. After Stanford Law School and a stint in the White House counsel’s office in the mid-1990s, he spent 12 years raking it in as a lobbyist, most of them as a partner at Quinn Gillespie & Associates, one of the most connected firms in town. When Connaughton condemns the revolving door, he’s a million miles from innocent, but he certainly knows what he’s talking about.
Some of the most eye-opening passages in the book draw on this body of knowledge. For example, despite having written about economic policy for over a decade, I’d never heard the term “Blob” before—a reference to the Wall Street-regulator industrial complex that governs our financial system. Connaughton dissects it with the practiced hand of a med-school anatomy instructor:
A king has his retinue, a celebrity his entourage, and Pig-Pen his cloud of dirt. Washington has The Blob. The Blob (it’s really called that) refers to the government entities that regulate the finance industry—like the Banking Committee, Treasury Department, and SEC—and the army of Wall street representatives and lobbyists that continuously surrounds and permeates them. The Blob moves together. Its members are in constant contact by e-mail and phone. They dine, drink, and take vacations together. Not surprisingly, they frequently intermarry. Indeed, a good way to maximize your family income in DC is to specialize in financial issues and marry someone in The Blob. …
A Blob member can simply take his or her non-Blob spouse to Blob parties—convivial gatherings of lobbyists and Wall Street emissaries, SEC and Treasury Department officials—to help gather and disseminate intelligence. It’s a weekly, and sometimes nightly, occurrence in Washington.
Connaughton also takes you through the cold calculus of an industry lobbyist peddling influence in Congress:
[I]’ve always thought a good career strategy for any lobbyist would be to select four or five key senators—on the most important committees, from states where reelection isn’t assured—and become deeply involved in their fundraising and political activities. If you can raise money from some group of pockets or simply facilitate the senator’s campaign aides in meeting the right people who can help raise money, you’re valuable.
But you can’t be a one-and-done fundraiser. Your commitment and involvement need to be sustained—and perceived as such. If you can put that amount of effort into five senators, you’ll become their Washington friend. And that means you’ll always have access. If they begin to trust you, they’ll listen intently when you come to them with a request. Your reputation for being part of their trusted circle of political advisors will grow. As a result, more and more special interests will hire you to help them ask for senatorial favors.
Thanks to his years of experience operating in this netherworld, Connaughton was immediately able to identify the SEC as a dysfunctional agency (dysfunctional from the perspective of the average American, that is; perfectly functional from the perspective of The Blob). The liveliest passages of the book describe Kaufman and Connaughton’s ongoing faceoff with the agency over such potential time-bombs as “dark pools” (in which institutional investors trade enormous hunks of stock with one another, unbeknownst to the rest of the market) and high-frequency trading (in which ultra-fast computers use fancy algorithms to score profits out-of-reach to ordinary investors, whom the machines often prey upon).
One of the book’s climactic moments is an October 2009 meeting with SEC chairman Mary Schapiro, which Kaufman and Connaughton demanded after several months of unresponsiveness. Kaufman’s pitch was as follows:
Just like with derivatives, which blew up and nearly sank the country, we’ve got the same formula with HFT [high-frequency trading]. ... Whenever you’ve got a lot of change, a lot of money, no transparency, and therefore no effective regulation—watch out. Because the next thing you could hear is “boom.”
Schapiro heard the senator out and blandly assured him she was committed to a comprehensive review. At which point Kaufman lost his patience: “I don’t believe you’re going to do anything about high-frequency trading,” he said. He was mostly right, but not entirely. Thanks in large part to his persistent hectoring, the SEC did subsequently announce a handful of useful (if too-small) reforms.
Connaughton’s account is both heartening and depressing in the end. Heartening because it shows that, if just a few more senators like Kaufman sunk their teeth into The Blob and refused to let go, they could actually accomplish a fair amount. Kaufman was, after all, a two-year Senate appointee with little leverage other than his power to write letters, badger witnesses at committee hearings, and agitate in the press. And yet he put a real scare into the Bloberatti. Imagine if a Senate veteran or committee chairman were just as driven.
On the other hand, Kaufman was able to devote himself to the cause largely because, having decided not to contest his Senate seat in 2010, he didn’t have to spend every waking moment either hustling for campaign cash or contemplating his next hustle. The very thing that made Kaufman effective—his complete independence—is the thing you almost never encounter in more powerful politicians. (Former Connecticut Senator Chris Dodd, whose name is on the landmark financial reform bill, comes in for especially rough treatment in this regard.)
And, of course, it's more than a little discouraging that even the good guys in this struggle are often people who, like Connaughton, spent years on the dark side. It's fair for any reader to ask why Connaughton didn't rat his former colleagues out before making his millions on K Street.
However you come down on these questions, though, it's at least worth knowing where to channel your frustration, and Connaughton is as useful a guide as you’ll find (not to mention a graceful and stylish writer). I can't recommend the book enough.
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