3
I have built my organization on fear.
—AL CAPONE
IT’S ONE OF THE OLDEST and most effective forms of extortion: the protection racket. Pay me money and I will promise to not make your life miserable. Fail to pay and bad things will happen to you.
Protection money has been the Mafia’s bread and butter for centuries. In the city of Palermo on the island of Sicily, 80 percent of the businesses pay protection money (pizzo) to the Mafia.1 If you fail to pay, you will be harassed, you might have your business burned down, and you might even lose your life.
In one famous case, a Palermo businessman named Libero Grassi refused to pay protection money and wrote an open letter to the mob in the local newspaper, Giornale di Sicilia. He addressed the letter “Dear Extortionist.” Nine months later, in August 1991, he was killed by the Mafia.2
The Permanent Political Class in Washington plays the protection racket too. Failure to pay will not get you killed—but it could kill your business. It might even make a difference in whether you will end up in jail. If protection money paid to the mob keeps them from literally burning down your business, protection money paid to the Permanent Political Class prevents them from figuratively burning down your business.
Current CEOs are loath to talk about it. They face regulatory and legal jeopardy and don’t want to make themselves a target for retribution. But former executives who are freer to speak out say it happens much more often than you might think. John Hofmeister, former president of Shell Oil, told me that while it didn’t happen to him during his tenure, he is familiar with the practice. “Anytime you are vulnerable to legal or regulatory compliance you can expect them to come after you with requests for money,” he said. “It’s like clockwork.”
Ray Plank, the founder and longtime CEO and chairman of Apache Corporation, is even blunter. “They basically come to you and say, ‘We are going to shove this bat up your ass and give you an enema. You better play ball.’ We saw a great deal of it. It’s an insidious blight.”
Companies large and small, as well as professionals like doctors, accountants, and lawyers, face a myriad of rules and laws that they are required to comply with every day. Undoubtedly, some of these laws are good. But many of them are complex and difficult to understand. Professor Alan Dershowitz estimates that today the average professional commits three felonies a day without realizing it, thanks to the complex layers of regulation and legal requirements that have been built up over time.3 And then there are the subjective legal actions that the federal government can take that might put you or your company in real legal jeopardy. This is precisely what happened when the Justice Department went after Microsoft in the 1990s on the grounds that it was engaged in anticompetitive activities. More recently, the Justice Department went after Apple and five book publishers over ebook pricing decisions. Fighting these cases costs tens and even hundreds of millions of dollars.
When Microsoft and other wealthy companies experience legal action that involves the threat of large fines (or perhaps even jail time for executives, depending on the charge), that makes them a prime target for financial shakedowns. Politicians and members of the Permanent Political Class are all too willing to offer some form of “protection” for the right price.
Indeed, consider the realities and the decisions that businesses must make when they are being investigated for possible criminal conduct by the Justice Department and then the president’s staff solicits them for donations. Or consider a lucrative industry under heavy political attack that is then asked to donate or hire individuals as consultants to make the problem go away.
As we saw earlier, Richard Nixon famously tied the actions of the Department of Justice (DOJ) and other regulatory agencies to his campaign fund-raising activities. Since then, the practice has become more subtle and less explicit. Being politically active and giving to candidates, as well as hiring the right lobbyists, does offer some protection. And the merging of law enforcement and political fund-raising has grown even closer in recent years. Indeed, when President Obama established his Justice Department staff after the 2008 election, something unprecedented happened. For the first time, at least half a dozen senior positions were occupied by individuals who had been campaign bundlers (fund-raisers) for a presidential candidate, including not only Attorney General Eric Holder but also senior officials who dealt with criminal and civil prosecutions: Associate Attorney General Thomas Perrelli, Deputy Associate Attorney General Karol Mason, and Associate Attorney General Tony West.4 Presidents have always selected Justice Department officials who share their views on legal issues. But seeking out individuals who actively raised large sums of money for the presidential campaign and then putting them into law enforcement positions—that is new in American politics. If an attorney general and his top lieutenants raised large sums of money from certain companies and industries, can we trust that they will judge those firms and industries impartially? If senior law enforcement officials are motivated enough to raise $500,000 for a candidate, can we be certain that politics won’t be part of their legal decision-making?
a. Attorney General Holder was a campaign co-chairman for the Obama campaign.
b. Deputy Associate Attorney General Chun advised Tom Perrelli.
In recent years few industries have been as under the gun as Wall Street and the financial industry. With the 2008 financial crisis, fraudulent mortgages, complaints of excessive compensation, large profits, and taxpayer bailouts, it is hard to have any sympathy for Wall Street. Yet the Obama administration has not filed any criminal charges against any major Wall Street investment banks or their officers. Could there be a simple reason? Could the Washington discussion about whether or not to investigate, whether or not to bring charges, be a cover for something else? Is it possible that Nixon’s methods are being replayed again in a new form?
While the Permanent Political Class debates how to deal with the problems in America’s financial sector, they are distinctly bipartisan about one thing: extracting as much money out of Wall Street as possible for their own benefit. Politicians on both sides have played the extraction process perfectly. President Obama raised record sums from Wall Street in 2008 and then declared on 60 Minutes, “I did not run for office to be helping out a bunch of fat cat bankers on Wall Street.”6 On the other hand, Obama privately positioned himself as the one politician who could protect the “fat cats” from the mob. Conversely, Republican congressional leaders publicly decried the verbal and regulatory attacks on capitalism, but privately relished the opportunity to seek out and receive “protection money.” They knew they could use the Democrats’ threats to raise money for themselves.
In early 2009, there were cries for aggressive legal actions against Wall Street firms. CNN predicted that some bankers could very well end up in jail.7 Commentators like Tom Gardner of The Motley Fool financial news service declared that “hundreds [of bankers] should go to jail.”8 It was amid that public clamor that President Obama, in April 2009, gathered twenty-five finance executives to the White House for a frank discussion. As ABC News reported, the president told them: “My administration is the only thing between you and the pitchforks.”9 One individual who attended the meeting told Politico, “The signal from Obama’s body language and demeanor was ‘I’m the president, and you’re not.’”10
To play this game best, an extortionist needs to sound convincingly threatening. Attorney General Eric Holder, despite having come from a law firm that represented many of the largest Wall Street firms, talked about criminal charges against individual Wall Street executives. And as the so-called Occupy Wall Street movement arose and occupied a park next to Wall Street, President Obama sounded supportive. According to the president, the protests and the civil disobedience reflected a “broad-based frustration about how our financial system works.”11 Democratic House leader Nancy Pelosi explained, “I support the message to the establishment, whether it’s Wall Street or the political establishment and the rest, that change has to happen.”12 Congresswoman Debbie Wasserman Schultz, head of the Democratic National Committee, added, “We understand their [Occupy Wall Street’s] frustration, we applaud their activism.”13
But time dragged on, without any criminal charges being brought. Soon the midterm election cycle loomed, and a major piece of financial regulation—the Dodd-Frank Wall Street Reform and Consumer Protection Act—moved toward passage. Wall Street money flowed to some of its fiercest critics in the 2010 election. That year, seven out of the ten top recipients of Goldman Sachs contributions, for example, were Democrats. Former Clinton secretary of labor Robert Reich declared that this was evidence that Wall Street was “bribing elected officials with their donations.”14 I would argue that Reich had the power equation wrong. It was the Permanent Political Class that threatened to cause severe damage to the financiers—not the other way around. As the late economics professor Peter H. Aranson puts it, “The real market for contributions is one of ‘extortion’ by those who hold a monopoly on the use of coercion—the officeholders.”15
The midterm election passed, and so did Dodd-Frank. But the extortion market continued. In mid-April 2011, executives at Goldman Sachs were worried. On April 13 , the Senate Permanent Committee on Investigations released a scathing report on alleged criminal conduct by Goldman and other firms during the financial crisis.16 The 635-page report created a panic. Forbes was soon reporting that Goldman executives were hiring white-collar defense attorneys.17 The Department of Justice was reportedly looking at possible criminal indictments.
In the weeks leading up to and following the report, a handful of Goldman executives poured more than $200,000 into the coffers of the Obama campaign and the Democratic National Committee. Three of those executives had never given to Obama before and had never even written large political checks.18 But now, in a non-election year, they were donating to the campaign. Goldman would learn that the Department of Justice had dropped its criminal investigation.19 Obama campaign advisers would also say publicly that their 2012 campaign strategy would involve “channeling anti–Wall Street anger” to their advantage.20
The message could not be more clear. The Democratic National Committee organized and promoted a March 7 White House dinner in the Blue Room for twenty “top Wall Street donors who could be key fundraisers” for Obama’s reelection bid, as Politico put it. They discussed policies that would affect the financial industry.21
“This was not a fund-raiser,” insisted Press Secretary Jay Carney. And indeed, it would have been inappropriate to host an explicit fund-raiser at the White House. But it was scheduled to “solicit ideas about how to improve the economy,” according to Politico, and the line between explicit and implicit fund-raising can be awfully hard to draw.
A Bloomberg survey found that fully 77 percent of Wall Street executives believed Obama was “anti-business.”22 Many of his supporters on Wall Street were frustrated by his anti–Wall Street rhetoric and were vowing not to support him this time around. But what choice did they have? The money continued to flow. By July 2011, just as Goldman executives were making their donations, cash from Wall Street made up fully one-third of President Obama’s campaign money raised by bundlers.23 As CNBC put it at the time, “Obama is relying more on Wall Street to fund his re-election this year than he did in 2008.”
By January 2012, Wall Street bundlers had already raised $2 million more than they had raised for Obama in 2008. They made up the largest bloc of bundled contributors to his campaign.24
Many on Wall Street were furious with the rhetoric. Paul Levy of JLL Partners voted for Obama in 2008 but had become frustrated by the rhetoric. “If he’s busy attacking people with wealth, why does he want to go to fancy restaurants and fancy homes to have these events? If he wants to go where the people go, I’m happy to go where the people go.” Levy suggested a fund-raiser at McDonald’s.25
Robert Wolf had been a supporter of President Obama’s since 2007, when he had first met him as a candidate. Wolf had bundled for Obama in 2008 and now served as an informal adviser to the president during the first term. Some considered him a “First Friend” to the president. Wolf ran the U.S. banking operations of the giant Swiss Bank UBS, which was under investigation by the federal government on several fronts. The Internal Revenue Service was looking into allegations that the firm was helping U.S. citizens evade U.S. taxes. During a 2009 hearing, Senator Carl Levin claimed: “Swiss bankers aided and abetted violations of U.S. tax law by traveling to this country, with client code names, encrypted computers, countersurveillance training, and all the rest of it, to enable U.S. residents to hide assets and money in Swiss bank accounts.”26 At the same time the Department of Justice was investigating other financial matters that involved the conduct of certain UBS executives. The Securities and Exchange Commission also had several other probes of UBS underway.27
Through it all, Wolf continued raising money for President Obama. In February 2009, UBS entered into a deferred prosecution agreement with the DOJ relating to charges that it impeded the IRS by hiding taxpayer identities. Although UBS did pay some fines, they were largely seen as slaps on the wrist considering the legal charges the firm and its executives might have faced. The DOJ dropped the charges against UBS eighteen months later, after the firm provided identities and account information for about 4,450 of their U.S. customers.28 Other bundlers came from JP Morgan Chase, JP Morgan, Goldman Sachs, and Bank of America, all of which were under SEC investigation and possibly under Department of Justice investigation as well.29
Extortion usually implies that the victims are innocent. Blackmail is the term used when they are guilty. I am not suggesting that UBS was innocent of wrongdoing, or that the other Wall Street firms had nothing to answer for. But the government should regulate or prosecute wrongdoing—not turn it into an opportunity to make money. Consider the case of another Obama bundler, Jim Chanos of Kynikos Associates. Chanos had not bundled for Obama in 2008. But in 2011 the hedge-fund titan signed up to raise money for the president’s reelection. The SEC was investigating Kynikos because of a civil complaint filed against the firm in 2006 by the insurance and financial services firm Fairfax. Chanos bundled between $200,000 and $500,000 for the president’s 2012 reelection.30 In November 2012, the SEC closed its investigation of Kynikos.31
Pfizer vice president for policy Sally Susman was another Obama bundler for the 2012 election. In July 2011, Pfizer headquarters was scheduled to be the site of a fund-raiser for the campaign. Only after the Boston Globe asked campaign officials about the propriety of holding the event at a pharmaceutical company regulated by the government was it moved to the University Club.32 But Pfizer remained a cornerstone of the campaign’s bundling operations. All this took place as the drug giant was facing criminal investigation by the Justice Department over alleged violations of the Foreign Corrupt Practices Act going back some ten years. Susman, who is also Pfizer’s lead lobbyist, bundled more than $500,000 for the 2012 campaign.33 In August 2012, the drug giant was able to settle the criminal case with DOJ officials.34 History shows that making donations lessens the possibility that the SEC will ding you for a financial crime.35 How can we be sure that senior Justice Department officials, who raised money for the presidential campaign, won’t be influenced by the same thing?
There is no explicit quid pro quo here. It is all unspoken. Friends help friends get elected by raising money. And friends who get elected don’t like friends who helped them raise money going to jail.
Both political parties were trying to grab the public high ground while in the background extracting what they could. Senator Harry Reid criticized Republican senators for holding “backroom negotiations” with Wall Street executives over the Dodd-Frank financial reform bill. But when he made the charge, Reid had only recently himself held a fund-raiser in New York City organized by Goldman Sachs president Gary Cohn.36 Republicans, on the other hand, criticized Democrats for extorting Wall Street, while playing a similar game themselves.
Leading the tightrope walk with Wall Street for Obama was Broderick Johnson, who joined the Obama campaign as a senior adviser in the fall of 2011.37 Johnson had worked for Obama in 2008 and was tied in with Wall Street, for whom he had lobbied since 2007. During the 2008 financial crisis, Johnson had lobbied for the bailout of the Financial Services Forum, an industry association comprising the twenty biggest financial CEOs in the United States. He also lobbied directly for JP Morgan, Bank of America, Fannie Mae, and the investment firm J. C. Flowers & Company.38
Johnson’s role in the campaign was to be its “representative in meetings with key leaders” and to help “ensure that there is constant, open communication,” according to Obama 2012 officials.39 He was part of the campaign’s senior staff, helping to provide “an ear to the ground.”
In addition to representing financial industry and Wall Street firms, Johnson is an attorney. He was a perfect liaison between Wall Street firms facing government investigations and the campaign. As Johnson’s current consulting website explains, “From one end of Pennsylvania Avenue to the other, we communicate with key policy and decision makers on an ongoing basis to secure useful intelligence in support of our clients’ overall business strategies. As relevant government decisions are being made, our outreach efforts yield sharper insights as to what may be happening or what has to happen to ensure successful client driven outcomes.”40 Such is the language of the sophisticated Washington player. He works for Obama, he works for Wall Street, and somehow, the latter ends up giving a lot of money to the former.
But the extortion was a bipartisan endeavor. The heated anti–Wall Street rhetoric and the threats to tax financial services into oblivion were good for Republicans too. The GOP message: we will protect you from those madmen . . . for a price.
When John Boehner became Speaker of the House in January 2011, he was already an effective and efficient fund-raiser. Much of the money came from his district and from businessmen around the country. Wall Street money had been part of the mix but not in any sizable quantities. But 2011 would turn out to be a banner year for him, precisely because Wall Street was under fire and feeling the heat. And precisely because he was implicitly offering them protection, Boehner was able to raise large sums of money.
One of the most contentious issues in 2011 was over taxes paid by Wall Street investors. America’s tax code had always been straightforward about one thing: income should be taxed differently than interest and capital gains made off of investments. But that distinction was now under fire as “unfair” because investors were paying a lower percentage on their capital gains than middle-class Americans were on income from their jobs. The New York Times called it the “Most Unconscionable Tax Loophole” in America.41 President Obama, along with many Democrats in Congress, was threatening to change it. Particular attention was focused on one of the biggest winners in 2010, hedge-fund titan John Paulson, who pulled in $4.9 billion. Forget for a minute the policy question of whether a change in the capital gains rate is good or bad. Instead, see it for what it largely created: an opportunity for extraction by both sides who were offering “protection.”
Boehner was generally opposed to large tax increases. But in the spring of 2011, he indicated that he might be open to considering a change in the capital gains rate.
Boehner then went to Wall Street looking for money. Over a two-day period, June 8–9, he deposited 144 checks worth $274,800 in contributions from hedge-fund and finance executives.42 Thirty-five of those checks, totaling over $56,000, came from employees of a single hedge-fund group, Paulson & Company.43 Paulson execs had never given to Boehner before. Cantor Fitzgerald executives were also quite generous—and also had no prior history of supporting Boehner. But now they needed his “protection.” Would they have done so without this threat?
In 2011 Boehner raised six times what he had raised in 2010 when he had merely been minority leader. But it’s not just politicians who extort. Well-connected members of the Permanent Political Class also got in on the Wall Street game. Anita Dunn joined the Obama campaign in 2008 and served as director of communications. When President Obama was elected, she moved to the West Wing, where she served as communications director. Her husband, Robert Bauer, became President Obama’s White House counsel. They were lauded as one of Washington’s “Power Couples” by Newsweek magazine.44
During her tenure in the White House, Dunn was part of a vocal group of political activists who tilted to the left. She became a staunch critic of the hedge-fund industry and of Wall Street for their excessive compensation.45 Shortly after leaving the White House, she became a director at the consulting firm SKDKnickerbocker. The firm specializes in corporate communications, crisis communications, and public relations. Dunn’s contributions at the firm included providing “strategic communications” advice to clients.46 Immediately upon joining the firm, she peddled some very expensive advice to those she had so aggressively criticized.
Dunn helped craft an SKDKnickerbocker proposal that went out to hedge funds, in late 2011, ostensibly to boost their image. The idea was simple: Dunn and her partners were offering to develop a national “paid media” pro–hedge-fund campaign as well as a “comprehensive public affairs operation” to “raise awareness about the positive role hedge funds play in the American economy” and to “eliminate the need for politicians to take aim at hedge funds.”47
The proclaimed goal of the campaign, to be done in conjunction with the PR firm McLean/Clark LLC, was to get politicians to “think twice” about attacking hedge funds and give them “political cover” to defend the hedge-fund industry.
The reaction from those in the hedge-fund industry was one of astonishment. As one executive who didn’t want to be named (because of the possibility of retribution) put it, “First we see Dunn attack us on television, and then she tells us to hire her to head off the exact attacks that she herself is hurling at us. The entire thing begins to stink like a protection racket.”
The proposal warned that hedge funds needed to do something to respond to the attacks Dunn herself had helped to fuel. As the packet noted, “Both the leftist Occupy Wall Street activists and the right-wing Tea Party movement herald a new era of populist peril for anyone associated with finance. Given current U.S. volatility, various measures of a similarly reactionary nature might very well attract strong political support. . . . Hedge funds make inviting targets.” As if to add fuel to the fire, Dunn’s fellow managing director at Knickerbocker is Hilary Rosen, who sits on the board of the Center for American Progress Action Fund, which was engaged at that very time in a campaign attacking the hedge-fund industry.48 The game is simple: make threatening noises, while offering services to protect against those threats. Dunn has become a go-to person for corporations under pressure from the Obama administration. With easy access to the White House, and as a senior campaign official, she is a logical source of protection. When AT&T was facing both Department of Justice and Federal Trade Commission litigation over a proposed merger with T-Mobile, it hired Dunn’s firm to provide strategic advice.49
The Permanent Political Class regularly solicits donations from firms and individuals concerned that they might be in legal jeopardy or face serious costs. It’s easy to see the opportunities for extracting donations.
Consider this dilemma. On June 18, 2012, President Obama was scheduled to appear at a New York City campaign fund-raiser hosted by members of the publishing industry. But two months earlier, the Obama administration had filed antitrust cases against five leading publishers, claiming they were fixing prices on the sale of electronic books. The Obama Justice Department was also suing Apple, as the prices in question came about at Apple’s encouragement. These were the five largest publishers: HarperCollins, Hachette, Simon & Schuster, The Penguin Group, and Macmillan.50 By August, many of them had settled the suit. Granted, the publishing industry tends to be liberal and would be expected to support a candidate like President Obama. But does the legal threat create further motivation to donate? It caught the attention of seasoned reporters like John Aloysius Farrell of the National Journal. “In any other field of business, the timing would suggest a classic political shakedown—Nice little literary business you got here. It would be a shame if anything were to happen to it—or an attempt by a shady commercial interest to grease its way in Washington.”51
We’ve come to accept this as routine: companies facing legal action from the federal government being solicited at the same time for campaign donations. On the street, this would be considered de facto extortion.
Consider the challenges faced by the telecom industry in the spring of 2012. The cherry blossoms had already turned on the Washington Mall, and America was increasingly preoccupied by a presidential election, but what worried the telecom industry was the possibility of being sued for doing something the federal government told them to do. Telecom companies had been advised to cooperate with federal law enforcement and U.S. intelligence agencies that were monitoring criminal or terrorist activity over the Internet or telephone lines. The problem? They might be sued in civil court by customers on the grounds that they had violated the privacy rights of people using their services. A bill pending in Congress, called the Cyber Information Sharing and Protection Act (CISPA), would allow telecom companies to share information with U.S. government law enforcement and intelligence agencies dealing with a possible cyber or terrorist threat, while also granting them legal immunity from lawsuits.52 The telecom companies had been granted immunity previously, but that was set to expire. And now there was a strong push by some in Washington to repeal the immunity. President Obama was hinting at it, as were a number of members of Congress. This would be a disaster for these industries: in effect, they would be forced to share information with government agencies while being left open to lawsuits for doing so. Again, forget for a minute the policy implications of this bill and consider the extortion opportunities.
The bill had been introduced in the House almost six months earlier. Because of some heated opposition, it was possibly stalling. One of the key votes on the issue was Congressman James Clyburn of South Carolina. A member of the powerful House Committee on Appropriations, Clyburn was the third-ranking Democrat in the House, behind Nancy Pelosi and Steny Hoyer. Owing to his seniority, Clyburn was well respected by his colleagues. Democrats in Congress were heavily set against extending the immunity, while Republicans were generally in favor. Clyburn was open to extending it, but he was also well positioned to extract money. The vote was scheduled for April 26. In the weeks before the vote, he kept coy about what his position might be. Meanwhile, he collected checks from AT&T, Verizon, and the National Telephone Cooperative Association in late March, for a total of more than $10,000. As the vote came closer, Clyburn saw the arrival of more checks. T-Mobile and the Cellular Telecom and Internet Association each sent him money, as did Time Warner Cable and the Echostar Dish Network.53 Funds also arrived from a lobbyist for the Cellular Telephone and Internet Association, and Telecom Industry Association.54
In the end, only 42 Democrats would vote in favor of the bill, and 140 against, granting the telecom companies immunity. But Clyburn voted in favor of immunity.55
The power of federal government officials to control or threaten large corporations is immense, even beyond legitimate law enforcement functions. In 2011 the Department of Health and Human Services (HHS) declared that the federal government would not work with the pharmaceutical company Forest Labs unless it replaced its CEO.56 HHS claimed that the longtime chief executive, Howard Solomon, had engaged in “marketing violations.” But Forest Labs had committed no real legal or regulatory violations. “The action against the CEO of Forest Labs is a game changer,” Richard Westling, a corporate defense attorney, told the Wall Street Journal. “It would be a mistake to see this as solely a health-care industry issue. The use of sanctions, such as exclusion and debarment to punish individuals where the government is unable to prove a direct legal or regulatory violation, could have wide-ranging impact.”
In 2009, during the height of the debate over health care reform, the company Humana found itself subject to investigation because it had communicated with its customers and expressed concerns that the proposed reform bill would increase health care costs and hurt benefits to seniors. Senator Max Baucus, the chairman of the powerful Senate Finance Committee and a supporter of the bill, contacted a former aide who was then at the Centers for Medicare and Medicaid Services (CMS), which oversees federal dollar spending on those programs, and asked him to investigate the communication. Needless to say, Humana wants to be on good terms with CMS. If they get on the agency’s bad side, they risk being excluded from Medicare and Medicaid programs. CMS promptly launched an investigation of the company for expressing its opinions and sent a warning letter telling it not to do the same in the future.57
The power of the purse is enormous in Washington. But where does all the money go? Is it mainly just for individual politicians’ campaign funds? Or are there more nefarious ebbs and flows? You would be amazed at the complex rivers of cash, and where they flow.