There is a new presidential candidate in town. His name is Christopher Dodd, Democratic Senator from Connecticut. This article take a very small look at some of the corruption associated with him. The same story might be told of any politician, present and past. Dodd is not exceptional. He merely happens to be convenient.
Before getting into the interesting details, I very briefly establish a very simple theory of corruption.
The state’s power is inseparable from the robberies it commits. The state’s robberies are inseparable from corruption. Systematic corruption necessarily accompanies government. It is the stuff of every history of every government.
The theory behind these connections is simple. The government’s lawmaking power creates opportunities to rob legally. To rob legally is to pass a binding law or regulation that favors one group at the expense of another. To an interest group anxious to rob, a legislator’s favorable vote is an economic good. If the lawmaker sets the price of that vote at zero, then there is excess demand for it. The lawmakers therefore must raise the price of their vote in order to ration it among the robbers who are bidding for it. The price includes campaign contributions, jobs when they retire, favorable publicity, and other favors. Graft and bribery are only the most crude forms of the auction. The overall result is endemic corruption that cannot be eliminated. There is no such thing as a clean government.
According to data from the Center for Responsive Politics, Senator Dodd has received $24.8 million in contributions between 1989 and 2006. He has spent $20.5 million. This leaves him a war chest of $4.3 million. His campaign organization has no debts.
Prima facie evidence of corruption follows. In 2004, the financial sector paid $207.1 million to all Federal candidates (about 472 of them excluding judges). This averages to $439,000 each. Dodd was paid $2.7 million, or over 6 times the average.
In his 2004 Senate race, Dodd won 66 percent of the vote to his opponent’s 32 percent. This repeated his 1998 victory in which he won 65 percent of the vote, having received $2 million from the financial sector.
The current Wiki piece on Dodd reports that he received more money from the (failed) Big Five accounting firm of Arthur Andersen than any other Democrat. Arthur Andersen was involved in several frauds, including the Enron case. Andersen’s contributions are the tip of an iceberg. Since 1989, accounting firms have given Dodd’s campaigns $573,000. Securities and investment firms have given him $2.2 million. Among them are many big names. Accounting firms include: Deloitte & Touche, PricewaterhouseCoopers, and Ernst and Young. Financial concerns include Greenwich Capital Markets, Bear Sterns, Citigroup, Goldman Sachs, JP Morgan Chase & Co., Morgan Stanley, American International Group, Lehman Brothers, Prudential Financial, and Credit Suisse First Boston.
Why does the financial sector pay so much money to a candidate whose seat is so safe if not to receive favorable law-making in return?
Dodd stays off the backs of his contributors plus he generates some favors for them. The Washington Post recently tagged him "The Banker’s Candidate." They write: "Each of these big-money interests applauds his light-handed approach to financial regulation and considers him a reliable friend…" It continues: "He also was the Senate’s leading champion of a 1995 law that limited shareholders’ right to bring class-action lawsuits against companies for alleged securities misdeeds." In addition, Dodd is helping to renew terrorist-insurance legislation which aids insurers by making the government co-insurer.
At times, the Senator has supposedly taken positions unfavorable to the financial sector, such as limiting interest rates on mortgages and credit cards. However, these positions favor established financial institutions at the expense of newcomers willing to service higher risk clients.
On Dodd’s fund-raising, the Post wrote: "He said he will not hesitate to shake Wall Street’s money tree, even though he is chairman of the committee that watches over its companies. But accepting millions of dollars from industries that his committee oversees will not affect his policy decisions, Dodd said. u2018My record speaks for itself,’ the senator said. u2018I haven’t changed my tune. I’ve been, I think, fairly consistent in my views on these issues.’"
Let us examine this record. Dodd pushed through a law called the Private Securities Litigation Reform Act of 1995. According to a legal expert on the subject, this law did four things: (1) It raised the pleading standards for class action securities fraud cases to a level well above the level for fraud cases in general. (2) It substituted proportionate liability for joint and several liability. (3) It restricted RICO so that treble damages could no longer apply to securities fraud cases. (4) It adopted a highly lax position on making forward-looking financial predictions.
These changes lowered the standards for both companies who report to investors and for auditors who certify accounting statements. It made it more difficult for investors to sue securities firms that issued the securities and promoted them. It made all these parties safer from lawsuits against fraud. It lowered the cost of fraudulent behavior and therefore encouraged more fraud. After a short time, these legal changes showed up in the form of mis-statements of earnings, associated with all sorts of creative accounting including suppression of the costs of stock options. These in turn led to inflated stock prices on a broad scale, contributing to the 1995—2000 stock market bubble.
Eventually as the true earnings were revealed to the markets, huge numbers of companies restated earnings. These restatements often covered three years of past earnings, indicating serious accounting issues. The stocks of many firms fell sharply when the earnings restatements were revealed. From a situation where about 50 firms a year restated earnings, we arrived at a record 414 restatements in the year 2004.
Dodd followed up on this legislation by pushing for and co-sponsoring The Securities Litigation Uniform Standards Act of 1998. This law ended class action fraud suits in state courts. This legislation again reduced the legal liabilities of accounting firms. It lowered the cost of lax auditing and encouraged accounting firms to allow misleading accounting practices.
The passage of these laws contributed to the increased laxity of the SEC in bringing actions against accounting firms, as the commissioners took their signals from Capitol Hill. Two Supreme Court cases also contributed to the rise of frauds that helped cause the stock market bubble. These are the 1991 Lampf, Pleva case and the 1994 Central Bank of Denver case. The former shortened the statute of limitations in securities fraud cases. The latter eliminated private "aiding and abetting" liability in securities fraud cases.
Senator Dodd, who is currently excoriating regulators for their lax oversight on subprime mortgage lending, himself brought about lax application of fraud standards in the case of the securities markets. And in the current case of subprime mortgages, the influence of government has been heavy-handed, not light-handed. Dodd does not acknowledge the important role that legislators played in passing the Community Reinvestment Act of 1977 that pushed lenders into making loans to poorer people. He does not acknowledge the liberalization of lending standards of the Federal Housing Administration, or the federally mandated affordable housing goals that Fannie Mae and Freddie Mac sought to meet by expanding their mortgage loans. He does not acknowledge the role played by a handful of important banks who set up subprime lending facilities and whose loanable funds exploded with the money-expanding policies of the Greenspan Federal Reserve.
Dodd has behaved no differently in office than hundreds and thousands of other officeholders. He has taken campaign contributions from interest groups. His subsequent votes have usually been to their liking. Was this cause and effect? Whether the robbers flocked to him because he happened to share their beliefs, or whether his beliefs and acts were shaped and reinforced by their contributions can’t be definitely ascertained. We know that he received their money, and we know that he used the state’s power on their behalf.
Dodd did not engage in classic bribery or graft. He has not been accused of doing anything illegal in taking millions of dollars from financial interest groups while sponsoring legislation that benefited them in the multi-millions. All elected officials do this. But is this system and are these transactions corrupt or not? Robbery and corruption utterly pervade government and its doings. They always involve injustice, mishandling, misdeeds, payoffs, frauds, misrepresentations, schemes, pork barrels, favorites, exploitation, shadiness, and often worse.
Senator Dodd claims to be incorruptible. He claims to believe 100% in the legislation he has sponsored. He claims he always has believed in it.
The fact is that Senator Dodd, like all politicians, is paid money. The money is politely called a campaign contribution or a donation rather than a bribe. Those who give either believe in what someone like Dodd espouses or hope to influence his vote. They usually hope to gain something that will come at the expense of someone else.
The Dodds of this world then produce or help produce laws for these donors or interest groups. But notice that when they spend most of the donations on campaigning, they become walking and talking advertisements paid for by those who donate to his campaign. They use the funds to sell various political points of view that benefit the donors. The money helps a candidate put together a coalition that can use power for an interest group without arousing excessive resistance to it. Politicians attempt to generate applause and support from the gainers behind them while also placating the losers whom they are robbing.
The politician has a racket that is akin to that of a Mafia boss of bosses. He is paid a salary by all the taxpayer-victims. The underbosses then pay him to enable their robbery of the victims. This he does in the least invasive way. The underbosses also pay him to convince the victims that they are not being robbed, which he also accomplishes. The underbosses make enough out of these exchanges that they are gainers, net of all their costs which include their small share of salaries and their donations.
Winning by losing
Breathes there a Senator with ambition and vanity so dead who has not to himself said: "I should be President of this, my country." Christopher Dodd has just announced that he is running for the Presidency of these United States. He is bid 20 cents (out of $100) to win the nomination of his party, that is, the odds of his winning are 499—1.
Even when candidates for office lose, they win. Before 1993, the money contributed to a political campaign could be and often was diverted to a candidate’s bank account. Retiring and defeated candidates could and did keep unused campaign contributions. Nowadays, the candidate with excess funds can spend it in other ways such as winding down his office, contributing to party committees, and supporting other candidates.
But there are more creative uses for leftover campaign funds. The defeated candidate can donate the money to a nonprofit charity, such as a foundation headed by a close relative. He can form a public agency or a nonprofit agency and funnel the money to it. Large amounts can then be spent on parties, gifts, and dues. He can channel funds to companies he controls, or employ his spouse to work at a campaign committee. Before the campaign is over, he might buy a Mercedes.
As noted earlier, systematic corruption necessarily accompanies government. Evidently, corruption necessarily accompanies campaigning for government office. The corruption associated with government spreads in widening circles because politics is theft. Candidates solicit contributions. The candidate spends most of these funds being a spokesman for parochial interests that seek to rob the public. What he does not spend, he uses to support other candidates or for personal purposes.
When elected, the office holder secures the booty for his supporters as best he can. What else is government for? Government is theft. Government is corrupt.
Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.