|
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.
Milking
donors
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. ‘My record speaks for itself,’ the
senator said. ‘I haven't changed my tune. I've been, I think, fairly
consistent in my views on these issues.’"
Dodd’s
doings
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.
The
racket
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
Michael S. Rozeff is a retired Professor of Finance
living in East Amherst, New York. He publishes regularly his ideas and
analysis on www.LewRockwell.com .
Copyright © 2009 by LewRockwell.com. Permission
to reprint in whole or in part is gladly granted, provided full credit is
given.
| 
