The Sellout of the Ivory Tower, and the Crash of 2008 (Excerpt)

Over the last thirty years, in parallel with deregulation and the rising power of money in American politics, significant portions of American academia have deteriorated into "pay to play" activities. No where is this more pronounced than in the realm of economics.
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Re-printed from Predator Nation: Corporate Criminals, Political Corruption, and the Hijacking of America; Copyright © 2012 by Charles Ferguson. Published by Crown Business, a division of Random House, Inc.


Many people who saw my documentary film about the 2008 economic crisis, Inside Job, found that the most surprising, and disturbing, portion of the film was its revelation of widespread conflicts of interest in universities, think tanks, and among prominent academic experts on finance, economics, business, and government regulation. Viewers who watched my interviews with eminent professors were stunned at what came out of their mouths.

Over the last thirty years, in parallel with deregulation and the rising power of money in American politics, significant portions of American academia have deteriorated into "pay to play" activities. These days, if you see a famous economics professor testify in Congress, appear on television news, testify in a legal case or regulatory proceeding, give a speech, or write an opinion article in the New York Times (or the Financial Times, the Wall Street Journal, or anywhere else), there is a high probability that he or she is being paid by someone with a big stake in what's being debated. Most of the time, these professors do not disclose these conflicts of interest, and most of the time their universities look the other way. Increasingly, professors are also paid to testify for defendants in fraud trials, both civil and criminal. The pay is high -- sometimes a quarter of a million dollars for an hour of congressional testimony. But for banks and other highly regulated industries, it's a trivial expense, a billion or two a year that they barely notice; and just as with politicians, it's a very good investment, with very high benefits.
Academics on industry payrolls are now so numerous and powerful that they can often prevent universities, professional associations, and academic journals from adopting or enforcing strong conflict-of-interest policies. They also have a chilling, even dominant, effect on several areas of academic research and policy analysis.

The sale of academic "expertise" for the purpose of influencing government policy, the courts, and public opinion is now a multibillion-dollar business. Academic, legal, regulatory, and policy consulting in economics, finance, and regulation is dominated by a half dozen consulting firms, several speakers' bureaus, and various industry lobbying groups that maintain large networks of academics for hire specifically for the purpose of advocating industry interests in policy and regulatory debates.

These consulting firms are not like McKinsey or the Boston Consulting Group. They do not exist to help companies make better products or operate efficiently. Their principal focus is on helping companies avoid or influence legislation, public debate, regulation, prosecution, class-action lawsuits, antitrust judgments, and taxes. The largest academic regulatory consulting firms are the Berkeley Research Group, the Analysis Group, the Brattle Group, Criterion, Compass Lexecon, and Charles River Associates. All have relationships with many prominent academics. Their combined academic roster is around one thousand, and their combined revenues are certainly well over $1 billion per year. (Most are private and don't release revenue information.) In some cases, they include a majority of the prominent academics in important policy-related fields, such as antitrust policy and the economics of regulation.

But how important and influential are these people and their relationships? Let's take two examples, one Republican and one Democratic: Glenn Hubbard and Larry Summers.

R. Glenn Hubbard became dean of Columbia Business School in 2004, shortly after leaving the George W. Bush administration, where he was chairman of the White House Council of Economic Advisers from 2001 through 2003. Hubbard has a PhD from Harvard and has taught at Columbia since 1988. Hubbard is co-chairman of the Committee on Capital Markets Regulation, a nonprofit organization that serves as a de facto public policy lobbying organization for Wall Street.

Much of Hubbard's academic work has been focused on tax policy. A fair summary is that he has never seen a tax he would like, particularly one on corporations or the wealthy. He was deeply involved in designing the Bush administration's tax cuts in 2003, which heavily favored the wealthy; half of their benefits went to the wealthiest 1 percent of the population.

Hubbard also coauthored an astonishing article with William C. Dudley in November 2004. The article, entitled "How Capital Markets Enhance Economic Performance and Facilitate Job Creation," was published by the Goldman Sachs Global Markets Institute. Dudley, his coauthor, was the chief economist at Goldman Sachs at the time. In 2009, when Tim Geithner became Obama's treasury secretary, Dudley succeeded Geithner as president of the Federal Reserve Bank of New York; he's still there. This should not reassure you. But neither should the fact that Glenn Hubbard remains dean of Columbia Business School.

Their article would be kind of funny, if it weren't deadly serious. Remember, this is November 2004, with the bubble well under way.

  • "The ascendancy of the US capital markets . . . has improved the allocation of capital and risk throughout the US economy. . . . [The benefits include] enhanced stability of the US banking system . . .more jobs and higher wages . . . less frequent and milder [recessions] . . . a revolution in housing finance."

  • "The capital markets have helped make the housing market less volatile. . . . 'Credit crunches' of the sort that periodically shut off the supply of funds to home buyers, and crushed the homebuilding industry . . . are a thing of the past."
  • "The revolution in housing finance has also led to another radical transformation that has been important in making the economy less cyclical."
  • "We believe that the economic performance of the United States over the past decade provides strong evidence of the benefits of well-developed capital markets."
  • Hubbard refused to say whether he was paid to write the article. He also refused to provide me with his 2001 federal financial disclosure form (from when he entered the George W. Bush administration), which we could not obtain otherwise, because the White House had already destroyed it. Hubbard also refused to identify most of his private consulting clients. He is currently on the boards of MetLife, ADP, Inc., KKR Financial Corporation, and BlackRock Closed End Funds. In 2010, the first three paid him $707,000 in cash and stock. Consulting/advisory relationships listed on Hubbard's CV include Nomura Holdings, Bank of America, Capital Research, Citigroup, Fidelity,

    Franklin Resources, JPMorgan Chase, Visa, Laurus Funds, Chart Venture Partners, and Ripplewood Holdings. Until January 2009, he was also on the board of Capmark, a major player in commercial real estate during the bubble that went bankrupt after the crisis.

    Hubbard was paid $100,000 to testify for the criminal defense of two Bear Stearns hedge fund managers prosecuted in connection with the bubble, who were acquitted. That assignment came through the Analysis Group, one of the large economic consulting firms mentioned earlier. Hubbard's Columbia web page lists the Analysis Group as a consulting client but does not list the ultimate, real clients for whom he worked via this relationship. Nor does his Columbia web page list his paid speaking engagements. However, satisfied clients giving public testimonials to Hubbard's speaking abilities include the Alternative Investment Group, BNP Paribas, the Massachusetts Bankers' Association, and Barclays Bank.

    In 2011, Hubbard became a senior economic advisor to Mitt Romney's presidential campaign.

    Larry Summers, who is undeniably brilliant, became a full professor at Harvard at a very young age and by now has held almost every important government position in economics. After being chief economist of the World Bank, he became, successively, undersecretary of the treasury for international affairs, deputy treasury secretary, and finally treasury secretary in the Clinton administration. He then became president of Harvard, his candidacy championed by Robert Rubin, until Summers was forced out in 2006. In 2009 he became director of the National Economic Council in the Obama administration; he returned to Harvard in 2011 as a professor at the John F. Kennedy School of Government.

    At the World Bank, Summers authorized a memo suggesting that wealthy nations should export pollution to the poor; when president of Harvard, he suggested that women might be innately inferior to men in scientific reasoning. Then there were his policy choices: remaining entirely silent about the abuses within investment banking that furthered the Internet bubble; working with Robert Rubin and Alan Greenspan to repeal the Glass-Steagall Act and then to ban regulation of all privately traded derivatives.

    When Summers became president of Harvard, he also started consulting to, and making speeches for, financial services firms. Because Harvard, along with most other major universities, does not require its faculty (or its presidents) to disclose outside income, we do not know how much Summers made. Even now, his Harvard Web page lists none of his consulting clients or speaking engagements.

    Most of our information about his outside activities at Harvard comes from his mandatory federal disclosure form. (Like Summers himself, Harvard's president and provost declined to be interviewed for my film and also declined to respond to written questions.) Shortly after he was forced to resign as president and returned to being a professor, Summers agreed to work one day a week at D. E. Shaw, a large hedge fund, which paid him over $5 million in the year before Summers entered the Obama administration in 2009.

    Summers's 2009 federal disclosure form stated his net worth to be $17 million to $39 million. His total earnings in the year prior to joining the administration were $7,813,000. He made $1,729,000 from thirty-one speaking engagements, nearly all for financial services companies; Goldman Sachs paid him $135,000 for one speech. He was also paid $45,000 by Merrill Lynch for a speech on November 12, 2008 -- after Merrill had completely collapsed financially, and one week after Obama's election. After questions were raised, Summers donated the Merrill Lynch fee to charity.

    In the Obama administration, Summers opposed strong measures to sanction bankers or curtail their income. He has never apologized for any of the decisions or statements he made between 1995 and 2006.

    And as of early 2012, the web page on his speaking agent's website included testimonials about Summers from seven clients. All but one (Regent University) were financial; they included the Texas Pacific Group, the Chinese Finance Association, Charles River Ventures, and Institutional Investor magazine.

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