Simon Johnson's Blog, page 15

Antonio Weiss Is Not Qualified To Be Under Secretary For Domestic Finance

By Simon Johnson

Antonio Weiss has been nominated by President Obama to become the next Under Secretary for Domestic Finance at the U.S. Department of the Treasury. Mr. Weiss’s supporters argue that he is highly qualified for this senior fiscal policy job. They are wrong. Mr. Weiss has no known relevant qualification or experience for this position.

In the organizational structure of the Treasury Department, the Under Secretary for Domestic Finance is “primarily responsible for policy formulation and overall management” at the Office of Domestic Finance – a very important role. This Office is central to our debt management policies, but the Under Secretary also guides the administration’s fiscal policies much more broadly,

“Domestic Finance advises and assists in areas of domestic finance, banking, and other related economic matters. It develops policies and guidance for Treasury Department activities in the areas of financial institutions, federal debt finance, financial regulation, and capital markets.”

Here is the detailed org chart of Domestic Finance. On paper, this Under Secretary is the third most senior official in the executive branch with regard to fiscal decision-making. Given the way the Treasury Department works, along with the position of the United States in the world economy, on a day-to-day basis, this person is effectively the number two on many budget- and debt-related issues.

There is no disagreement on what Mr. Weiss has been doing for the past 20 years. Writing recently in the New York Times, Andrew Ross Sorkin said, Antonio Weiss is “a longtime adviser on mergers at the investment bank” [Lazard]. And “He has spent his career whispering strategic advice in the ears of corporate leaders.” (More detail on his career advising corporations is in the New York Times news coverage.)

Bloomberg reports his title as global head of investment banking at Lazard. For more details of the firm’s activities and clients see this Lazard page on their “M&A and Strategic Advisory” and their most recent results. You can also search the Lazard website for mentions of Antonio Weiss. Or look at Mr. Weiss’s job description, from Lazard’s press release on his March 2009 promotion to his current position. Without question, Mr. Weiss is experienced in advising companies how to buy other companies, particularly across international borders.

Mr. Sorkin thinks Mr. Weiss is the right pick because, “the job requires deep experience in the capital markets and global relationships.”

But Mr. Weiss’s “high profile M&A activities” are completely unrelated to the central task of this position: running responsible federal government finances. The Under Secretary for Domestic Finance does not typically buy and sell companies – or engage in any activities remotely related to advising companies on acquisitions. The treasury job requires knowledge of sovereign credit, experience with the practicalities of public debt sustainability, and an understanding of the intricacies of our national budget. From the public record and otherwise available information, Mr. Weiss has no substantial knowledge or expertise on any of these issues.

Mr. Weiss was one of 12 people who signed a paper on fiscal issues published by the Center for American Progress in 2012 (co-authored with Robert Rubin, among others). However, Mr. Weiss’s role in formulating ideas or writing that paper remains unclear. This is the only paper Mr. Weiss has written with CAP or, as far as can be determined, elsewhere on this topic (or on anything else to do with economics or public finance.) There are also no other publicly available speeches, op eds, or other writing by him on issues that might touch on the substantive duties of the Under Secretary position.

Mr. Sorkin suggests that failing to immediately confirm Mr. Weiss could have serious negative implications for our national cash flow.   Citing Ben White of Politico (who got this from an anonymous “Wall Street exec”), Mr. Sorkin says,

“if the interest on the securities the Treasury sells was just 20 basis points higher for a year because of uncertainty or mismanagement, it would cost taxpayers $32 billion — more than it would cost to fund the Consumer Financial Protection Bureau for 50 years.”

To suggest that the interest rate paid by the U.S. Treasury would in the short term increase due to any part of the nomination process for this specific candidate is absurd. Mr. Sorkin fails to provide any evidence or logic to support his assertion that Mr. Weiss’s confirmation (or not) would affect the full faith and credit of the U.S. government – and how that is perceived by the market.

The Washington Post editorial page then weighed in last week along the same lines as Mr. Sorkin:

“The 48-year-old Mr. Weiss would bring much in the way of relevant experience to the job, having graduated from Harvard Business School and gone on to a successful career in finance, most recently as head of investment banking for the venerable Lazard firm.”

Again, Mr. Weiss simply has no relevant experience. Working in corporate M&A is profoundly different from managing public (government) finance.

Bill Cohan, who used to work at Lazard, adds further detail in another New York Times column that is strongly supportive of Mr. Weiss, “In addition to being a much-respected global M.&A. adviser, he [Antonio Weiss] has supervised bankers who worked for Detroit pensioners, the National Association of Letter Carriers and the American Airlines pilots.” Important work, no doubt, but again not something that could fairly be regarded as qualifying someone to become Under Secretary for Domestic Finance.

And, importantly, the New York Times felt the need to add a significant correction at the foot of Mr. Cohan’s column:

“An earlier version of this column described imprecisely part of the work history of Antonio Weiss, based on a document prepared by the Treasury Department. While he supervised bankers who advised Detroit pensioners, the National Association of Letter Carriers and the American Airlines pilots, he did not advise them directly himself.”

This suggests that the Treasury Department has been stretching its facts regarding Mr. Weiss’s experience in an inappropriate manner – to make him look more qualified for the job than he really is. (My understanding is that the work in question was actually done by Ron Bloom.)

Announcements about further scrutiny or appropriate pushback regarding the qualifications of Mr. Weiss have not and will not move the market for U.S. Treasury debt.

Interest rates are influenced by many factors including – in the first instance these days – by Federal Reserve policies, but also by the balance of global savings and investment, as well as inflation expectations and views on how quickly the US economy (and, to some extent, the global economy) will make a full recovery. Threats of a government shutdown or a confrontation over the debt ceiling might also play a role – at least, that has been the experience in recent years.

In coming years, the overall stance of US fiscal policy will matter a great deal for long-term interest rates, with one key issue being whether domestic and international investors remain convinced that our debt-GDP ratio is on a sustainable path. (James Kwak and I wrote a book on this topic.)

Based on the record, there is no indication that Mr. Weiss has the skills likely to help put us on such a path (yes, fiscal policy is determined by Congress as much as by any administration – but the Under Secretary is an important part of the decision-making mix).

And there is a legitimate concern about Mr. Weiss’s qualifications which, ironically and perhaps inadvertently, was raised by Mr. Sorkin himself, when he conceded, “that Mr. Weiss doesn’t have a lot of experience in the regulatory arena, and at least part of the role he is nominated for involves carrying out the remaining parts of the Dodd-Frank overhaul law.”

The negative fiscal implications in that statement are potentially first-order. Ineffective financial regulation increases the probability of a serious crisis. And such crises have major negative effects on the public balance sheet – the near-collapse of the financial system in 2007-08 caused a recession that will end up increasing our debt-to-GDP ratio by about 50 percentage points (this is based on the Congressional Budget Office’s analysis.)

Having the experience, commitment, and world view necessary to ensure this never happens again should be essential background for whoever might become the next Under Secretary. Regrettably, this critical responsibility is too often an afterthought – when it should be a priority. Given the cost of the crash and the lasting economic wreckage of the Great Recession, this is indefensible.

It’s hard to think of any senior fiscal official from a serious country with qualifications as weak as those of Mr. Weiss.

Mr. Weiss might be qualified for other positions, for example in the Commerce Department. Based on the available facts, he is simply not qualified for the post of Under Secretary for Domestic Finance in the Treasury Department.

Law School and Radio

By James Kwak

This week I posted two things on Medium. The first was a commentary on changes in the markets for law students and lawyers. In short, if you are thinking of going to law school, the case is significantly stronger than it was four years ago. Whether it’s strong enough to pull the trigger depends on too many factors for me to say anything about your particular situation.

The second was about Serial, the new podcast from the This American Life people. Longtime blog readers know that I love love love TAL. I was really looking forward to Serial, and it had its moments. But I finally gave up on it when it framed one too many unreliable recollections with pregnant pauses and ominous music. I just don’t think there’s enough there there, at least not for me.

Obamacare, Taxes, United Airlines, and My Tea Infuser

By James Kwak

Over at Medium, I just posted a new article about the Jonathan Gruber-Obamacare “scandal.” Republicans are highlighting Gruber’s remarks as proof that the individual mandate really is a tax, and that the administration hid that fact in order to put one over on the public. But this whole argument flows from a faulty premise: that whether something is a tax or not is a question that has a knowable answer.

Last week I wrote a post complaining about my dismal experiences on United Airlines, which I chalk up to two things. The first is miserable computer systems. (It’s remarkable when you can see a computer system failing, and you know exactly what’s going wrong.) The second is the oligopolistic/near-monopolistic structure of the industry, especially when combined with a do-nothing Antitrust Division over at DOJ. It’s not just me: Tim Wu thinks so, too.

Finally, before that I wrote a post about Amazon’s extraordinary dominance in online retailing of physical goods. Who cares if no one will buy your phone when people are happy using other people’s phones to buy toilet paper and diapers from you?

Enjoy.

A Conference On Finance For Everyone Else

By Simon Johnson

It is hard to move around in Washington these days without bumping into a conference on the future of finance. But most of these are either closed to the public, or run on behalf of large banks as part of their lobbying efforts.

Next week, there will be a conference open to everyone at George Washington University to discuss where we really are on financial reform, and what still needs to be done. You should register in advance through the web page (link given above), but there is no cost to attend.

Featured speakers include Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, and Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation. We also have a wide range of other technical experts – on issues from resolution to “shadow banking” – who are willing to speak frankly and engage in honest discussion.

GW Center for Law, Economics and Finance (C-LEAF), Stanford Graduate School of Business, Max Planck Institute for Research on Collective Goods, and Better Markets generously made this event possible.

If you want to understand what has really happened to finance, show up.

No, You Can’t Get a Drink at 5 AM

By James Kwak

I’m in the United Club at SFO waiting for a flight, and the bar is closed until 8. So much for business travel.

I just published a post over at Medium that is really about two things: how both airline marketers and on-campus recruiters perpetuate the idea that air travel is glamorous, even when all of us know that it isn’t. It’s sort of a sequel to one of my favorite posts of those I’ve written, “Why Do Harvard Kids Head to Wall Street?” which I think is the one Paul Tough mentioned in his book about grit. Now that it’s recruiting season in the Ivy League, I thought it might be useful.

Also, last week I wrote a post about the HP breakup and what it implies about corporate management.

Cultural Capture and the Financial Crisis

By James Kwak

A few years ago, while still in law school, I was invited to write a chapter for a Tobin Project book on regulatory capture. It was a bit intimidating, being part of a project that included luminaries like David Moss, Dan Carpenter, Luigi Zingales, Richard Posner, Tino Cuellar, and the deans of two of the best law schools in the country. I was asked to write something about an idea that I had slipped into 13 Bankers, almost in passing, about the cultural prestige of the financial industry and the political and regulatory benefits the industry derived from that prestige. My chapter turned into a discussion of the various mechanisms by which status and social networks can influence regulators, creating the equivalent of regulatory capture even without traditional materialist incentives (cash under the table, promises of future jobs, etc.).

Two weeks ago, an investigation by ProPublica and This American Life illustrated the culture of deference, risk aversion, and general sucking-upitude among New York Fed bank examiners that effectively resulted in the capture of regulators by the banks they were supposed to be regulating. As David Beim wrote in a confidential report about the New York Fed, the core problem was “what the culture expected of people and what the culture induced people to do.”

I wrote about the story for the Atlantic and referred to my book chapter, but at the time the chapter was not available for free on the Internet (at least not legally). The good people at the Tobin Project have since put it up on the book’s website, from which you can download it (legally!). Note that they are only allowed to put up one chapter at a time and they rotate them, so this is a limited-time offer.

Game of Thrones, The Wire, and the New York Fed

By James Kwak

I wrote a column that went up this morning at The Atlantic about the ProPublica/This American Life story about the New York Fed. The gist of the argument is that we all knew the New York Fed was captured; for people like Tim Geithner, that’s a feature, not a bug.

There was a paragraph in my original draft that I really liked, but I can completely understand why the editors didn’t want it:

“When Tyrion Lannister wants his son killed, he sentences him to death in public. When Avon Barksdale wants potential incriminating witnesses killed, he obliquely lets his lieutenant know that he’s worried about loose ends—because he doesn’t want his fingerprints (voiceprints, actually) visible. When senior New York Fed officials want their staff to go easy on Goldman Sachs—well, they don’t need to lift a finger. The institutional culture takes care of it for them.”

This is similar to the idea at the core of “The Quiet Coup,” the Atlantic article that had a million page views back in 2009. In a less well developed political system, rich businessmen buy favorable policy by passing money under the table (or hiring politicians’ relatives, or giving them loans and then letting them default, and so on). In the United States, for the most part, you don’t have to do anything illegal: the system takes care of it for you, whether it’s bailout money from the Treasury Department or regulatory forbearance from the New York Fed. That system is a combination of personal incentives, cultural capture, and institutional sclerosis.

In short, buying politicians (or regulators) is good. Not having to buy them in the first place is even better.

New Collection on Medium

By James Kwak

I’ve joined a new collection on Medium devoted to business and finance writing. It’s called “Bull Market,” after an intense lobbying campaign (including alleged vote-buying, although I haven’t tried to collect) by Felix Salmon, and includes Felix, Mark Buchanan, Dan Davies, Alexis Goldstein, Francine McKenna, Evan Soltas, and Mark Stein. The goal is to write thoughtful articles that don’t just respond to the latest story on the wire (although there will be some of that, too).

My contribution for today is a post about the no-poaching lawsuit in Silicon Valley and what it says about class consciousness in America today.

I hope you enjoy the collection.

Changes

By James Kwak

You may have noticed that my blogging has tailed way off over the past few months—to, well, just about nothing. You probably noticed that it was pretty spotty for a long time before that. The main reason is that I’ve been busy with a new teaching job, which requires some effort on academic publications, and raising two small children. The other major factor is that I often just find I don’t have much that’s original to say. Financial regulation is a pretty heavily covered field, and I don’t have the time to be a real expert on, say, derivatives clearinghouses, and—believe it or not—I generally try to avoid posting if I don’t have something new to add. I tried to get back into the flow in the spring semester, when I was only teaching one class, and that worked for a while. But at the beginning of the summer I started doing some part-time consulting for my old company (I’m on unpaid leave from my law school this semester), and that’s made it impossible to keep up with the news, much less write something interesting about it.

That said, I still like to write. I’ve started posting occasionally on Medium, which I like both for the gorgeous interface and because it isn’t organized as a reverse-chronological list—which means that I don’t have to worry as much about saying something newsworthy before the moment passes. This week I wrote about playing Minecraft with my daughter (OK, it’s mainly about the Microsoft acquisition) and one of my favorite topics, why megabanks run on bad software.

I don’t know how long I’ll be keeping this up, but in the meantime my plan is to write an occasional post here summarizing things that I write on Medium or elsewhere on the web. As usual, I’ll also post new articles to Twitter more or less immediately after publishing them.

Thanks for reading.

An Elizabeth Warren for New York

By Simon Johnson

These days, almost everyone likes to complain about institutional corruption – and various forms of intellectual capture of government orchestrated by big corporate interests. But very few people are willing to do anything meaningful about it.

Zephyr Teachout is an exception. Not only has she written about the history of political corruption in the United States, both in long form (her recent book) and in many shorter versions (e.g., see this paper), she is competing for the Democratic nomination to become governor of New York.

In many countries, Ms. Teachout would sweep to victory. She has smart ideas about many dimensions of public policy (here are her economic policies), she has assembled a strong team, and – most of all – she represents exactly the kind of responsible reform that we need at this stage of our republic.

Elizabeth Warren offered exactly the same sort of promise to the people of Massachusetts in 2012 – real reform through pragmatic and effective politics. She has delivered on this promise and there is every indication that her influence will only grow in the years to come.

On Tuesday, New York has an opportunity to head in the same direction. I’ve work with policy makers around the world and across the political spectrum in the United States. Ms. Teachout is completely credible as a potential governor.

And we need her brand of reform. In spring 2009, I wrote about the capture of the American federal government by big financial interests. But the problem is much broader – it is rooted in our electoral system and the ways that money effectively buys votes.

I’m often asked – what can ordinary Americans possibly do about this? The only reasonable answer is: seek out plausible reform candidates, donate to their campaigns, and vote for them. Too few such candidates have come forward in recent years. But Elizabeth Warren offered (and offers) exactly this sort of opportunity, and so too now does Zephyr Teachout.

If you live in New York and are eligible to vote in the Democratic primary, vote for Zephyr Teachout – or stop complaining.