The Payoff: Why Wall Street Always Wins – Jeff Connaughton

Jeff Connaughton has just authored a major insider account revealing and explaining the failure of the politicians and regulators to hold the banksters who drove the financial crisis accountable and to remove the most obvious risks of future crises.  On Sunday, October 21, 2012, UMKC’s Bill Black hosted a book salon on Firedoglake with Jeff Connaughton.  With Connaughton’s permission, we are cross-posting his introductory post (which explains how he came to write the book) and Bill Black’s review of his book.


Jeff Connaughton’s Introductory Comment:

Thanks, Bev, and thank you to FDL for hosting me and for having this discussion.

I want to especially thank Bill Black for agreeing to host and for taking the time to write such an intelligent and generous post. His thoughts about the book make me wish I had known him well enough to ask him to read it in draft and give me his comments, as his powerful points illuminate key aspects of the facts and story in important ways. And of course his background and expertise in prosecuting financial crimes is nonpareil.

I know you’re all book lovers, or you wouldn’t be here. But I also know few people can find the time to read every financial reform book, especially when every week we can read Bill’s not-to-be-missed blog posts about unfolding issues and, as another example, David Dayen’s excellent posts about something that often just happened even hours ago. I know I spend much of my day reading several superb financial and legal bloggers, hoping that I can stay as current as possible on complex developments I care about.

Which leads me to ask: What good is memoir? I’m not qualified to answer that from a literary perspective, only a practical one. As a former Senate and White House staffer and then long-time lobbyist, I went back into government after the financial crisis and was profoundly disappointed by what I experienced. Yes, Bill wrote a strong case for why my book deserves to be read, even though the public intuitively understands what is wrong with DC and many of you understand it in considerable detail.

Even so, if the book never enters the mainstream, and is never read by people who aren’t already following these issues closely, perhaps “The Payoff” will ultimately be filed on the library’s shelf of “futile gestures.” I’ve already joked, with my lobbyist friends, that I probably should have lit myself on fire on the deck at Morton’s at Connecticut and L Street, where I often used to smoke cigars and drink scotch with those friends. At least that way, newspapers around the country might have run the headline — “Former Lobbyist Protests the Financial Elites Who Now Run Washington” — and my buddies could have reached over and lit up another smoke.

Alas, I was only willing to immolate myself professionally in DC, knowing that my prior years in lobbying had already provided me with enough of a nest egg that I could comfortably transition to another city, life and profession. As I wrote in the book, there are powerful reasons to remain silent in DC. Members of the Blue Team are well compensated (indirectly) when they circle the wagons and shoot at the Red Team. I knew that if I deigned to bluntly criticize Democrats, I had best take off my blue jersey and skedaddle long before publication date. But, among other things which I saw from a front-row seat, the failure to prosecute Wall Street crimes was too unconscionable, too great a stain on the American justice system, for me to remain silent.

This pressure to remain silent or to keep these kinds of conversations on the margins is especially true now during an intense presidential election campaign. For the most part, partisan loyalists are blindly tribal. With two weeks to go before Election Day, few partisans want to be dispassionate, self-critical and honest about their own party’s shortcomings (indeed, I still sometimes succumb to the pressure to add after every verse the refrain “The Republicans Are Worse”). It’s all about getting reelected. And for the most part, the public seems to have compartmentalized the financial crisis and financial reforms from the Obama-Romney choice. Neither candidate is talking about Wall Street (much). Therefore the media is not talking about it.

Yet I’ve broken free of thinking like a partisan. I never saw the need to restore some semblance of law-and-order to Wall Street and finding the best solutions to prevent the next financial crisis as left-right issues. Progress will require a change in view and increased activism by people across the political spectrum.

For reasons Bill discussed, I knew my book wouldn’t add value unless I laid bare the entire Washington culture, sharing much of what I’d seen and heard during my 25 years in Washington – how Washington had changed in that time and how it had changed me. This book was written to give you more facts (anecdotes, really) and analysis from which you can draw inferences to affirm your current views or perhaps alter your beliefs about what exactly caused governmental systemic failure to deal effectively with financial systemic failure. And to give to the broader reading public – to the extent my book ever reaches that public – a compelling narrative and clear reasons to stand up to both political parties and insist on breaking the control of the financial elites. Reform will take many people writing many books and blogs and giving many speeches, but it will mostly take citizens and other non-Wall Street power centers becoming educated and active in many different ways.

I do take special pride in the book’s brief retelling of my becoming acquainted with Bill, which brings me back to why I am so pleased he was willing to host. In early 2009, when I became chief of staff to then U.S. Senator Ted Kaufman (who, by the way, is the true hero of my book), my response to Bill’s expertise was to value it and promote it in private meetings with senior officials of the Department of Justice. Finding the correct path to pursuing complex financial crimes seemed simple in concept (though admittedly difficult in reality).

1. In early 2009, I didn’t know Bill from Adam.
2. I began reading Bill’s ideas.
3. Those ideas made sense to me, and his credentials bolstered his credibility.
4. So I picked up the phone and called Bill for his advice.
5. In person, Bill was very convincing on what was the correct course for pursuing financial crimes.
6. So I tried to get the Justice Department to follow Bill’s advice based on Bill’s experience. As did Senator Kaufman.
7. As time passed, I asked myself, why aren’t others heeding Bill’s wisdom?
8. Has something about the legal and regulatory system, its culture, or its leadership changed so dramatically that even those officials who agreed with Bill find themselves unable (or unwilling) to implement his advice?

In short, in 2009, I said often: “Hey, this guy Bill Black seems to know what he’s talking about. Why don’t we do some or all of what he recommends?” Here we are 3 ½ years later. And we know the system didn’t. And there’s really no good excuse for why it didn’t. And all of that, I believed, deserves to be aired out and debated in detail.


A review by William K. Black for Firedoglake’s Book Salon of Jeff Connaughton’s

The Payoff: Why Wall Street Always Wins   (Prospecta Press: 2012)

Jeff Connaughton has authored a powerful, and chilling insider’s perspective on the financial crisis and the pathetic governmental response to it. The second part of his title sums up the result and the first half explains why Wall Street always wins. Many, perhaps most Americans are likely to agree with both parts of Connaughton’s title so this book will not transform the public’s view of the issues. The public largely has this set of issues correct. Connaughton gives the readers unique access to the facts because he had a front row seat to many of the key discussions and he has the analytical abilities and expertise to explain the significance of those facts.

Reading Connaughton’s account evoked in me the comments of Dr. Rieux in Albert Camus’ The Plague.

All I say is that on this earth there are pestilences and there are victims — and as far as possible one must refuse to be on the side of the pestilence.

[W]hen you see the suffering and pain that it brings, you have to be mad, blind or a coward to resign yourself to the plague.

Connaughton shows us that the leaders of both parties were – and are – mad, blind, and cowards. They have sided with those that caused the pestilence and resigned our nation to a series of financial and moral plagues.

Readers who pick up The Payoff should buckle up first – it will be a bumpy ride regardless of your political affiliations. There are a few heroes, but the title warns that Wall Street Always Wins even when the folks with courage and a commitment to the public interest stand up to the banksters. Hannah Arendt famously described the “banality of evil” during the Holocaust. Connaughton describes the banditry of the banal. Connaughton shows that the system is so rotten, so rigged in favor of Wall Street, that evil individuals are unnecessary to produce catastrophe. No one has to be (formally) bribed. Theoclassical economic dogma has led to regulatory and prosecutorial leaders committed to not regulating and not prosecuting the banksters.

Dogma is so dangerous because it is the death of true reasoning. It excludes alternatives so fully that the alternatives are no longer even understood to exist. The most critical assumptions are implicit. Explicit assumptions should inherently prompt the question of whether they are justified. We are not even aware that we are making assumptions when we make them implicitly. Neither the author nor the reader can feel any need to question whether an unrecognized implicit assumption is justified.

Connaughton is a superb guide because he has such varied career. He’s got an MBA and a JD from two of the top schools in the world and did so well that he achieved one of the juiciest judicial clerkships. He’s worked as an investment banker with two top firms. He ran a lobbying firm. He was an important aide to (then) Senator Biden, President Clinton, and Senator Ted Kaufman. He is also candid. Republican and Democrats alike will cringe as they read his account of why Wall Street always wins.

For the sake of brevity I will only discuss two examples from the book. The clearest examples of an insanely dangerous and destructive policy that any rational system would eliminate are the systemically dangerous institutions (SDIs). The SDIs are treated as “too big to fail.” Eliminating SDIs would provide a win-win-win-win. They pose a systemic risk of global collapse. They make “free” markets impossible for the implicit federal guarantee of their general creditors means that they can borrow at a significantly lower interest rate than their smaller competitors. I had the privilege of hosting the book salon for the three (very conservative) NYU Stern School authors of Guaranteed to Fail. Their simile for the extent of the competitive advantage this implicit federal subsidy provides is that it is “like bringing a gun to a knife fight.” The NYU authors’ conclusion was that there was nothing “free” about housing finance markets due to the SDIs. A wide range of scholars have used the same phrase to describe the inherent degradation of democracy caused by SDIs – crony capitalism. The additional good news is that the SDIs are far too large to be efficient. We would make finance more efficient if we shrank the SDIs to the point that they no longer posed a systemic risk. Progressives, conservatives, and libertarians often share this four-part indictment of the SDIs, so one needs Connaughton’s insider perspective to understand why an essential action with so many vital benefits not only did not occur but is not even an issue. Neither major party proposes to do anything about the SDIs. Connaughton provides a telling vignette that shows that “serious” officials consider any crack down on the SDIs to be illegitimate.

“Senator Diane Feinstein … asked [Senator] Durbin … ‘What’s this [Brown-Kaufman amendment to end the SDIs]’? [Durbin replied]: ‘To break up the banks.’ Giving the thumbs-down sign, Feinstein said bemusedly: ‘This is still America, isn’t it?’”

Serious, experienced Democratic Senators like Feinstein and Durbin consider any effort to protect Americans from global systemic crises and our democracy from crony capitalism to be un-American. In the name of “free” markets we must allow the inherent elimination of any possibility of “free” markets. To propose the one reform that would be any real financial regulator’s top priority is to be treated with contempt by the Senate Democratic leadership. Yes, political contributions from the finance industry are important and Connaughton repeatedly shows us why this is so. But anyone who has met with prominent American politicians knows that the degree of acceptance of the mantra “what’s good for Wall Street is good for America” among the leadership of both parties is our nation’s most important barrier to fixing the catastrophe that is Wall Street. Connaughton shows us that this absurd identification remained intact despite widespread fraud by Wall Street elites who grew wealthy by driving the greatest economic crisis since the Great Depression. He shows that a purportedly “reform” administration led by a “progressive” president acted to protect the elite frauds from sanctions and to make them even wealthier through bailouts.

As a former financial regulator and Justice Department attorney (my spouse, June Carbone, was also a DoJ attorney) the pages that were most painful for me to read were Connaughton’s explanation of how the professionals who run DoJ and the SEC were repeatedly complicit in providing de facto immunity to the Wall Street elites who drove the crisis. Connaughton confirms the insider views of Neil Barofsky and Sheila Bair in their recent books about the important and pernicious role that Treasury Secretary Timothy Geithner played in securing that immunity as a deliberate policy.

Connaughton’s tale is vastly more damning because he, as a legal professional working for years as a leading staffer for the Senate Judiciary Committee understood the institutions and the key people. He emphasizes a point I have often made – our nation is blessed with something that is rare globally. We have scores of prosecutors and investigators who are willing and able to take on the most elite white-collar frauds and corrupt officials. They routinely take on the best criminal defense lawyers in the world with unlimited budgets – and generally win. Biden, Kaufman, and Connaughton know these people on a first name basis, which makes Connaughton’s book an essential reading for anyone who wishes to understand the financial crisis and why our response to the Great Recession has been a national disgrace.

Our nation is also blessed with hundreds of experienced financial regulators who are nearly unique globally because of their willingness and skill in taking on elite frauds and their lawyers and allied professionals. Connaughton makes it clear that the Bush and Obama administrations have overwhelmingly refused to take advantage of this talent in order to hold the elite Wall Street frauds who grew wealthy by driving the financial crisis and the Great Recession. Connaughton takes us inside the SEC to see why that agency’s leadership has adopted policies that guarantee failure. We owe him a great debt for his service to the nation and for making his account of what went wrong public in this book.

4 Responses to The Payoff: Why Wall Street Always Wins – Jeff Connaughton

  1. Excessive dogmatism causes death of reasoning. Agreed. but debating the issues at the initial stages generally leads to good decisions. Bigger surprise to an Asian like me is that a democratic and the freest society of America gives chance to some ‘elites’ to play with the financial institutions of the country; sometimes considered too big to fail and sometimes declared as Guaranteed to Fail. The political leaders now should protect the main street with much more vigour than given to the Wall Street.

  2. Quis Custodiet Ipso Custodes

  3. Quis Custodiet Ipso Custodes
    “Who will guard the guards themselves?”
    Use Google.