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Andrew Silton: Stop the conveyor belt between Wall Street and high-level government positions

This week I am going to convince you that it’s worth worrying about who will be the next undersecretary for domestic affairs at the U.S. Treasury. It’s not just that undersecretary is an important government job; this position symbolizes the conveyor belt that links Wall Street to our government. The job involves managing the nation’s $12.9 trillion debt. President Barack Obama has nominated Antonio Weiss, the head of investment banking at Lazard. It turns out that Lazard will pay Weiss $20 million in deferred compensation if he is confirmed by the U.S. Senate and takes the job. If Weiss were to take a job with another investment bank, such as Morgan Stanley, he’d have to forfeit those deferred payments. I bet your employer doesn’t offer you this kind of benefit. Of course, you’re not in a job where you could pile up tens of millions of dollars in deferred salary and stock in the first place. However, it is folks like Weiss who wind up in senior government jobs that affect your economic well being.

It turns out that Lazard is not alone in offering to pay out their senior executives if they go into public service. Goldman Sachs has a similar policy, and Citigroup paid Treasury Secretary Jack Lew under a similar provision when he first joined the Obama administration at the State Department in 2008. Wall Street wants us to believe that paying out their senior executives is a great way to promote public service and send highly talented people to Washington, D.C. They are right. Offering an investment banker tens of millions in deferred compensation is a powerful inducement. However, it’s a compensation policy that serves Wall Street rather than the public.

A corporate game

It’s hard to believe that we need more Wall Street influence or culture. In both Democratic and Republican administrations, investment bankers and traders have done enormous damage to the public interest. The failure to properly regulate derivatives and mortgages, the failure to properly regulate banks and brokerages, and the failure to enact equitable tax policies have come about under the continuing influence of bankers. You can’t point a finger solely at Republicans or Democrats. Ronald Reagan relied on Donald Regan, chairman of Merrill Lynch. George H.W. Bush trusted Nicholas Brady, chairman of Dillon Reed. Bill Clinton called upon Robert Rubin, chairman of Goldman Sachs, to serve as secretary of the Treasury. George W. Bush depended on Henry Paulson, also a chairman at Goldman. Obama has employed a host of Rubin protégés from Lawrence Summers to Timothy Geithner. In turn, these high-level appointees brought their Wall Street colleagues into important positions throughout our government. Weiss is another potential appointee in this unfortunate tradition.

Pay to play

These folks didn’t enter government service without first paying an admission fee in the form of large political contributions. Rubin provided the prescription in his 2003 memoir, “In an Uncertain Time.” “From time to time others in the financial world have asked me for advice on how to get involved in politics. You can most readily acquire a place at the table by raising money.” Weiss has followed Rubin’s timeless advice. While he’s by no means the biggest campaign contributor, he is listed as a large bundler (someone who raises large campaign sums from donors) for Obama and has written big checks to support Senate Democrats. My Republican readers might want to consult the campaign contributions of former Secretary of the Treasury Henry Paulson before they try to draw a partisan conclusion from Weiss’s political activity. Paulson was a large donor to Republican causes before he became a government official.

In the hands of Wall Street, accelerating deferred compensation and benefits in exchange for public service simply becomes one more corporate game. To play the game, an executive merely has to find a 12- to 18-month government gig so he can accelerate five to 10 years of benefits and then reload with signing bonuses and stock options when he rejoins Wall Street. Weiss will get his $20 million and then only serve about 18 months until the Obama administration comes to an end. After that, Wall Street will be eager to have him back. If Weiss needs a bit of reassurance about his post-government employment prospects, he need look no farther than the private equity firm, Warburg Pincus, or the investment bank, Moelis & Co. The former has employed Geithner as its president, and the latter has hired former House Majority Leader Eric Cantor as its vice chairman.

What passes for talent

Some of you probably believe that the compensation paid to these folks is indicative of their talent and that we ought to take advantage of that talent by enticing them into public service. We shouldn’t confuse talent with extraordinary compensation. Most Wall Streeters aren’t paid based on their value or talent. Rather, they are paid tens of millions of dollars because the compensation system has been rigged to unduly reward a tiny proportion of our population. Weiss and his Wall Street colleagues are simply smart guys who happened to get a “golden ticket.” If they want to work in government, they need to leave their huge piles of deferred cash and unvested equity behind.

There are plenty of mid-level executives in the private sector who could greatly aid the public sector. They don’t have huge deferred compensation packages, and they would be making an even bigger financial sacrifice if they left their private sector careers to lend a hand in the federal government or a state capital. However, it is only senior bankers who can bring along every penny of their wealth if they decide to enter government.

In addition, we shouldn’t confuse talent with experience. Investment bankers have a tendency to believe that they can do anything simply because they are smart. Thus, they’ll think nothing of giving strategic advice to companies in industries that they don’t know much about. This hubris extends to government service.

Disaster for government

For years, bankers have moved into policy jobs involving aspects of our government that are far removed from finance. However, even when they’ve landed in financially related posts, they’ve tended to make rules that are good for Wall Street but bad for the average American. Weiss is a good example of this problem. No doubt, he’s smart. He received his undergraduate degree from Yale and his MBA from Harvard. While he’s spent decades restructuring companies, he has no experience in capital markets or public policy, which is at the heart of being undersecretary for domestic affairs. Being smart or an investment banker is not nearly good enough.

Over the past few decades the federal government’s policymakers and lawmakers, both Republicans and Democrats, have been manufactured on a conveyor belt that begins at Harvard and other elite schools and passes them along to Wall Street, where they are unjustifiably enriched. As a result, they are able to feed our political process with mountains of campaign cash and then occupy key positions in the White House and federal agencies before the conveyor belt returns them to Wall Street. The results for our government and the public interest have been nothing short of disastrous. Instead of greasing the conveyor belt by offering investment bankers immediate access to their deferred compensation, we need to shut it down.

Andrew Silton’s Meditations on Money columns can be found twice a month in The N&O’s Work&Money section. He is a retired money manager living in Chapel Hill. He was CIO for the North Carolina Retirement System from 2002-2005. He writes the blog http://meditationonmoneymanagement.blogspot.com/

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