Authors: Charles Ferguson
I watched the growth of this problem when I was in academia myself, and must confess that I once participated in it. When I was a twenty-four-year-old PhD student, I was hired for a summer by
Massachusetts Institute of Technology professor Peter Temin, a prominent economist, to help him defend AT&T, which was still a nationwide monopoly and had been sued for antitrust violations by
the US Justice Department. I was very young and naive, and was stunned at what I saw. Within a month, I realized that AT&T had literally hired the majority of the most prominent
telecommunications and regulatory economists in America. Everywhere I went—MIT, Harvard, Stanford, Yale, the University of California at Berkeley—the main guys were working for
AT&T, whose spending dwarfed the Justice Department’s, probably by fifty or a hundred to one. I concluded that AT&T was guilty; wrote something very unfavourable to AT&T, which of
course never saw the light of day; and returned to my PhD work. Peter Temin is actually a very nice guy, and was very kind to me and the six other graduate students he hired that summer. But the
experience left me with a bad taste in my mouth.
And, having been sensitized, I noticed over the intervening years that the problem was growing—fast. Vast amounts of money (by academic standards) started arriving from powerful
industries, mainly in the form of direct consulting payments to professors. This problem is now so pervasive that the academic disciplines of economics, business, public policy, and law have been
severely distorted by the conflicts of interest now endemic to them. The areas most severely affected have been finance, the economics of regulation, industrial organization, corporate governance,
antitrust analysis, the economic analysis of law, and the analysis of specific industries affected by government policy. The principal industries involved are energy, telecommunications, health
care, agribusiness—and, most definitely, financial services.
There are also serious problems in medical research and, disturbingly, even national security policy (we
will shortly consider some interesting facts about Libya).
Academics on industry payrolls, and the interest groups that pay them, are now so numerous and powerful that they can 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. Most of America’s best
universities do not limit financial conflicts of interest, do not require their disclosure, and aggressively resist inquiries into the issue. There are several reasons for this, including fear of
public embarrassment; the
existence
of personal conflicts of interest among university presidents and deans; dependence on donations from companies and executives; and the internal power
(within the university) of large numbers of professors who wish to preserve their incomes and reputations, and who know that disclosure and reform would endanger them.
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 lower their costs or forecast demand. Their principal
focus is on helping companies avoid or influence legislation, public debate, regulation, prosecution, class-action lawsuits, antitrust judgements, 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.
The Berkeley Research Group, for example, lists 148 “experts”, most of them identified as “principals” or “directors”, and most of them high-profile
academics—Laura Tyson is one, for example.
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With eighteen offices in the US and one in London, it organizes its work around “high-stakes,
complex commercial disputes and regulatory and legislative issues.” BRG lists nineteen specialties, including antitrust, energy, environmental research, and intellectual property, as well as
litigation support services—damages analysis, forensic financial analysis, and class-action certification.
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The Analysis Group, headquartered in Boston with offices throughout the US, has a staff of five hundred and a star-studded list of academic experts, including John Campbell, chairman of the
Harvard economics department, Jonathan Gruber, a leading health care economist at MIT, and Glenn Hubbard, the dean of Columbia University’s business school.
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Compass Lexecon has three hundred on its staff, which now includes six former chief economists of the Department of Justice’s antitrust division.
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It recently signed several new experts, including a Nobel laureate from New York University.
Charles River Associates was founded by MIT economist and antitrust expert Franklin Fisher in 1965 and is now a publicly traded international consulting firm with seven hundred employees. It
also maintains exclusive relationships with forty-four prestigious academics for occasional advisory assignments.
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And business is good. The Charles River
financials show revenues averaging over $300 million annually between 2008 and 2010. Revenues per employee were nearly $450,000 a year, and revenue per consultant exceeded $600,000 per year. Those
are investment-banking-type numbers.
Speakers’ bureaus are another significant channel, and are sometimes used to launder or disguise payments to academics for lobbying and policy advocacy. Speaking fees (for corporate events
and industry
conventions, for example) sometimes exceed $100,000 for prominent academics, particularly if they have also served in government. Prominent academics often make
half a million dollars a year that way, particularly if they study and write about a highly regulated industry.
But how important and influential are these people and their relationships? What follows is a sample of the academic world’s relationships to the financial services industry and their
impact on public debate and policy. I think that most readers will find it all too . . . convincing. The financial sector is, yet again, very well connected.
The Money People
THE MOST EMINENT
academics in the US, particularly those who have studied, written about, and/or worked on financial regulation and deregulation, have
made fortunes from Wall Street while advocating its interests in Congress, regulatory proceedings, the courts, and the media. Here we will consider some examples in detail, all of them very
prominent:
• Glenn Hubbard
• Larry Summers
• Frederic Mishkin
• Richard Portes
• Laura D’Andrea Tyson
• Martin Feldstein
• Hal Scott
• John Campbell
Glenn Hubbard
. 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. He also served in the US
Treasury Department during the George H. W. Bush administration. Hubbard is cochairman of the Committee on Capital Markets Regulation, a nonprofit charity 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 favoured 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.
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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. This should not reassure you. But neither should
the fact that Glenn Hubbard remains the dean of Columbia Business School.
Their article warrants quotation at some length. It 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 development of the capital markets has helped distribute risk more efficiently. . . . This ability to transfer risk facilitates greater risk-taking, but
this increased risk-taking does not destabilize the economy. . . . Thus the capital markets ensure that capital flows to its best uses and that riskier activities with higher payoffs are
funded.”
• “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 closing costs associated with obtaining a residential mortgage have
fallen, and the terms . . . have become less stringent. At times homeowners can obtain 100 percent financing to purchase a home.”
• “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.
That is because the US economic performance has improved over time, both absolutely and relative to other G-7 countries in which capital markets are much less well-developed.”
Hubbard refused to say whether he was paid to write the article. He also refused to provide me with his most recent government financial disclosure form (from 2001, 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.
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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 property during the bubble that went
bankrupt after the crisis.
Hubbard was paid $100,000 to testify for the criminal defence 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 lists the Analysis Group as a consulting client but has not divulged the identities
of the ultimate, real clients for whom he has worked via his relationship with the Analysis Group. Nor did his Columbia web page (as of February 2012) list his paid speaking engagements. Both of
these omissions represent apparent violations of the new disclosure requirements established by Columbia Business School after the release of my film.
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However, his speaker’s bureau, the Harry Walker Agency, is one of the very few such agencies that lists the names of some speakers’ clients by name, in its “ovations”
testimonials. Clients giving testimonials to Hubbard’s speaking abilities include the Alternative Investment Group, BNP Paribas, the Massachusetts Bankers’ Association, and Barclays
Bank.
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My filmed interview with Hubbard in 2009 contained the following exchange:
CF:
How does your personal income compare, your private income as opposed to your university salary?
GLENN HUBBARD:
Vastly times more, because I write textbooks, so that’s much more remunerative than being a professor.
Textbooks? Surprising.
In 2011, Hubbard became a senior economic adviser to Republican Mitt Romney’s presidential campaign.
Larry Summers
. Summers, who is undeniably brilliant, is the son of two economists and a relative of Paul Samuelson and Kenneth Arrow, two of the
greatest economists of the last century. Summers 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.