Government for Sale: How Lobbyists Shaped the Financial Reform Bill

Two weeks ago, along a marble corridor in the Rayburn House Office Building in Washington, I watched about 40 well-dressed men (and two women) delivering huge value for their employers. Except that we, the taxpayers, weren't employing them

  • Illustration by John Ritter for TIME

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    War of the White Papers
    Depending on those staffers turned lobbyists to provide a courtroom-like balanced debate also ignores the imbalance of forces storming the Hill. Except for the fight over one key provision — a measure to limit what banks can charge retailers to process debit-card payments, an issue pitting major retailers against the banks — lobbyists for the banking and financial-services industries simply outgunned lobbyists for consumers. "We have three lawyers total working on this [entire bill]," says Travis Plunkett, the legislative director for the Consumer Federation of America, a lobbying and education organization representing 280 nonprofit groups. "They can have three people working on a paragraph."

    The imbalance can be measured not just in bodies but also in the unending flow of alternative-language proposals and extravagant "white papers" that the heavy hitters churned out. My favorite white paper this season was the Private Equity Council's "study" of how taxing those who run these funds at the same rates that everyone else pays for earned income would be disastrous for the economy. It was 15 dense pages, elaborately footnoted, colorfully graphed and full of intimidating calculus formulas that purported to show how higher taxes paid by people who manage equity funds would dry up investments because their after-tax income would be lower and therefore they wouldn't want to take on as much risk. This is gibberish posing as scholarship. The 20% fee that fund managers get from the fund's profits (that's the famous "carried interest" that Capitol Tax Partners was trying to protect, and it often amounts to tens or hundreds of millions of dollars) has nothing to do with any investment-risk calculation they make, because they are not risking or investing a penny to get that slice. They get those fees (plus typically a guarantee of 2% of all the money they manage, whether they invest it successfully or not) simply for showing up every morning and managing the fund. It's risky only in the sense that the average worker risks not getting a bonus if he doesn't perform well. The so-called limited partners whom the fund managers rely on to actually invest in their funds are the ones making the risky investments, and their favorable tax rates would not go up under the proposed reform. "I have trouble with that logic myself," concedes one of the funds' lobbyists when asked about the white paper, "but when you publish something like this, it gives a staff person or member who wants to help you something to hang his hat on ... It helped us get the compromise," he adds, referring to the resulting rate (now tucked into a broader tax bill that awaits a final vote) that is between the regular tax rate and the lower capital-gains rate.

    Beyond the resources lobbyists can deploy, there's the campaign money they can supply. The average winning congressional campaign in 2010 is likely to cost about $1.5 million, requiring the incumbent to raise roughly $15,000 a week. Lobbyists not only contribute on their own but are the most important fundraisers in the money grind, because they serve as lawmakers' links to the most promising donors: those with business interests related to each member's committee assignments. So it was no surprise that as the financial-reform conference began its deliberations, the CRP reported that since 1989 the 43 members of the committee had received $112 million from donors associated with the finance, insurance and real estate industries. "You can say that lobbyists on the Hill are like lawyers in the courtroom and that the advocacy system produces the best result," says David Arkush, the director of Congress Watch. "But in court you don't have the lawyers and clients donating to the jury."

    The Fights You Can't See
    Yet it would seem that for all their advantages, the high-powered lobbyists lost big, assuming the financial-reform bill wins the necessary votes in the Senate. Everything that Goliaths like the Chamber of Commerce (which alone spent $144.5 million last year lobbying for business interests) fought — the new consumer-financial-protection agency, derivatives regulation, restrictions on banks' adding risk by trading on their own accounts, regulation of debit-card fees — made it into the final version approved by the conference. So what's the problem? "The more important an issue is to the public," says Congressman Frank, "the less important the lobbyists are ... The one thing politicians care more about than money is votes. So when an issue catches the public interest, lobbyists and contributions will almost always take a backseat — unless the politician is a crook."

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