NOTES
Introduction
1. See Dodosh (2008).
2. See Roguski (2008).
3. See Sims (2008).
4. An asset-backed security is one whose value is based on returns from some underlying asset. In the case of mortgage-backed securities, the value is derived from cash flows generated by interest payments on an underlying pool of mortgages.
5. See Foote, Gerardi, and Willen (2012).
6. On Raines’s compensation, see Bebchuk and Fried (2005).
7. In a research article, Steven Levitt (coauthor of Freakonomics) estimates that personal ideology represented about 50 percent of the mix. See Levitt (1996).
8. Our focus will be on U.S. financial crises, so we are concerned primarily with the particular structure of U.S. policy-making institutions.
9. See “In the Court of Common Pleas of Allegheny County, Pennsylvania, Federal Home Loan Bank of Pittsburgh v. J.P. Morgan Securities Inc., J.P. Morgan Chase & Co., Moody’s Corporation, Moody’s Investor Services, Inc., and the McGraw-Hill Companies, Inc.,” Complaint No. GD 09-016593, filed October 23, 2009. See also “In the State Court of Fulton County, State of Georgia, Federal Home Loan Bank of Atlanta v. Countrywide Financial Corporation (n/k/a Bank of America Home Loans, Inc.); Bank of America Corporation (as successor to the Countrywide Defendants); J.P. Morgan Securities, LLC (f/k/a J.P. Morgan Securities, Inc. and Bear Stearns & Co., Inc.); UBS Securities, LLC; and John Doe defendants 1–50,” filed on January 18, 2011.
10. Foote, Gerardi, and Willen (2012) indicate that the ratings problem centered on CDOs constructed from risky tranches. AAA rated MBS were correctly rated.
11. See Faux and Shenn (2011).
12. The Twentieth Amendment changed the presidential inauguration date to January 20 and the starting date of the new Congress to January 3. The amendment was ratified January 23, 1933, but did not take effect until October of that year.
13. See Bruner and Carr (2007).
14. See Hansell (1994); Mallaby (2010); and Partnoy (2009).
15. In another securitization scandal of 1994, Procter and Gamble and other companies successfully sued Banker’s Trust for providing customers with inaccurate information about their exposure in interest rate swaps.
16. See Lewis (2010).
17. For example, in the lead-up to the crisis, Lehman Brothers used a questionable accounting practice known as Repo 105 to goose its balance sheet just in time for quarterly earnings reports. Using Repo 105 transactions, Lehman loaned assets collateralized at 105 percent in the overnight repo market. These loans were counted as sales on the firm’s balance sheet. See De la Merced and Werdigier (2010).
18. See Berner and Grow (2008).
19. See Reinhart and Rogoff (2009).
21. See Abelson (2000).
22. Oxford English Dictionary, 2nd ed., s.v. “ideology.” Although we consider it the most important clause, the third edition of the OED drops the final clause. See Benabou (2008) for a formal model of ideological rigidity.
23. See McCarty, Poole, and Rosenthal (2006).
24. See Sorkin (2009: 284, 302, 535–36) and Paulson (2010: 152–53, 285–86). Without congressional pressure, Paulson may well have preferred a bailout for Lehman.
25. See McCarty, Poole and Rosenthal (2006: chap. 6).
26. See Smith (1904) and Mayhew (1974).
27. This provision exempted all over-the-counter electronic trading of energy securities from government regulation. The primary beneficiary of the restriction on regulatory jurisdiction was Enron, which operated the main trading platform for these securities. See Lipton (2008).
28. See Public Citizen’s Critical Mass Energy and Environment Program (2001).
29. Ibid.
30. See Morgenson (2012).
31. See Browning (2010).
32. See Shear (2009).
33. To complicate our distinction between ideology and greed a bit more, few advocates of free market conservatism are pure libertarians of the Ron Paul mode. Most are willing to tolerate or support government interventions that benefit business or higher-income voters even when they violate free market or small government principles. For example, many voters who identify with the Tea Party and its support for free market conservatism oppose reductions of Social Security or Medicare benefits for high-income beneficiaries (see chapter 8). So while ideology is more than simply a mask for private interest, the belief systems of politicians and citizens may be shaped by private interest.
34. See Kindleberger and Aliber (2005: 165).
35. Even democracies in which the government is far more engaged in the economy have suffered significant financial crises. Sweden and Japan are notable examples from the 1990s.
36. See Reinhart and Rogoff (2009: 210–13).
37. See Mishkin and Herbertsson (2006).
38. See Halberstam (1969). One of us experienced this failure firsthand. However, the GI Bill may have made him one of “the best and the brightest” after the fact.
39. LTCM was truly elite. Its CEO was a University of Chicago MBA; its partners included two Nobel Prize Laureates, six MIT economics PhDs, and three Harvard professors.
Introduction to Part I
1. See Goldin and Katz (2008).
2. “Robo-signing” is the practice of mortgage company employees signing foreclosure affidavits without reviewing the accuracy of the underlying documentation. Several mortgage lenders were sued over this practice, resulting in a $26 billion settlement. That money was intended to provide relief to struggling homeowners to avoid foreclosure. But the standards for what qualified for such assistance were diluted. See Dewan and Silver-Greenberg (2012).
3. See Mitchell (2007). Another baseball hero, Sandy Koufax, may not have popped pills on the mound, but got scammed by Madoff, through his high school teammate and New York Mets owner Fred Wilpon.
4. Moreover, Paulson’s collusion with Goldman Sachs to create MBSs that he could bet against, suggests that this faith in short sellers to correct markets may be naive and entirely misplaced.
5. See Igan, Mishra, and Tressel (2009).
6. Gramlich (2007) summarizes his actions.
7. See Streitfeld and Rudolf (2009).
Chapter 1
1. Economists define the fundamental value of an asset as the net present value of payments (e.g., dividends or interest) over time. Consequently, erroneous beliefs either about the flow of payments or the time value of money can drive a wedge between the price and the fundamentals.
2. For a sampling of the economic arguments about bubbles, see Shiller (2000); Meltzer (2003); and Blanchard and Watson (1982). See also Kindleberger and Aliber (2005).
3. The term bounded rationality is usually attributed to Herbert Simon; see Simon (1957).
4. See Nakamoto and Wighton (2007).
5. For empirical evidence on distorted beliefs in the housing market, see Cheng, Raina, and Xiong (2012).
6. See Malkiel (1990: 227).
7. See Buffett (2010). See Benabou (2012) for a formal model of delusion in financial markets.
8. See Clinton (1999).
9. See Greenspan (2005).
10. See Buiter (2008); emphasis in the original. See also Johnson and Kwak (2010).
11. See Jacobe (2008).
12. In May 2005, the Case Shiller Ten City Index was 206 (where an index of 100 equals prices in January 2000). In May 1995, the index was just 77. Data accessed June 5, 2011, at http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----.
13. See Jacobe (2008).
14. Some government officials, namely Treasury Secretary Geithner, were somewhat sympathetic to this line of argument. See Calmes (2009).
Chapter 2
1. See Malabre (1994: 220).
2. See Dixit and Weibull (2007).
3. See Shamim (2009).
4. See Reuters (2009).
5. Comments on Fox News Sunday, July 5, 2009, quoted in Holden (2009).
6. See Brooks (2012).
7. See The Financial Crisis and the Role of Federal Regulators (2008).
8. Ibid.
9. Ben S. Bernanke, “Remarks,” quoted in Friedman and Schwartz (2008: 243). Mellon also, in an extreme precedent for the current Republican inflation bugaboo, advocated price deflation that would adversely affect nominally denominated industrial and farm debt. In contrast, Franklin Roosevelt, in devaluing the dollar and canceling gold clauses in debt contracts, forced a 31 percent haircut on industrial debt; see Kroszner (1999).
10. See Gramm (1999).
11. See Hill (2008).
12. As we shall see, Greenspan is one of the few free market devotees to publicly adjust their views about the role of regulation.
13. See The Financial Crisis and the Role of Federal Regulators (2008).
14. See “Greenspan Pockets $250k for Speech” (2006).
15. Ronald Reagan replaced Paul Volcker with Greenspan in 1987, with only two votes against confirmation in the Senate. When Volcker was appointed by Jimmy Carter in 1979, he was confirmed unanimously. But when reappointed by Reagan in 1983, there were sixteen negative votes. These included the two most liberal Democrats (Howard Metzenbaum and Edward Kennedy) who most likely objected to the Volcker hike in interest rates. Volcker was also opposed by three of the four most conservative Republicans (Jesse Helms, Steven Symms, and Gordon Humphrey), who probably objected to his regulatory stance. Reagan probably concurred with conservative opposition in 1987. In the two Clinton reappointments, Greenspan drew seven negative votes from liberals in 1996 and four in 2000.
16. See Stiglitz (2009a: 51).
17. See Barrett (2008).
18. Ibid. Cuomo’s actions may not have been entirely ideologically driven. He also had close political connections with real-estate finance lobbyists who wanted the GSEs to tie up more of their portfolios in subprime mortgages so that they would have to stay out of the high-end market.
19. See Frame (2008).
20. Many analysts agree that ultimately the role of the GSEs in the subprime market played only a limited direct role in the housing and credit crises. Yet the GSEs’ participation in that market may well have added legitimacy to the huge expansion of this market and the unsavory practices of mortgage lenders.
21. See Fannie Mae (2003: 18–19).
22. See Slack (2010).
23. See Lucas (2011).
24. See Curry and Shibut (2000).
25. That there are many flavors of liberalism and conservatism and that there is contestation over the meanings of these terms will not detain us here. As we argue below, a single liberal-to-conservative continuum has an ability to explain much of contemporary American politics.
26. See Poole and Rosenthal (1997: chap. 8). Of course, the index of a liberal group will just be a flip of a conservative index. A legislator who gets a 100 score from the Americans for Democratic Action is likely to get a 0 from the National Taxpayers Union.
27. See Poole and Rosenthal (1997) and McCarty, Poole, and Rosenthal (1997). Although many have suspected that this was a Congress-specific artifact, the finding of near one-dimensional politics has been replicated in dozens of national parliaments, the European Union parliament, and American state legislatures. Our historical findings are largely supported by an alternative methodology (Heckman and Snyder 1997). It is fair to say that there is now a professional consensus that current American politics is largely one-dimensional.
28. See Hare, McCarty, Poole, and Rosenthal (2012).
29. On the effects of party discipline, see McCarty, Poole, and Rosenthal (2001).
30. See Poole and Rosenthal (1997, 2007) and McCarty, Poole, and Rosenthal (1997, 2006).
31. For contrary views, see Carmines and Stimson (1989) and Mendelberg (2001).
32. See McCarty, Poole, and Rosenthal (2001) and Nokken and Poole (2004).
33. See Poole (2007).
34. Boxer was elected to Alan Cranston’s seat upon his retirement, and Feinstein won a special election to replace Pete Wilson, who had become governor of California.
35. In order of increasing differences, these are Vermont (independent Sanders caucuses as a Democrat), Arizona, South Carolina, and Delaware.
36. See Poole and Romer (1993).
37. The act also created the National Monetary Commission, whose reports became the basis of the Federal Reserve Act.
38. See McCarty, Poole, and Rosenthal (2006).
39. See Schattschneider (1960: 38).
40. See Philippon and Reshef (2009). This financial wage premium is also a major determinant of the overall level of income inequality in the United States; see Kaplan and Rauh (2007).
41. See Philippon and Reshef (2009).
42. See Bakija, Cole, and Heim (2010: tables 2 and 6).
43. See Piketty and Saez (2003).
44. See Abramowitz (2011) and Fiorina, Abrams, and Pope (2010).
45. See Levendusky (2009).
46. The histograms also show the proportionate reduction in error (PRE). If our after-the-fact prediction was that everyone voted with the majority on a roll call, our prediction errors would be the number of votes on the minority side. The minority votes are used, therefore, to benchmark the spatial model. If the spatial model makes no errors, the PRE is 1.0. If the spatial model does no better than the benchmark, the PRE is 0.0. If the spatial model reduces the errors in the benchmark by half, the PRE is 0.5.
47. This bill included federal licensing of mortgage lenders, fines for inappropriate subprime loans, limits on fees and on balloon payments, and liability for firms creating mortgage-backed securities. Many tougher provisions, such as allowing defaulters to use bankruptcy court, were eliminated from the bill.
48. See McCarty, Poole, and Rosenthal (1997). Other techniques include optimal classification (Poole 2000), the factor analytic method (Heckman and Snyder 1997), and Bayesian MCMC (Clinton, Jackman, and Rivers, 2004). DW-NOMINATE scores are used in media reports, as in Stolberg (2009a) and Lizza (2012).
49. For an explanation of the proportionate reduction in error, see note 46, above.
Chapter 3
1. Michael Burry, quoted in Lewis (2010: 55).
2. See Schlesinger (1965: 635).
3. See Lieberman and Asaba (2006).
4. On Enron’s lobbying success, see Ismail (2003).
5. See Beckel (2011).
6. See Morgenson (2010).
7. See Igan, Mishra, and Tressel (2009).
8. See Romer and Weingast (1991).
9. Because these data are taken from the 2000 decennial census, they are very likely to understate levels of employment in these sectors at the top of the boom. For example, the National Association of Realtors had its membership grow from 776,580 members in 2000 to 1,338,001 in 2007. See National Association of Realtors (2011).
10. See Bartels (2008: chap. 9). See also Bhatti and Erikson (2011) and Tausanovitch (2011) for more nuanced views of Bartels’s claims.
11. Data on industry of employment from the 2008 ANES have not been released as of this writing. Because people routinely lie about voting, both of these are inflated estimates. There is little reason to believe that employees in the financial sector would be any more truthful than the average respondent.
12. Eric Zitzewitz (2006) estimates that late trading costs mutual fund investors $400 million per year.
13. Zitzewitz (2006) finds statistical evidence consistent with late trading for thirty-nine of the sixty-six mutual fund families in his study.
14. See Mian, Sufi, and Trebbi (2010).
15. See Ansolabehere, de Figueiredo, and Snyder (2003). It is also worth pointing out that campaign contributions are only part of the total amount of money spent on politics. Direct lobbying expenditures are also substantial. According to the Center for Responsive Politics, lobbying expenditures for the financial industry since 1998 include $1.3 billion by insurance interests, $746 million by real estate interests, and $636 million by securities and investments firms. See our discussion of lobbying below.
16. Computations provided by Adam Bonica, Stanford University (correspondence with the authors).
17. See Kroszner and Stratmann (1998).
18. See Nuñez and Rosenthal (2004).
19. The data was downloaded from various pages at http://www.opensecrets.org/industries; accessed July 11, 2011.
20. Lawyers and law firms contributed $126 million in 2008. A big chunk of these contributors may also have had interests in financial industry regulation.
21. See Philippon and Reshef (2009).
22. The argument is amplified in Toobin (2010: 50–57).
23. In fact, former Goldman CEO and Treasury secretary Henry Paulson is an avid environmentalist. See Sorkin (2009).
24. See Wachtel (2012).
25. On Wall Street’s rocket scientists, see Overbye (2009).
26. See Sorkin (2011).
27. See Wilmott (2009) and McGinty and Scannell (2009).
28. See U.S. Commodity Futures Trading Commission and U.S. Securities and Exchange Commission (2010).
29. For a more formal elaboration of these arguments, see McCarty (2013).
30. The insurance industry is omitted, as much of its recent lobbying has been directed at health care rather than financial services.
Chapter 4
1. Parliamentary democracies can in principle hold elections more frequently. The regular term for a parliamentarian is typically five years, but it can be as low as three years (Australia). Presidential systems such as those in East Asia and Latin America have fixed legislative terms, but none elect the entire lower house every two years.
2. See Diermeier and Feddersen (1998).
3. On local interests in the McFadden Act, see Rajan and Ramcharan (2011).
4. See Illinois Department of Financial and Professional Regulation (2013).
5. See Preston (1927).
6. See Bank of Canada (2012).
7. See Hernandez and Labaton (2007).
8. See Romer and Weingast (1991) and McCarty, Poole, Romer, and Rosenthal (2010a).
9. The U.S. Constitution cannot be amended to eliminate equal representation of states in the Senate (Article V). It is permanent. For evidence of its importance for policy outcomes, see Lee (1998) and Lauderdale (2008).
10. See Binder (2003).
11. See Labaton (2005).
12. See Black (1958).
13. For evidence of the responsiveness of politicians and policies to voter preferences, see Erikson, MacKuen, and Stimson (2002).
14. See Cox and McCubbins (2005).
15. Cox and McCubbins (2005) argue that the majority party was able to exercise such agenda control beginning with the establishment of the Reed Rules in the 1890s.
16. A caveat is in order. Because of estimation error in DW-NOMINATE scores, we are more certain that the median is around –.197 than we are that Boucher is actually the median.
17. See Sinclair (2002).
18. See Krehbiel (1998).
19. If the bill was too conservative, at least sixty would oppose it and it wouldn’t pass even if cloture were obtained.
20. See McCarty (1997); Cameron (2000); and Cameron and McCarty (2004). Presidents’ informal agenda-control powers are considerable in their ability to frame issues and originate legislation in executive branch agencies.
21. If the president is sufficiently moderate (i.e., located between the filibuster pivots) the presidential veto does not increase the gridlock interval. If the president is sufficiently rightist, the gridlock interval ranges from Senator 41’s ideal point to the larger of Senator 66 and Congressperson 285’s ideal point. The interval for a leftist is the minimum of Senator 34 and Congressperson 146 to Senator 60.
22. See Senate Library (1992).
23. Of course, the House of Representatives affects the veto pivot. But in the current Congress, the veto pivots are senators, and so we refer to them as such.
24. Other Senate personnel changes that occurred before the 2010 elections had no impact on the gridlock intervals.
25. See Wawro and Schickler (2006) for an elaboration of these arguments.
26. See Binder and Smith (1997), Wawro and Schickler (2006), and Koger (2010).
27. McCarty (2007) shows statistically that the width of the gridlock interval can be well accounted for by the degree of polarization and changes to the cloture rule.
28. Senator Long opposed provisions that would allow national banks to open branches, a policy that would threaten small state-chartered banks. Eventually, his objections were accommodated. See Williams (1969) and Kennedy (1973: 72–73).
29. During the first one hundred days of Roosevelt’s presidency, Congress passed Glass-Steagall; passed the Economy Act, which cut government salaries; suspended the gold standard; started the Public Works Administration; passed the Farm Security Act to raise farmers’ incomes; and established the Tennessee Valley Authority. This is just a partial list. In contrast, President Obama passed his controversial stimulus package.
30. The gold clauses are discussed in more detail in chapter 6.
31. See Gilmour (1995) and Groseclose and McCarty (2000).
32. See Clinton (1995).
33. Congressional Record (104th Congress), p. H15219.
34. See Prior (2007, and forthcoming) for a discussion of the relationship between changes in the media environment and polarization.
35. See Sunstein, Schkade, and Ellman (2004); Segal and Spaeth (2002); and Martin and Quinn (2002).
36. See Teles (2008).
37. See Romer and Weingast (1991).
38. Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp., 439 U.S. 299 (1978).
39. See Ferejohn and Shipan (1990) and Spiller and Gely (1992).
40. Cuomo v. Clearing House Association, L.L.C., 557 U.S. 519 (2009).
41. See Duca, Muellbauer, and Murphy (2012: fig. 1).
42. See Duca, Muellbauer, and Murphy (2012: fig. 2).
43. See Gorton (2010a).
44. See Wooten (2001).
45. See Olshan (2011).
46. The situation was chronicled by Mitchell Martin in the New York Times on April 7, 1998:
Sanford Weill, the Travelers chairman, said he expected the Fed to quickly approve his company’s application to become a bank holding company and added: “I don’t think we have to spin anything off to make this happen.” Current law, he said, allows at least two and as many as five years for prohibited assets to be divested. “We are hopeful that over that time the legislation will change,” he added. He said the companies had already had talks with the Fed about specific legal impediments and said, “We have had enough discussions to believe this will not be a problem.” As well as having had discussions with the Fed and the Treasury, [Citicorp chairman John] Reed said President Bill Clinton was briefed on the announcement Sunday night.
See Martin (1998).
47. See Epstein and O’Halloran (1999) and Huber and Shipan (2002).
48. See Fiorina (1989).
49. See McCubbins and Schwartz (1984).
50. See Lipton and Kirkpatrick (2008).
51. See Kwak (2013).
52. This unfortunate fact is most vividly revealed in Charles Ferguson’s documentary film The Inside Job (2010). See Zingales (2013) for quantitative evidence.
53. See Huber and McCarty (2004). See also McCarty (2013).
54. On theories of regulatory capture, see Huntington (1952); Bernstein (1955); Noll (1971); and Stigler (1971).
Chapter 5
1. Duca and Saving (2008) have claimed that the increase in equity investments since the 1970s is an explanation of increased support for the Republican Party.
2. See McCarty, Poole, and Rosenthal (2006: chap. 3).
3. A $148 million settlement was paid in 2012 by Wachovia’s acquirer, Wells Fargo. See Isidore (2012).
4. See “Wachovia Settlement Checks Real” (2012).
5. For the details of the Wachovia case, see Subramanian and Sharma (2010).
6. Our view about the role of housing policy thus falls in the middle of a debate that has engaged two prominent economists. Chicago professor and former International Monetary Fund chief economist Raghuram Rajan (2010) sees the bubble as part of a political response to rising income inequality. Rajan’s position has been critiqued by MIT professor and Clark Medal winner Daron Acemoglu. Acemoglu (2012) emphasizes policy shifts as industry driven.
7. Moreover, unlike most tax deductions, it is not subject to the alternative minimum tax (though the property tax deduction did not receive the same preferential treatment).
8. See Arnold (1990) and Coate and Morris (1995) for discussions of how the lack of transparency facilitates certain types of policy decisions.
9. See Gropp, Scholz, and White (1997) and Bahchieva, Wachter, and Warren (2005).
10. See Acharya et al. (2011: 27–30).
11. Public housing has hardly gone away. More than 600,000 residents of New York City live in public housing. See New York City Housing Authority (2011).
12. See Lemann (1991).
13. Advocates also calculated a political advantage based on their belief that homeowners would be more likely than renters to support conservative policies.
14. See Acharya et al. (2011: 17–19).
15. The Housing and Community Development Act of 1992 (Public Law No. 102-550), Title XIII: Government Sponsored Enterprises, Subtitle A: Supervision and Regulation of Enterprises—Part 3, Miscellaneous Provisions. See Acharya et al (2011: 31–36) for a discussion of the impact of these provisions.
16. See Madrick and Partnoy (2011).
17. From Fannie filings at http://www.sec.gov/cgi-bin/browse-edgar?company=fannie+mae&match=contains&action=getcompany. Capital Research held a much larger stake, averaging 20 percent. AXA, the French insurance giant, was a major investor in Freddie Mac.
18. See Jaffee (2003).
19. See Acharya et al. (2011) for a discussion of how the GSE capital market advantages triggered a regulatory “race to the bottom.”
20. See Lichtblau (2012).
21. See Morgenson and Rosner (2011).
22. The SEC complaint was a civil, not criminal, action. Not only does the government fail to take strong action—criminal prosecution—against financial executives involved in the crisis but also the private sector appears to welcome second acts. Mudd, after the disaster at Fannie, was able to recycle himself as the cohead of Fortress Investment Group, a private equity firm. The other cohead was Randal Nardone, who had roots at UBS. When Mudd took a “leave of absence” on December 21, 2011, Fortress, selling on the New York Stock Exchange for over $31 a share in 2007, closed at $3.37. (Share prices accessed September 21, 2012 at Fidelity Investments, http://www.fidelity.com). A predecessor of Mudd, James Johnson, has had his own second acts. He remained (as of September 2012) on the boards of Goldman Sachs and Target; see Goldman Sachs (2012).
23. See Stiglitz, Orszag, and Orszag (2002, 2004).
24. See Morgenson and Rosner (2011: 75–76).
25. See Jaffee (2003).
26. Of course, the political cost of concentration stressed by the Jeffersonian tradition in American politics was the impetus behind traditional antitrust policy developed in the late nineteenth century.
27. See McLean and Elkind (2003: chap. 17).
28. See Glaeser and Scheinkman (1998).
29. See Gerardi, Shapiro, and Willen (2008).
30. Congress passed the Secondary Mortgage Market Enhancement Act in 1984, at a time when 95 percent of the MBS market was in government and GSE issues. Remarkably, Bleckner (1984) accurately anticipated all the problems that would arise with privatization of this market, including the use of private ratings agencies as the source of information that would safeguard investors. The push to deregulate was so strong that the 1984 Act was passed by voice vote in both the House and Senate. See http://thomas.loc.gov/cgi-bin/bdquery/z?d098:SN02040:@@@R (accessed February 8, 2012).
31. See Acharya et al. (2011: 118).
32. See Igan, Mishra, and Tressel (2009).
33. See McNamee (2004).
34. In early 2012, three traders at Credit Suisse were indicted for fraud related to MBSs. The alleged motivation for the fraud was that the traders sought to pump up their annual bonuses. This is again a “skin in the game” problem: the traders’ compensation is based on short-run benchmarks and not the long-run performance of the securities. See Lattman and Eavis (2012).
35. See Foote, Gerardi, and Willen (2012).
36. See Tett (2009) and MacKenzie (2009).
37. See Duca, Muellbauer, and Murphy (2011).
38. Some conservative groups, such as the Heritage Foundation, opposed the bill as “fiscally irresponsible.” See Utt (2003).
39. See Bush (2003).
40. See Congressional Budget Office (2001).
41. See U.S. Department of Housing and Urban Development (2011).
42. See Commodity Futures Trading Commission (2011: 4).
Introduction to Part II
1. Citizens United v. Federal Elections Commission, 558 U.S. 50 (2010).
2. As of July 2012, however, financial firms and other corporations have not extensively used their newfound opportunity to spend corporate treasury money on independent electoral expenditures. By assuming that all undisclosed independent political expenditure was corporate, Adam Bonica estimates an upper bound for corporate independent expenditure in 2010 of $205 million, or just 5.6 percent of the total federal campaign expenditures. See Bonica (2012).
3. Clifford (2009) finds that after the repeal of Glass-Steagall the campaign contributions of various financial industry subsectors became more aligned.
4. See Cooper and Steinhauer (2012). The Constitution allows the president to make appointments to positions that otherwise would require Senate confirmation during periods in which that body is in recess.
Chapter 6
1. See Gerring (1998).
2. Kuhn, Loeb was eventually absorbed by Lehman Brothers.
3. See Tufano (1997).
4. See Warren (1935). See Bolton and Rosenthal (2002) for a theoretical argument that, when debt contracts are incomplete, political intervention in debt contracts is optimal, even when economic agents are fully rational and anticipate that the government will intervene in exceptional circumstances.
5. See Rothbard (1962).
6. Bronson v. Kinzie, 41 U.S. 311, 1 How. 311 (1843).
7. See Alston (1983).
8. See Wheelock (2008: 133).
9. See Kroszner (1999).
10. Ibid. The finding is all the more credible because of the author’s political affiliations: Randall Kroszner was a member of the Council of Economic Advisors in the George W. Bush administration and a Bush appointee as Federal Reserve governor. His paper finds that cancellation of the gold clauses in industrial bond contracts had widespread economic benefits. After the cancellation was upheld by a 5–4 Supreme Court decision, prices of bonds as well as equities rose. There was a disconnect between the later reaction of markets and ideology in Congress. Republicans in Congress strongly opposed cancellation.
11. See Sorkin (2009: 200).
12. See U.S. House of Representatives (2012).
13. See U.S. Senate (2012).
14. Under the 1974 Budget Act, some budgetary legislation (subject to a few limitations) may be considered under a set of procedures known as reconciliation. The primary benefit of these reconciliation procedures is that the time period for debate is limited, and therefore legislation considered in this way may not be filibustered.
15. See Perino (2010). Of course, there was no shortage of damaging allegations against the industry in 2009 and 2010; the most politically important was the SEC case against Goldman Sachs over its Abacus mortgage-backed CDOs.
16. John J. Raskob, a financial executive and the builder of the Empire State Building, was head of the Democratic National Committee from 1928 to 1932. In the 1928 and 1932 elections, the DNC received nearly 25 percent of its funds from “bankers and brokers.” The Republican National Committee received approximately the same share from these sources (Overacker 1932). With retaliation for the New Deal reforms, the Democrats found themselves able to raise only 3.3 percent of their funds from the industry in 1936 (Overacker 1937).
17. See Alston (1983).
18. The mortgage case was Home Building & Loan Association v. Blaisdell, 290 U.S. 398 (1934). The gold clause cases were Norman v. Baltimore and Ohio Railroad, 294 U.S. 240 (1935); United States v. Bankers Trust Co., 294 U.S. 240 (1935); Perry v. United States, 294 U.S. 330 (1935); and Nortz v. United States, 294 U.S. 317 (1935).
19. See Kennedy (1973: 73). Although Long claimed to be defending small state banks, Senator Glass charged that Long was doing the bidding of the New York bankers. See “Glass Links Banks to Attack by Long” (1933).
20. See Federal Deposit Insurance Corporation (1984); and “Glass Links Banks to Attack by Long” (1933).
21. Our discussion of the S&L crisis reflects McCarty, Poole, Romer, and Rosenthal (2010a), which draws on Romer and Weingast (1991).
22. The Thrift Industry Recovery Act was Title IV of the Competitive Banking Equality Act. See http://thomas.loc.gov/cgi-bin/bdquery/z?d100:HR00027:@@@D&summ2=m& (accessed June 12, 2012).
23. See Pyle (1995).
24. The RTC is now generally thought to have done a good job, though it had some rocky years. In disposing of the assets of failed thrifts, the RTC faced conflicting political mandates (including social policy objectives such as minority contracting and affordable housing, as well as getting the highest value for the assets). See Davison (2006).
25. See Federal Home Loan Banks (2012) and see Standard & Poor’s (2011).
26. See Schaefer (2010).
27. See Rappaport and Rapoport (2010). Hurtado and Sandler (2012) report that in 2009, Ernst and Young “paid $109 million to settle investor claims that it failed to find a $2.7 billion fraud at HealthSouth Corp.”
28. See Skeel (2001) and Warren (1935).
29. See Mann (2001) and Berglöf and Rosenthal (2006: 396–414).
30. See Skeel (2001).
31. On the meeting, see Whitehouse (1989) and Wicker (2005).
32. Before the financial crisis, Fuld was named number one CEO by Institutional Investor; see Prince (2007). After Lehman failed, he was named the worst CEO of all time by CNBC; see “The Worst American CEOs of All Time” (2009).
33. See Bruner and Carr (2007: 67).
34. On the role of the SEC in corporate bankruptcy, see Skeel (2001).
35. See Weingast (1984). Notably, the end of monopoly profits in the trading of stocks is said to be a factor in Wall Street’s gravitation toward excess risk taking in collateralized debt. See Gapper (2008).
36. See Lowenstein (2000: 37).
37. The automatic stay prevents creditors from seizing assets of the bankrupt firm.
38. See Edwards and Morrison (2005).
39. Ibid.
40. See Morgan (2008).
41. See Skeel (2011).
42. See New Generation Research (2012).
43. Populists and Silverites served alongside the major parties.
44. See Hansen (1996).
45. See Berglöf and Rosenthal (2005).
46. On the Interstate Commerce Act, see Poole and Rosenthal (1994).
47. See Balleisen (1996).
48. See Brady, Canes-Wrone, and Cogan (2000).
49. There are cases of widespread public protest against a law. The Medicare Catastrophic Coverage Act, passed in June 1988, resulted in protests over increased premiums for middle- to high-income seniors. The headliner was the pounding on the car of Dan Rostenkowski, the Ways and Means Committee chair, by members of the “Gray Panthers.” Yet repeal was voted on only by a new Congress in November 1989. More recently, a firestorm of protests was set off by a provision in the 2009 health care law mandating IRS form 1099 reporting of business expenditures over $600. The provision was repealed in April 2011. Neither of these examples pertains to financial markets.
Chapter 7
1. See Sorkin (2009).
2. See “The Rubin Connection” (2008).
3. Cuomo v. Clearing House Association, L.L.C., 557 U.S. 519 (2009). See Stohr (2009).
4. The proposed rules will implement Dodd-Frank, Section 941. These delays may have had adverse effects on the mortgage market. The definition of “qualifying residential mortgages” that would be exempted from the retention requirement is an example of this. The uncertainty about which loans are the easiest to securitize may have impeded home lending.
5. See Davis Polk (2012).
6. See U.S. Department of the Treasury (2011).
7. See Barofsky (2011). Prominent Yale economist John Geanakoplos made a very public push to get the administration to push harder on mortgage relief but was largely unsuccessful. See Geanakoplos and Koniak (2008, 2009).
8. See Milbank (2010).
9. See Collins (2011).
10. See “Banks Are Off the Hook Again” (2011).
11. See Elmer (2012).
12. See Sussman (2012).
13. See Posner (2009).
14. Technical note: these scores were computed with W-NOMINATE. See http://voteview.com/wnominate_in_R.htm for details.
15. We estimate these measures on all roll call votes rather than just ones related to financial measures. Below we detail specifically that, with the exception of TARP, voting on financial measures was largely unaffected by the crisis.
16. Comparisons are made only for those legislators who voted on at least twenty-five roll calls pre-Lehman and at least twenty-five post-Lehman. This choice implies the exclusion of legislators who served only in the 111th Congress and not in the 110th.
17. They were 0.544 in 2009 and 0.536 in 2007.
18. See Obama (2008).
19. Obama’s early overtures toward bipartisanship might possibly have been strategic. Consistent with the blame-game bargaining described in chapter 4, he may have been attempting to out the Republicans as extremists by offering compromises that he knew they would not accept. But if this was the strategy, the outcome of the 2010 elections suggests that it did not work. See McCarty (2009).
20. See Weisman and Herszenhorn (2008). “Pay as you go” rules require that any new expenditure be matched with a spending cut somewhere else.
21. Another fissure within the Democratic Party is that it is home to both committed environmentalists and to coal-state “porkers.” State senator and U.S. senator Barack Obama was a strong supporter of coal. See Dilanian (2008).
22. See Herszenhorn (2008b). Some observers suggested that Senate Majority Leader Harry Reid’s main rationale for pushing the bigger program was to put Republican senators on record as opposing specific provisions in an election year.
23. See Herszenhorn (2008a).
24. See Cooper (2010). By contrast, the personal tax cuts in the 2009 stimulus package were implemented through changes in the withholding schedule. But this mechanism seems to have denied President Obama political credit for the cuts.
25. See Weisman and Andrews (2008).
26. This delay resulted in the United States implementing a stimulus program several months after most other nations had done so.
27. See Lizza (2012).
28. See Baker and Herszenhorn (2009).
29. Six members did not vote.
30. We do not have 111th Congress ideology estimates for two Democrats who voted in favor.
31. When Specter switched parties, his ideology score went from +0.11 to –0.39—from the moderate center to the right flank of the Democrats.
32. A perceptive reader will see that we could eliminate the Voinovich “error” by moving the cutting line to the left. This would be cheating. For technical details, see Poole and Rosenthal (1997: appendix A).
33. See Stolberg (2009b).
34. CBS News poll, February 2–4, 2009; available at the Roper Center Poll Archive, http://www.ropercenter.uconn.edu/.
35. Ibid. In response to “In your opinion which will do more to get the U.S. out of the current recession: increasing government spending, or reducing taxes?” only 16 percent said increase spending, whereas 63 percent favored lower taxes.
36. CBS News/New York Times poll, July 24–28, 2009 available at the Roper Center Poll Archive, http://www.ropercenter.uconn.edu/.
37. See Chan (2010a).
38. See Stolberg (2010) and Calmes (2010a; 2010b).
39. See Ansell (2011).
40. Hall (2010) calculates that by the first quarter of 2010, total purchasing by federal, state, and local governments had fallen around $25 billion below its trend level.
41. See Baker (2010). Of course, other countries’ packages may be overstated in a variety of ways as well.
42. See Hall (2010). Estimates by the Congressional Budget Office are in the same ball park; see Congressional Budget Office (2010).
43. Amendments dealing with credit card practices were proposed by Senate Democrats as the Senate passed a bankruptcy bill in 2001. See Nuñez and Rosenthal (2004).
44. Central clearing refers to a requirement that derivatives counterparties engage a clearing house that would guarantee each party’s performance on the contract.
45. Seventeen such Republicans voted against the reconfirmation of Chairman Bernanke in January 2010. See chapter 8.
46. In the final legislation, the Consumer Financial Protection Agency became the Consumer Financial Protection Bureau.
47. See Dennis (2010b); Chan (2010b); and Appelbaum (2010b).
48. See Dennis (2010a); Appelbaum (2010a); and Wyatt (2010).
49. Cao and Jones were also errors on the stimulus package conference report, but in an opposite sense. They voted against the stimulus package when they were predicted to have voted for it.
50. Castle’s primary loss appears not to be closely linked to his vote on Dodd-Frank but to be more a matter of a Tea Party purge—supported by conservative Republican senators such as Jim DeMint—of moderate members of Congress.
51. The Feingold story is elaborated in McCarty, Poole, Romer, and Rosenthal (2010b).
52. See Roubini (2008).
53. See “President Bush Overall Job Rating” (2012).
54. See Bernanke (2005).
55. See Hauke and Nelson (2007).
56. Our analysis of predatory lending draws heavily on DeBold (2010).
57. See Bostic et al. (2008).
58. Conservative jurists often argue that states should be afforded a high degree of deference. Scalia’s vote is consistent with that position. The votes of the other conservative justices appear to have accommodated the interests of the financial sector at the expense of ideological purity.
59. A 2-28 is a thirty-year adjustable-rate mortgage with a fixed interest rate for the first two years. A 3-27 resets after three years.
60. See Swagel (2009). See also Foote, Gerardi, and Willen (2012).
61. See Mian, Sufi, and Trebbi (2010).
62. See Baker (2008). Another piece of evidence echoes Mian, Sufi, and Trebbi’s (2010) findings. On a vote just prior to the AHRFPA votes in May, the House passed the Neighborhood Stabilization Act of 2008, introduced by liberal representative Maxine Waters (D-CA). This program would have done little for Republican voters; only eleven Republicans voted for passage. The Senate never considered the bill.
63. Piskorski, Seru, and Vig (2010) found that foreclosure was substantially less likely on loans that were held directly by banks than on loans that had been securitized.
64. See Gorton (2010b).
65. See Nunnari (2011).
66. See Mian, Sufi, and Trebbi (2010).
67. Indeed, among Republicans, those receiving the most financial industry cash were more likely to vote against the bill. This indicates that precrisis financial firms often supported free market conservatives with commitments against government intervention of any form. But when the industry needed intervention, its hand was bit by the ideology that it had been promoting.
68. See Poole and Rosenthal (2007).
69. See Fogel (1989).
Chapter 8
1. See Cilliza (2012).
2. These probabilities were estimated using probit separately for each party.
3. See Bureau of Labor Statistics (2011).
4. See Pew Research Center (2011).
5. Los Angeles Times/Bloomberg poll, September 19–22 and 26–28, 2008. All polls cited in this chapter’s notes are available at the Roper Center Poll Archive, http://www.ropercenter.uconn.edu/.
6. CBS/New York Times poll, February 5–10, 2010. Twenty-three percent blamed Wall Street and 6 percent Obama. A plurality blamed President Bush (31 percent). However, 13 percent blamed Congress.
7. CNN poll, February 18–19, 2009. The exact numbers are: labor leaders, 47 percent; Obama, 73 percent; Republicans in Congress, 53 percent; Democrats in Congress, 66 percent; auto executives, 25 percent.
8. CNN poll, September 19–21 2008.
9. Los Angeles Times/Bloomberg poll, October 10–13, 2008.
10. Los Angeles Times/Bloomberg News, December 6–8, 2008.
11. Because the survey was in the field when TARP was announced, responses probably reflect attitudes about TARP as well as prior bailouts (e.g., Bear Stearns).
12. Los Angeles Times/Bloomberg poll, October 10–13, 2008. Even among Republican voters, only 18 percent said they would vote to punish a TARP supporter.
13. Los Angeles Times/Bloomberg poll, October 10–13, 2008.
14. CNN poll, September 19–21, 2008.
15. CNN poll, October 17–19, 2008.
16. CNN poll, October 3–5, 2008.
17. Los Angeles Times/Bloomberg poll, December 6–8, 2008.
18. CNN poll, January 12–15, 2009.
19. CNN poll, February 18, 2009.
20. CBS News poll, February 2–4, 2009.
21. CNN poll, December 6–9, 2007. Slightly more than 50 percent blamed the homeowners for their problems; only 45 percent blamed predatory lending, however.
22. Los Angeles Times/Bloomberg poll, October 10–13.
23. Seventy-one percent of Democrats, but only 43 percent of Republicans, supported such assistance. CNN poll, October 17–19, 2008.
24. The margin was 72–26 percent. CNN poll, December 6–9, 2007.
25. CBS News/New York Times poll, April 1–5, 2009. The Los Angeles Times/Bloomberg poll from December 6–8, 2008, provides almost identical results.
26. CNN poll, March 19–21, 2010.
27. CNN poll, May 21–23, 2010.
28. CNN poll, July 16–21, 2010. Overall support ran 58 to 39 percent. Democrats favored at 78 percent and Republicans at 42 percent.
29. CNN poll, March 19–21, 2010.
30. The gap was 61 percent to 35 percent. CNN poll, December 16–19, 2009.
31. Support depended on how questions were framed. When asked “Do you favor or oppose Congress passing a law that would give the federal government new powers to regulate large banks and major financial institutions?” support fell as low as 46 percent. Gallup poll, April 17–18, 2010.
32. CBS News poll, July 9–12, 2009.
33. CBS News/New York Times poll, April 1–5, 2009. Forty-one percent supported restructuring, but 31 percent answered “don’t know.” In the same survey, a third of the respondents agreed that financial firms were treated better than the auto manufacturers; only 6 percent said the automakers got a better deal.
34. Twenty-seven percent favored, 14 percent opposed, 56 percent had not heard enough. CBS News/New York Times poll, February 5–10, 2010.
35. Pew Research Center for the People and the Press poll, November 11–14, 2010.
36. As of June 18, 2012, 65 percent of all bailout funds had been returned or paid back as interest. Most of the funds outstanding represent the bailout of Fannie and Freddie. See Kiel and Nguyen (2012).
37. CBS News poll, February 2–4, 2009. In December 2008, however, 50 percent thought “government’s partial ownership of banks and other industries is a necessary step to save the private sector” Los Angeles Times/Bloomberg poll, December 6–8, 2008.
38. The history and background of the Tea Party Movement is detailed in Rasmussen and Schoen (2010); Zernike (2010); and Skocpol and Williamson (2011).
39. When one of the producers suggested that Santelli run for Senate, he retorted, “Do you think I want to take a shower every hour? The last place I’m ever gonna live or work is D.C.” For a transcript of Santelli’s remarks, see “Rick Santelli, Tea Party” (2009).
40. “Rick Santelli, Tea Party” (2009).
41. See Robbins (2009) and Fox News (2009).
42. See Sarlin (2010). Up to that point the only observed Tea Party action was directed at Republican Senator Bob Corker for cooperating with the Democrats. See also Weigel (2010).
43. See McGrath (2010).
44. See Williams (2011).
45. See Schwartz (2011).
46. As an experiment for the forms of “deliberative democracy” advocated by many political scientists, OWS was a failure.
47. Lasn and Adbusters senior editor Micah White drafted a letter to President Obama specifying demands including greater financial regulation, a ban on high-frequency trading, and stepped-up prosecution of those responsible for the financial crisis, but the letter was not adopted by the General Assembly. Instead, the General Assembly drafted a “Declaration of Occupation” that Schwartz (2011) describes as “more worldview than a list of demands.” Instead of policy goals, the document contains a long laundry list of grievances and a brief in favor of deliberative and participatory democracy.
48. See Heilemann (2011).
49. Ibid.
50. This study was controversial. It had a relatively small sample size, and the details of how the poll was conducted and the sample was generated have not been released.
51. Generally, poll respondents overreport voting, but it is possible in this context of a protest against the political system that voting may have been underreported.
52. Somewhat surprisingly, Schoen (2011) uses these same data to conclude that OWS “comprises an unrepresentative segment of the electorate that believes in radical redistribution of wealth.”
53. Heilemann (2011) reports the frustration of one of the more reformist activists: “I don’t want to live in a fucking commune. I don’t want to blow shit up. I want to get stuff done.”
54. See Soros (2010).
55. See Morgenson (2011).
Chapter 9
1. Other Congresses have had larger Democratic majorities, but the conservative and moderate blocks of the Democratic Party were much larger. See McCarty (2008).
2. For a discussion of these other presidential strategies, see Beckmann (2010).
3. See Tapper (2011).
4. See “Obama’s Take on Wall Street Prosecutions” (2011).
5. See U.S. Securities and Exchange Commission (2010b).
6. See U.S. Department of Justice (2012).
7. See U.S. Attorney, Eastern District (2012) and Pelofsky and Vicini (2011).
8. See U.S. Securities and Exchange Commission (2010a).
9. Recently, a federal judge admonished the SEC for its practice of quickly reaching no admission of fault in out-of-court settlements with banks instead of vigorous prosecution; see Lattman (2011). Perhaps this rebuke finally motivated the SEC to go after six Fannie Mae and Freddie Mac executives for lying to investors about the amount of their subprime holdings in the lead up to the meltdown. See “SEC Brings Crisis-Era Suits” (2011).
10. The percentages pertain to banks with more than $300 million in assets. For the top ten banks, the corresponding percentages are 50 percent, 60 percent, and 62 percent. Authors’ computations from data available at http://www.federalreserve.gov/releases/lbr/, accessed June 16, 2012.
11. See Sorkin (2009: chap. 20) and Paulson (2010: 362–68).
12. See Kiel and Nguyen (2012).
13. This discussion draws from Chao (2011).
14. See Davis Polk (2012).
15. See Morgenson (2011).
16. See Lowenstein (2008); Lewis (2010: chaps. 4 and 6); and Morgenson and Rosner (2011: chap. 15, esp. 279–89).
17. See Schattschneider (1960).
18. See “The Talented Mr. Gensler” (2011).
19. See Scott and De la Merced (2012).
20. Per the financial regulation index in Philippon and Reshef (2009).
21. See McKee and Lanman (2009).
22. See Stiglitz (2009b) and Treanor (2009).
23. And even if campaign contributions lost free speech protections, what about money spent on lobbying and issue advocacy?
24. Many scholars have concluded that the cloture rule is unconstitutional and have urged the courts to intervene. We think that it is highly unlikely that the courts would do so. Other scholars have argued that a sufficiently determined majority could change the cloture rules by a simple majority vote. But because a party’s moderates benefit from the current rules, such an attempt might engender intraparty conflict. See Wawro and Schickler (2006).
25. See Alesina and Rosenthal (1995).
26. Rear Admiral James B. Stockdale won the medal of honor for his heroism as a prisoner of war in Vietnam. His exemplary military service did not translate into politics very well.
27. See Fogel (1989).
28. The movement began to fade after 1920 and should not be confused with current liberals who also use the “progressive” label.
29. On the progressives, see Hofstadter (1955, chap. 4) and Hofstadter, Miller, and Aaron (1959, chap. 32).
30. See Philippon and Reshef (2009).
31. See Eisenhower (1956).
32. See Perlstein (2001) and Kabaservice (2012).
33. See “Faculty Profile of Paul MacAvoy” (2012).
34. See McClintick (2006).
35. See Bates, Zennie, and Durante (2012) and Reuters (2012).
Epilogue
1. See Maxfield (2012).
2. See Protess (2012).
3. See State National Bank of Big Spring et al. v. Geithner et al. (2012) and Stephenson (2012).
4. Money market mutual funds (MMFs) generally try to sustain a net asset value (NAV) of $1 to provide security to investors. A run on the Reserve Primary Fund, triggered by its exposure to Lehman Brothers, left it unable to redeem its shares at that price. This forced the Treasury to insure $1 NAV for MMFs. To prevent a replay, the SEC considered new rules that would force MMFs to “float” (i.e., not guarantee $1 NAV) or to hold a larger capital buffer. These proposals failed to generate support from a majority of commissioners and were then tabled by Chair Mary Schapiro.
5. See Davis Polk (2013).
6. See McKenna (2012).
7. See Silver-Greenberg (2012a).
8. See Silver-Greenberg (2012b).
9. See Comfort (2012).
10. Ibid.
11. Puzzanghera (2012).
12. See Hernandez (2012).
13. See Sides (2012).
14. Not many Wall Streeters who contributed to Obama in 2008 switched to Romney in 2012. Typically these donors decreased their contributions in 2012 or sat out the election. Romney’s money came largely from those who had not contributed to Obama in 2008. Many who had contributed to Republicans in the past increased their contributions in 2012, to Romney’s benefit. (Personal communication from Adam Bonica, Stanford University.)
15. The gratuitous posturing hypothesis is supported by the fact that almost all House Republicans who voted against the tax increase voted in favor of the rule that brought the legislation to the floor.
16. See Condon (2012).