Crony Capitalism Revisited

The propagandists of neo-liberalism have had an amazingly easy ride over the years, spinning a fantasy world out of their interests

The mainstream media has a short term memory, if not there would be frequent embarrassment for the global power elite. This means that if previous lectures this elite has given to the rest of the world are to be counterposed to its present behaviour, one had better be quick about it. Already the South East Asian financial crises of 1997-8, seem to belong to a previous era, pre September 11th; George W. Bush; the dotcom bubble and all the other things that exercise opinion-makers. For the people of the region however, its impact has left behind a trail of consequences; for the working class of South Korea and the poor of Indonesia for example.

These crises, runs on national currencies, were according to the unified voice of the west, its power elite, caused by generalised phenomena given the name "crony capitalism." This had the function of rebutting the argument that the crises had been caused by the unregulated, massive global flows of credit finance. The notion of "crony capitalism" lumped together a variety of crimes: national economic policies directed at national economic development; any failure to go along with the free trade demands of the World Trade Organization; corruption; a reluctance to "deregulate"; a lack of "transparency"; and a general failure of standardised accountancy. That such phenomena got their comeuppance on their financial markets was described with relish by Federal Reserve superman Alan Greenspan as a milestone in the "inexorable trend towards market capitalism."

Clubby Capitalism

Even at the time the bold cheek of this as a general accusation took the breath away. At the same time as the crisis began, news broke of top ex-US government guys, Democrat and Republican, lobbying for a restriction on government aid to Azerbaijan to be lifted, and doing so on behalf of US corporations fearful of being left out of the country"s oil jackpot. These included James Baker, Brent Scowcroft, Zbigniew Brzezinski, Dick Cheyney and Lloyd Bentsen. The very "handling" of the Asian crisis itself was crony capitalism in action, involving as it did, a mix of personnel from multinational corporate banking, the US government, its Treasury and Defense Departments, the IMF and yet more corporate bankers. "Clubby capitalism" we might call that grouping, or what C Wright Mills with great prescience called some fifty years ago, the Power Elite. Even the hardly radical Jeffrey Garten of the Yale Management School felt moved to comment: "For all the talk about free markets...the fact is that global finance has become the quintessential interweaving of public and private institutions, mechanisms and interests." More recently, the Enron bankruptcy has revealed the extent of what might still be clubby but is also without doubt endemic crony capitalism within the USA and elsewhere in the West.

The propagandists of neo-liberalism have had an amazingly easy ride over the years, spinning a fantasy world out of their interests. Lecturing, always lecturing the rest of the world with supreme self-confidence. And are still at it, Irwin Stelzer one of their leading lights (clubbable adviser to Rupert Murdoch and crony of Tony Blair) telling us recently how we should be grateful to Enron, that by bringing competition into the energy market, prices to the consumer had fallen. Brazen these people, when the involvement of Enron in California and India show the opposite to have been the case.

Terminator technology

But it goes further than that, the ascribing of the South East Asian crisis to state involvement in the capitalist national economy as Greenspan did and for this to be one ingredient of "crony capitalism there" was cheek on a historical scale. The evidence of this particular kind of hypocrisy vis-à-vis underdeveloped countries trying to get out of the trap, is legion. Western economies all used protectionist measures for their domestic industries and other measures for the development of national economies, and still do as in the case of US steel production. More to the point, the involvement of western states using public money in the interests of private capital continue apace. In the United States for example enormous defence budgets have paid many of the R&D costs of cutting edge technological development as well as propping up aircraft manufacturers. That the basics of the internet were developed by the US military still cannot be taken on board by its capitalist utopians.

The case of "terminator technology" shows how widespread the phenomenon and how it works. The technology adds to the monopoly power of GM seed producers by the addition of a gene which can at any given time be chemically "bombed" to render the seed sterile. The development of the technology took place at the US Department of Agriculture research station at Lubbock, Texas in the interests of "American technology". Since then further work on this horrendous "breakthrough" has been discouraged within the department, leaving its development to the agribusiness oligopoly. The deregulated Savings and Loan banking scandal cost $150bn of public money via the Federal Insurance Scheme. More generally the states of the capitalist west, and not just the USA, their Export Credit Agencies have financially supported some $432bn worth exports, often to developing countries. "Free Trade" being as elastic a term as "free markets", and yet still the underdeveloped world is preached to as to their pristine virtue.

The lecturers at the time of the South East Asian financial crisis also bundled in into the "crony capitalism" accusation, implied and overt connections between regulation and corruption, both bureaucratic and political; lectured as if corporate funding of western political parties did not exist, or belonged to some other behavioural sphere. The US especially has been a serial de-regulator over the last 30 odd years, a process which has since been taken up in Europe. The consequences for labour non-protection and the environment are well known, but the process has been most consistent in the financial sector whose extraordinary power (along with that of the media) had not fully emerged at the time of Wright Mills" Power Elite. In the financial world de-regulation has also been called innovation, as if we were talking of a breakthrough in the engineering or medical world. In the 1980s, such "innovation" took place in the business of Mergers and Acquisitions with the junk bond. The upshot of the financial scandals of the time was that one person, Michael Milken did 2 years jail in the Club Fed, and is now said to be an adviser to Rupert Murdoch. In 1999 as predicted by this writer, the Glass Steagall Act was abolished. This Act, a consequence of the Wall St crash of 1929 and the lessons learned, separated commercial from investment banking. The lobbying from the banks for its repeal was ferocious, and they got what they wanted.

The dotcom bubble

In the late 1990s, innovations which can be traced back to the deregulation of broker commissions on May Day 1975, have resulted in the massive shift of wealth from small investors to financial institutions and the rich that occurred during the "dot.com revolution" which became the "dotcom bubble". This shift in wealth involved the mechanism called IPOs (initial public offerings) whereby investment banks, and especially Credit Suisse First Boston"s Frank Quattrone, would launch dotcom companies with a lot of hype while having previously allotted shares to institutional investors before they floated on the open market. Those lucky enough to get such an allocation were more or less sure to see the value of their shares soar when they did float. Allegations that in return the banks received additional, excessive and undisclosed commissions from the institutional beneficiaries arose thanks to the litigatious nature of US small investors who bought such shares at inflated prices before the bubble burst. In the case of Linux shares there appears to have been a tie-in arrangement which further manipulated the price.

Quattrone is said to have brought in $1bn worth of such commissions for CSFB. In January of this year with the spotlight on more dramatic events at Enron this bank which had already been hit with regulatory sanctions in Japan, Sweden, New Zealand and India was fined $100 million to resolve SEC charges of IPO abuse. Of this we might say that post facto though it may have been regulation did come into force. This in itself did not change the shift of wealth and further, does not address the role played by analysts in the dotcom bubble, whose role in the Enron scandal is again being raised. In the case of the bubble, celebrity analysts Mary Meeker of Morgan Stanley and Henry Blodgett of Merrill Lynch there are investor lawsuits in the pipeline claiming that they concealed a conflict of interests as they hyped up dotcom stocks in the media while working for investment banks with a direct interest in the pricing of such stocks and their involvement with dotcom IPOs.

Concealing a conflict of interest

"Concealing a conflict of interest", this surely is of the essence of crony capitalism. The Enron bankruptcy has put some holes in that spectacular form of concealment. Analysts, the financial press, the Bush governmental regime, and accountants have all been shown to have had concealed conflicts of interest. The failure of the financial media to get on to Enron despite certain warning signals like Blockbuster pulling out of the broadband gamble last year, raises questions about its independence. In the dotcom bubble, which was the most spectacular sector in the last years of the generally overpriced American bull run, financial journalists were afraid to spoil the party, even if they had wanted to. Even saviour of the world himself, Alan Greenspan, apart from his gnomic reference to "irrational exuberance" did not want the party pooper role. And besides, poorer though they might be, financial journalists live in this same elite world, and their proprietors are usually big players in that world.

The analysts in the Enron case, talking up its shares, not looking at the warnings, they too worked for banks making money from Enron business. Once again pops up the name of Credit Suisse First Boston which played its part in the creation of those controversial offshore partnerships Enron were so keen on. A CSFB team under Laurence Nath helped Enron"s now notorious CFO Andrew Fastow set up the offshore assets Osprey, Marlin and Firefly. As of now CSFB is saying these were legitimate ventures to raise capital. In the meanwhile one wonders, why offshore? Why this tolerance of the USA and UK especially of the offshore financial world? And why then so much ignorance in another part of CSFB. Curt Launer, managing director of equity research at the bank maintained a strong "Buy" recommendation on Enron until days before it filed for bankruptcy. Facing the Senate Governmental Affairs Committee this "master of the universe" plays the nincompoop. "It now appears that some critical information on which I relied for my analysis of Enron was inaccurate or incomplete."

In the case of Enron, the pressure to show good earnings figures in an era when it had become expected, must have been immense. To this pressure add the "innovation" of share options and accountancy firms deriving huge fees from certain clients. It is at this point that the accusations rained down on South East Asian countries four years ago looks especially grotesque. One did wonder at the time, the suggestion that western accountancy with standards of transparent honesty would help in that region can only have occasioned grim mirth thinking of Coopers and Lybrand for example and their track record with Robert Maxwell, Polly Peck, Barings Bank and dodgy state contracts in Arizona, none of which held up their merger with Price Waterhouse itself now fined for misdemeanours. It went further than that, the western assumption that the equity model for corporations was some how more "ethical" than having high debt, was itself supposed to reinforce the greater transparency of western accounting.

In fact US accounting law (de-regulated) on stock options demands no clear statement by corporations of their potential liability if all the options were to be exercised. For one thing, as Enron employees know to their cost, it is an incentive for as company to pay ever more stock options. And of course it gives a massive incentive to boost that stock price by overstating the company"s well-being, something normally indicated by profit figures. In the case of Enron, accountants Arthur Anderson put no check on the production of falsely inflated profit figures because their fees from the company were considered too big to contemplate their loss, fees from consultancy work as well auditing, a conflict of interests which the late-as-usual financial media is now highlighting. It is doing so because despite the shredding of documents in the fashion of war criminal Oliver North, the Enron bankruptcy put the Anderson can of worms out into the open. Of course in the case of Enron, their top guys are real pirates and put others who tried to use September 11th as an attention-diverter in the shade, as they offloaded stock they must have then known would soon be worthless out on to an innocent world. If that"s what they were. Important investigative work needs to be done on who actually bought this stock in the last months.

Pointing the spotlight in all the wrong directions

In the meanwhile the mainstream media carries out its normal function of arriving late and then pointing the spotlight in all the wrong directions. The BBC"s excitable Stephen Sacker for example: is there a "smoking gun; that will tie President Bush directly to wrongdoing at Enron? No. And that was it, a question no one else was even asking, answered in adavance as if there might not be other things worth looking at, like the workings of crony capitalism.

There is a sense that many responsible citizens around the world are grabbing hold of the Enron story, clinging to it as the possible chink in President Bush"s hard-to-understand domestic popularity. If the Savings and Loan and junk bond scams of yesteryear are anything to go by there will be one or two fall guys like Michael Milken doing a year or so in a Club Fed; or being sacked liked Allen Wheat ex chief of CSFB"s investment banking operation (sacked a long time before Enron over the dodgy IPOs). The collapse of the cheekily named Long Term Capital Management hedge fund in 1998, which was also grabbed like a lifeline by Keynsian commentators was, in the event, dealt with deftly by the Power Elite with Greenspan and Rubin to the fore. And if Arthur Anderson does become untenable as a company, then the oiligopoly of global accountancy firms will become one step closer to monopoly...And Then There Were Four!

For Enron is just one story, a story of a scam that could not be indefinitely concealed in the world of crony capitalism. It is of course true that the personal links and duplication between Enron and the higher reaches of the Bush administration are extraordinarily high and the money invested in Bush"s political career equally so. It is also true that Robert Rubin, Clinton"s Treasury Secretary and "clubby" capitalist in chief in the handling of the South East Asian crisis lobbied the new administration on Enron"s behalf over its protracted battles in India. The fact is however, that these links and duplications between the political, corporate and military worlds described by Wright Mills 50 years ago are commonplace and not, it must be emphasized to those especially horrified by the Bush administration, confined to the USA.

Think only of Douglas Hurd, a chief appeaser of Milosevic"s murderous policies as Foreign Secretary and very soon after well paid by NatWest Bank to make a profitable loan to Milosevic, one which financed the assault on Kosovo. Or easy movement between civil service, business and politics in France. Or the financing of the Christian Democrats in Germany. It has become normalized, that politicians and civil servants when out of office or retired, senior military figures also, take highly paid jobs as directors or consultants in companies where their contacts and privileged information are prized. The Power Elite as crony capitalism.

Take a company like the Washingon-based Carlyle Group for example. In 15 years it has been able to realise a 34% rate of return on its investments and is now unofficially valued at $3.5bn. Among the companies it owns are those making munitions and equipment for the US military. One of its first partners is Frank Carlucci, Defence secretary under Reagan. Another is the ubiquitous James Baker, former Treasury Secretary, Secretary of State and White Chief of Staff, top hatchet man for Reagan and Bush Senior and brought in by Bush Junior to keep a tight grip on the snatched victory in Florida. Bush Senior himself and John Major, they too are on the Carlyle books. So, as a highly paid speaker has been Arthur Levitt, ex-chairman of the SEC and keen critic of IPOs and the dotcom bubble. The company says it does not lobby the government and say this despite the meeting in February last between Carlucci and Defence Sectretary Rumsfeld when defence contracts were under consideration. In its main business of taking over private companies, it is also in a position to keep most of its own finances private.

Unlike Enron this company is not a scandal and yet is archetypical of how the Power Elite works. In the case of Enron, their modus operandi seems to have been cruder. Large political donations, a revolving door of personnel with the present administration, James Baker had been prominent in the past, and up-front lobbying for further steps in energy de-regulation and, this really is gross, recommendations which seem to have been accepted in two cases, of appointees to the Federal Energy Regulatory Commission (FERC). Crude perhaps, but consistent as a strategy of suborning all levels of possible regulation. In respect of its membership of the US Coalition of Service Industries, Enron positioned itself to play a role in WTO negotiations. Not something new, not something specific to the Bush presidency. It may be remembered how under Clinton, Maurice Greenburg, "czar" of the US insurance industry demanded one step further for its interests when the WTO deal on the liberalization of financial services was pushed through with undisguised opportunism in the midst of that Asian financial crisis.

The Power Elite

What the Enron bankruptcy has done, when what was concealed could no longer be concealed despite the byzantine nature of its finances and financial statements, is show up how the links and duplications work, and how grossly so in the present period. The role of Vinson and Elkins for example, Enron"s law firm and lobbyists for Alcoa from whence comes Treasury Secretary O"Neill. Secretary of the Army, Timothy White, an ex-vice-chair of Enron Energy; Federal Trade Representative, Robert Zoellick, former Enron advisor. It is how it has worked since the fifties, this Power Elite.

What has been different in the last 20 years has been the power of financial capital and the increasingly abstract tools by which it has taken an unwarranted share of a capitalist "real economy". More recently still it has gone one step further, there is not enough money to be squeezed from the poor, now it must be the "middle class" too that must be squeezed. We do not know the size or class composition of those who lost out in the dotcom and Enron bubbles, only that it was not the rich. In Argentina we know the same, only that the consequences have been sharper for the poor and the middle class, and that here western crony capitalism in conjunction with the local financial elite, were the beneficiaries. Not just that but the same characters, the Bush family and Credit Suisse First Boston.

It may be remembered that the dollarization of the Argentinian peso in 1990 was heralded as a great step forward, a move which would keep inflation in check. Needless to say since its world record debt default all the wiseguys have shaken their heads, said it was asking for trouble and so on. In the meanwhile it made the country both especially profitable and secure for foreign investors; made it especially easy for the Argentine rich to put their money, dollar-denominated, off-shore; and initially squeezed the poor as they had to pay for privatized public services owned by foreign investors in peso-dollars.

One of its main architects, Domingo Cavallo, a minister of the economy in the early 90s was recalled in April 2001 by President de la Rua to rescue the country from the debt crisis built up in the Menem years, massive depsite the over-hasty, bargain sales of public assets. On the day he returned to office he discussed the possibility of a debt swap with his friend David Mulford, chairman of CSFB International. According to the sober journal Euromoney, within half an hour of this meeting, they had assembled the deal managers of six other heavyweight banks to make one of the largest debt-swaps ever, $29.5bn of old Argentine bonds swapped for new ones. In effect the dealt crisis of 2001 was dealt with temporarily by becoming more indebted, while the lead managers made a cool $125 commission fee. What is now also being investigated by the Argentine parliament is that in addition, lead managers, somewhat in the manner of the IPO scam, were also sold new bonds at discount rates which had not been approved by parliament. To be scrupulous here, this latter allegation is not proven as of now but what is revealed is how western crony capitalism works elsewhere.

The easy move, the "revolving door" between corporations, investment banks and political power are visible in the cases of Carlyle Group and Enron. Credit Suisse First Boston (CSFB) is another. Ex-US international troubleshooter Richard Hobrooke is on the board. David Mulford himself, debt swap organizer, was Bush Senior"s under-secretary of the Treasury, and in this role was responsible for the implementation of the Brady debt plan in South America in the 1990s. It is as if he had made a trial run when in government for what he was to do on behalf of CSFB, something also made easy by the close relationship between ex-President Menem and the Bush family. Mr Mulford is also on the board of Banco General de Negocios whose chairmen, the Rohm brothers, are accused of shipping $30 million out of Sargentina in Decemeber 2001, that is after it had been decreed that ordinary citizens, non-cronies, could not access their own bank savings. Meanwhile as Euromoney points out, friends of George W. Bush and his administration did very well out of Menem and Cavallo"s privatization giveaways which have subsequently, put some "public" services out of the reach of many Argentine citizens.

Transparency was never meant to mean democratic control

In the patronizing lectures dished out at the time of the South East Asian "crisis", the buzzword was Transparency, the need for it. At the time one could already hear the counter words Business Confidentiality said with equal authority if and when awkward questions were asked about western business practices. Transparency as preached by the preachers was never meant to mean democratic control. Instead it was a smug assertion of professional standards in accountancy and regulation that prevailed in the USA most of all. The myriad of non-disclosure loopholes created for, and on behalf of crony capitalism; the complexity of financial derivatives; offshore banking; the compromising of these professional standards by de-regulation; the presence of such professional personnel within the orbit of crony capitalism; and the revolving door between government, banks, and corporations, all these give the lie to this assertion.

The lecturers are still lecturing. Treasury Secretary O"Neill at the recent World Economic Forum told the rest of the world the score: it was all Argentina"s fault; more deregulation and so on. In the case of Argentina, the Administration depends on a fear of civil war to restrain autarkic and Keynsian policies going too far. In the US itself what Enron has shown up creates perhaps a more difficult political problem. The small investor is a crucial ideological and financial element to US capitalism. Having perhaps been burned already in the stock market, such people are now said to be wary about investing because they don"t necessarily believe the figures any more. To restore their confidence however may involve regulations unacceptable to a crony capitalism dominated by the financial sector.