Hamilton Project Revisited: Foxes Guard the Henhouse

In the April 24 issue of The Observer, there appeared a letter of mine to Roger Altman with respect to

In the April 24 issue of The Observer, there appeared a letter of mine to Roger Altman with respect to the Hamilton Project, of which he’s a sponsor and a member of the Advisory Council. He replied the next day with the courteous, mature good humor typical of him. He expressed his personal fondness for me, which I appreciate; rejected my plea to cease and desist with the Project, not that (as he properly notes) I ever thought he would; dismissed as farfetched my assertion that the Project is a de facto manifesto of a government-in-waiting; and asserted his own belief, with which I wholly concur, that the progressive “infrastructure” requires rebuilding. Here, in turn, is my reply to him.

Mr. Roger C. Altman

Evercore Partners

55 East 52 Street

New York, N.Y. 10055

Dear Roger:

And I am fond of you. Indeed, of all that group of young men whose employment at Lehman Brothers I had something to do with, I always felt that you were morally and intellectually a cut above the rest—and so it has proven.

I agree with Warren Buffett: I think it’s akin to a national calamity that so many of our best and brightest gravitate to the business of moving money around. It is not a business which, at the mean, requires much in the way of intellect, especially in times like these, when a raging torrent of global liquidity means that damn near any deal or trade, however commercially or industrially dubious, can get done. Anyone challenging this thesis need only drop into one of the better-known Manhattan steakhouses; at the height of a traders’ bull market, there really are few places on earth as vile and lowbrow.

The nation has other, better uses to which all this cleverness might be put—but the money’s too good. More important, I think, is the moral compromise. The biggest bucks come from playing with a stacked deck, namely the access of a privileged overclass to what I call the “Public Capital,” the full faith and credit of the American taxpayer and all other fiscal and financial resources at the disposal of the constituted authority.

The way this works is egregious and inequitable. Why, for example, should “private equity” promoters have access to virtually prime-rate, fully deductible interest rates from Citicorp to accomplish a socially pointless corporate recapitalization, which you as well as I know is what 99 percent of “private equity” deals are, while some poor schmuck—possibly an employee of the same company—is paying a nondeductible 20 to 30 percent A.P.R. on his Citibank Visa card? These deals usually cause some degree of economic discomfort—via cost-cutting—to employees and communities, and yet invariably, on the other end, involve a plan to raise prices, thus being both deflationary and inflationary where it stings most.

How can one explain that deal last year in which K.K.R. and Texas Pacific accomplished a six-times profit flip on an investment they had owned for all of nine months? This was an energy deal in which the buying company, which paid $6 billion all in, had but three years earlier stiffed its creditors and stockholders in a bankruptcy reorganization. What is the effect of this financing on B.T.U. prices at the kitchen stove? Even more interestingly, how does a company go, virtually overnight, from a bankrupt deadbeat to a multibillion-dollar prime credit? Again, consider by contrast what befalls the poor schmuck with a $100 blot on his credit report and how life works out for him. I guess it’s who you know that matters. Some energy crisis!

Transactions like these are, to repeat myself, as iniquitous as they are inequitable. Will the Hamilton Project address such matters? Given that the Project’s sponsors are deeply involved, both personally and institutionally, in the kinds of deals that embody these assaults on the Public Capital, it’s hard to believe that it will. One might argue that the “meaningful efforts to turn this country back to a sane fiscal policy” sought by your group might well start with this kind of wheeling and dealing. Are chickens wise to hire foxes as security consultants? Actually, the case can be made either way: A fox may have a taste for fowl, but he will also be wise in the ways of other foxes. It all depends on conscience, I expect.

Obviously, one objective of your or any other similarly minded project must be to promote a better government of, for and by the people. Here, what’s needed is completely fresh thinking. I work from the assumption that you get the government you pay for, and if you’re unwilling to pay for it, the government you get is likely to be as ineffective, improvident and corrupt as the one we have now.

We pay Senators and Congressmen, in round figures, $165,000 a year plus a very good benefits plan. Speakers and party leaders make about 10 percent more. This sounds like a lot of money. But one thing I learned very early on Wall Street was that every sum of money exists in two dimensions, if you will—the absolute and the proportionate—and the clever Wall Streeter will use whichever better serves the lie he’s about to tell. While $165K is big money compared to what someone makes clerking at Wal-Mart, say, it’s peanuts compared to the importance and scope of the work we ask members of Congress to perform and the sums over which they exercise legislative discretion.

What they do is clearly more essential—not only to the country and the nation but to Wall Street itself—than what Wall Street does. And yet, on the Street today, $165K a year is derisory; you pay that (including bonus) to first-year B-school hires. Is some second-desk Forex trader at Goldman as vital or potentially as consequential to your interests and mine as Senator Charles Schumer (I choose someone for whom I have almost unrelieved contempt)? If not, why is he paid 10 times as much? Nor is that trader required, as are members of Congress, to maintain two residences, one in the District, a second back home with their constituency.

So what happens as a result? K Street is what happens, and bloated Congressional staffs—those people one sees seated behind the members at hearings—to process a flow of work sufficient to generate adequate returns under the table, and to bolster the low self-esteem of the underpaid by giving them people to order about and carry clipboards and process “contributions.” The consequences: inefficiency; the ascendance of Parkinson’s Law (work expands to fill the time—i.e., staff-person hours—available for its completion); and corruption.

My solution is simple: Raise Congressional salaries, but cut—I mean really cut—Congress’ administrative budget, or whatever it’s called that funds the staff bloat on the Hill. About $750,000 sounds right as a salary number for the members. Beyond that, no more than five in total staff per Congressperson, plus a modest amount for a district office. That’s a number that might even start attracting competent and incorruptible people into politics. And while we’re about it, what do you think the Presidency should pay? Here again, let’s think proportionally: If the C.E.O. slot at Exxon is worth whatever Lee Raymond got, how much for the White House? After all, we’re talking about two executives heading two entities essentially dependent for their effectiveness and success on the Middle East, but our government’s activities are denominated in three more zeros than Exxon’s. You’ve been in government; you put a number to it.

We need new ideas. Radical ideas, in some cases. Oxen will have to be gored, and this is what troubles me about your Project, as well as other nobly intentioned private initiatives. If the most appropriate sacrificial beasts must be culled from your own (i.e., the Street’s) herd, will you have the courage to make that recommendation? It will be hard.

I’m not speaking cynically, mind you. I just think it’s time to get real—though in an age given to euphemism (the rhetorical mode the Street invariably prefers when the going is fat), a realist will be damned as a cynic. So be it.

Ah well, we beat on, boats against the current, borne (and here I think Fitzgerald got it backward, so I’m going to call it as I see it) ceaselessly into the future. God help us.

All my best as always,

Michael Hamilton Project Revisited:  Foxes Guard the Henhouse