Paul Nitze: The financial crisis – what would Teddy Roosevelt do?
On Tuesday the SEC reached into the loftiest corporate ranks when it accused Rajat Gupta of passing inside information to Raj Rajaratnam, Gupta’s friend and the founder of the Galleon Group hedge fund. Gupta could reasonably be called the face of the Indian-American business community. He was the managing partner of McKinsey & Co. when I worked there as an analyst a decade ago, and his reputation is spotless. Since leaving McKinsey, he served on A-list corporate boards, including those of Goldman Sachs, Proctor & Gamble, and American Airlines.One civil complaint does not a case make, and we have much to learn about why Gupta repeatedly called Rajaratnam after gleaning inside information from board meetings. Unlike other participants in the many-tentacled insider trading probe, Gupta had no obvious financial motive for sharing information. His lawyer, who has ritually professed Gupta’s innocence, claims that he lost $10 million with Galleon Group. Not that it’s ever really about the money. If the complaint is proven, Gupta will join a long parade of powerful figures in business and politics who risked everything for very little in return. It’s the John Edwards syndrome in a different context.Morale may be poor at the SEC, but there appears to be some fight left in the agency. Even a demoralized and underfunded bureaucracy can make cases when self-dealing is rampant. And to judge by public reaction, voters know that for every complaint that’s filed, there are hundreds more that have so far gone uncovered and unprosecuted. That ratio will get worse if the House Republicans succeed in their attempt to impose draconian cuts on every agency that polices Wall Street.Americans have a high tolerance for inequality, but we can’t abide fraud and abuse. We won’t begrudge wealth, but we love to punish sin. Now it’s just a matter of drawing the boundaries. In the same week that Gupta was accused of trading inside information, J. Crew was sold to two private equity funds in a buyout led by its CEO, Mickey Drexler. The J. Crew deal followed the letter of the law, but the same spirit of rank self-dealing was at play. Among other problems with the transaction, Drexler negotiated with the buyers for two months before presenting the “arms length” deal to the board.In their response to the financial crisis, Congress and the White House seemed to forget to frame it as a moral problem, a question of holding Wall Street accountable for its crimes. To date, there has been no meaningful criminal prosecution of anyone involved. Even Countrywide CEO Angelo Mozilo has escaped criminal liability.A century ago Teddy Roosevelt framed his trust-busting agenda as a moral crusade from the start. Roosevelt’s first great battle against the trusts, launched in 1902, was an attack on a trust called Northern Securities. Northern Securities was a fairly middling railroad operator, not one of the giants, but it did exercise monopoly power over small farmers and ranchers, who were at the mercy of Northern’s freight tariffs.When the dust settled on the Northern Securities case (and the subsequent cases against American Tobacco and Standard Oil), Roosevelt had successfully increased the bargaining power of small farmers and businessmen against the large corporate monopolies. We remember Roosevelt as a progressive champion, a friend of labor, and an opponent of economic inequality.But that’s not how Roosevelt saw himself. As detailed in the final volume of Edmund Morris’s Roosevelt biography, which came out last year, Roosevelt complained when President Taft went after the trusts again in 1911. In a scathing article titled, “The Trusts, the People, and the Square Deal,” Roosevelt cast himself as a friend of the big trusts. “Size in itself does not signify wrong-doing,” he wrote. Those who viewed him as an ally of the small-holder were deceived; he was simply fighting for a “moral” economy.Whatever his purpose, Roosevelt’s moral crusade had a tactical genius. He overcame the opposition of the Morgans and Rockefellers because he never framed his agenda as an attack on big business. In Morris’ words, it was “corporate mischief” he was after.In today’s new Gilded Age, Roosevelt’s take on the American psyche is as valid as ever. Democrats’ recent failures to push hard on either financial regulation or the tax cuts can be traced to a narrative void in their party. Not very far on the horizon the president faces a battle over the budget, in which the Bush tax cuts will again be up for debate. The president has said that he wants to end corporate giveaways and close rampant loopholes. But the way to get there is not to push for tax fairness in the name of reducing inequality. Instead he’d do well to push for greater enforcement, to increase the budget at the SEC and the IRS, to ferret out people and companies who cheat on their taxes and send the worst of the lot to prison. Congress will produce a fairer tax code in its shame at rampant malfeasance. That’s how Roosevelt would do it.
Paul Nitze has been a part-time Aspenite his entire life. He currently lives in Washington, D.C.