One day Clifford Cain, Jr., a retired electrician in Baltimore, discovered that a debt collector had garnished his bank account after suing him for about $4,500 that the company said he owed on an old debt. According to the New York Times, Cain said he never knew the lawsuit had been brought against him until the money was gone from his account. Nor did hundreds of others who were similarly sued by the collector, Midland Funding, a unit of the Encore Capital Group, in Maryland State Court. When Cain brought a class action in 2013 against Midland Funding, the company had the lawsuit dismissed on grounds that the only way the plaintiffs could recover their money would be in private arbitration, because the debts they allegedly owed contained mandatory arbitration clauses, and class actions are banned in arbitration. So Cain and the others would have to fight the unit of Encore, one of America’s largest debt buyers, one by one. Few could afford to do so.
It may seem odd that companies can use arbitration to avoid being sued in court and at the same time use lawsuits to collect from consumers, but that’s the law. In 2011, in AT&T Mobility vs. Concepcion, the Supreme Court ruled that companies could legally bar class actions within consumer contracts. The following year, the number of large companies that included class-action bans in their contracts more than doubled. Subsequently, in their 2013 decision, Comcast v. Behrend, the Court threw out $875 million in damages sought by Philadelphia-area subscribers from Comcast for allegedly eliminating competition and overcharging them. Justice Antonin Scalia, writing for the Court, said the Comcast subscribers had failed to show that Comcast’s wrongdoing was common to the entire group and that damages were therefore an appropriate remedy for all of them rather than to individuals. The effect of these rulings has been to reduce the ability of groups of consumers—or, for that matter, employees or small businesses—to band together to enforce the law.
The Supreme Court is only one of many agencies of government busily tipping the scales in favor of large corporations and against ordinary individuals. In this age of widening inequality, the law has become a strategic instrument of large corporations to enlarge their wealth and power.
Consider the issue of liability: who’s responsible when something goes wrong. Entire industries with notable political clout have gained legal immunity from prosecution. In 1988, for example, the pharmaceutical industry persuaded Congress to establish the Vaccine Injury Compensation Program, effectively shielding vaccine manufacturers and doctors from liability for vaccines that have harmful side effects.
Corporations with deep pockets have also gained effective immunity. Long before Japan’s Fukushima Daiichi plant contaminated a large swath of the Pacific Ocean with radioactive material in 2011, General Electric marketed the Mark 1 boiling-water reactor used in the plant (as well as in 16 American nuclear plants) as a cheaper alternative to competing reactors because it used smaller and less expensive containment structures. Yet the dangers associated with the Mark 1 reactor were well known. In the mid-1980s, Harold Denton, an official with the Nuclear Regulatory Commission, warned that Mark 1 reactors had a 90 percent probability of bursting if their fuel rods overheated and melted in an accident. A follow-up report from a study group convened by the commission found that “Mark 1 failure within the first few hours following core melt would appear rather likely.” Why hasn’t the commission required General Electric to improve the safety of its Mark 1 reactors? One factor may be General Electric’s formidable political and legal clout. In the presidential election year of 2012, for example, its executives and PACs contributed almost $4 million to political campaigns (putting it 63rd out of 20,766 companies) and it spent almost $19 million on lobbying (the fifth highest lobbying tab of 4,372 companies). Moreover, 104 of its 144 lobbyists had previously held government posts.
Similarly, the national commission appointed to investigate the giant oil spill in the Gulf of Mexico in 2010 found that BP failed to adequately supervise Halliburton Company’s installation of the deep-water oil well—even though BP knew that Halliburton lacked experience in testing cement to prevent blowouts and had not performed adequately before on a similar job. In short, neither company had bothered to spend enough to ensure adequate testing of the cement. Meanwhile, the Minerals Management Service of the Department of the Interior (now renamed the Bureau of Ocean Energy Management, Regulation, and Enforcement) had not adequately overseen the oil and oil-service companies under its watch because it had developed cozy relationships with them. The revolving door between the regulators and the companies it was responsible for overseeing was well oiled.
Similarly, the National Highway Transportation Safety Administration has shown itself more eager to satisfy the needs of the automobile industry than to protect driver safety. For decades the industry’s powerful allies in Congress, led by Michigan Representative John Dingell, ensured that would be the case.
Or consider the New York branch of the Federal Reserve Board, which has the responsibility of monitoring Wall Street banks. Even after the Street’s near meltdown, the banks’ legal prowess and political clout reduced the ardor of examiners from the New York Federal Reserve Bank. Senior Fed officials instructed lower-level regulators to go easy on the big banks and not pry too deeply. In one meeting that came to light in 2014, a banker at Goldman Sachs allegedly told Fed regulators that, “once clients are wealthy enough certain consumer laws don’t apply to them.” Afterwards, when one of the regulators who attended the meeting shared with a more senior colleague her concern about the comment, the senior colleague told her, “You didn’t hear that.”
Another technique used by large corporations to squelch laws they dislike is to ensure Congress does not appropriate enough funds to enforce them. For example, the West Texas chemical and fertilizer plant that exploded in April 2013, killing fourteen and injuring more than 200, had not been fully inspected for almost three decades. The Occupational Health and Safety Administration and its state partners had only 2,200 inspectors charged with protecting the safety of 130 million workers in more than eight million workplaces nationwide. That came to about one inspector for every 59,000 workers. Over the years, congressional appropriations to OSHA had dropped. The agency had been systematically hollowed out. So, too, with the National Highway Transportation Safety Administration, charged with automobile safety. Its $132.8 million budget for 2013, supposedly enough to address the nation’s yearly toll of some 34,000 traffic fatalities, was less than what was spent protecting the U.S. Embassy in Iraq for three months of that year.
The Internal Revenue Service has also been hollowed out. Despite an increasing number of wealthy individuals and big corporations using every tax dodge imaginable—laundering money through phantom corporations and tax havens, and shifting profits abroad to where they would be taxed least—by 2014 the IRS budget was 7 percent lower than it had been as recently as 2010. During the same period, the IRS lost more than 10,000 staff, an 11 percent reduction in personnel. This budget stinginess didn’t save the government money. To the contrary, less IRS enforcement meant less revenue. For every dollar that went into IRS enforcement, an estimated $200 was recovered of taxes that had gone unpaid. But it reduced the likelihood that wealthy individuals and big corporations would be audited.
In a similar vein, after passage of the Dodd-Frank financial reform law, Wall Street made sure that government agencies charged with implementing it did not have the funds to do the job. As a result, fully six years after the near meltdown of Wall Street, some of Dodd-Frank—including much of the so-called “Volcker Rule” restrictions on the kind of derivatives trading that got the Street into trouble in the first place—was still on the drawing boards.
Repealing laws by hollowing out the agencies charged with implementing them works because the public doesn’t know it’s happening. The enactment of a law attracts attention. There might even be a signing ceremony at the White House. News outlets duly record the event. But the defunding of agencies supposed to put the law into effect draws no attention, even though it’s the practical equivalent of repealing it.
An even quieter means of repealing laws is to riddle them with so many loopholes and exceptions that the law becomes almost impossible to enforce. Typically, such holes are drilled when agencies attempt, through rulemaking, to define what the laws mean or prohibit. Consider, for example, the portion of the Dodd-Frank law designed to limit bets on the future values of commodities.
For years Wall Street has profitably speculated in futures markets—food, oil, copper, other commodities. The speculation has caused prices to fluctuate wildly. The Street makes bundles from these gyrations by betting, usually correctly, which way prices will go, but they have raised costs for consumers—yet another hidden redistribution mechanism from the middle class and poor to the wealthy. Dodd-Frank instructed the Commodity Futures Trading Commission (CFTC) to come up with a detailed rule reducing such betting. The commission thereafter considered 15,000 comments, largely generated by and from the Street. The agency also undertook numerous economic and policy analyses, carefully weighing the benefits to the public of any such regulation against its costs to the Street.
After several years, the commission issued its proposed rule, including some of the loopholes and exceptions the Street sought. But Wall Street still wasn’t satisfied. So the commission agreed to delay enforcement of the new rule for at least a year, allowing the Street more time to voice its objections. Even this wasn’t enough for the big banks. Their lawyers filed a lawsuit in the federal courts, seeking to overturn the rule, arguing that the commission’s cost-benefit analysis wasn’t adequate. It was a clever ploy, since costs and benefits are difficult to measure. And putting the question into the laps of Federal judges gave the Street a significant tactical advantage because the banks had almost infinite funds to hire “experts” (many of them academics who would say just about anything for the right price) using elaborate methodologies to show the CFTC had exaggerated the benefits and underestimated the costs.
It was not the first time the big banks had used this ploy. In 2010, when the Securities and Exchange Commission tried to implement a Dodd-Frank requirement making it easier for shareholders to nominate company directors, Wall Street sued the SEC. It alleged the commission’s cost-benefit analysis for the new rule was inadequate. A Federal appeals court, inundated by the banks’ lawyers and hired “experts,” agreed. That put an end to Congress’s effort to give shareholders more power in nominating company directors, at least temporarily.
Obviously, government should weigh the costs and benefits of every significant action it takes. But big corporations and large banks have an inherent advantage in the weighing: They can afford to pay for experts and consultants whose studies will invariably measure costs and benefits in the way big corporations and large banks want them to be measured. Few if any other parties to regulatory proceedings have pockets nearly as deep, to pay for studies nearly as comprehensive, to back up their own points of view.
In addition, when it comes to regulating Wall Street, one overriding cost does not make it into any individual weighing: the public’s mounting distrust of the entire economic system, a distrust generated in part by the Street’s repeated abuses. Wall Street’s shenanigans have convinced a large portion of America that the economic game is rigged.
Capitalism, alas, depends on trust. Without trust, people avoid even sensible economic risks. They also begin thinking that if the big guys can get away with cheating in big ways, small guys like them should be able to get away with cheating in small ways—causing even more people to distrust the economic system. Moreover, people who believe the game is rigged are easy prey for political demagogues with fast tongues and dumb ideas.
Tally up these costs and it’s a whopper. Wall Street has blanketed America in a miasma of cynicism. Most Americans still believe, with some justification, that the Street got its taxpayer-funded bailout without strings in the first place because of its political clout, which was why the banks were not required to renegotiate the mortgages of Americans who, because of the collapse brought on by the Street’s excesses, remained underwater for years. It’s why taxpayers did not get equity stakes in the banks they bailed out nearly as large, in proportion, as Warren Buffett got when he helped bail out Goldman Sachs. When the banks became profitable again, taxpayers did not reap many of the upside gains. We basically just padded their downside risks.
The Street’s political clout is not unrelated to the fact that top bank executives who took great risks or overlooked excessive risk-taking retained their jobs, evaded prosecution, avoided jail, and continued to rake in vast fortunes. And why the Dodd-Frank Act, intended to avoid another financial crisis, was watered down, and the rules to implement it were filled with loopholes big enough for Wall Street executives to drive their Ferraris through, some never even reaching the light of day. The costs of such cynicism have leeched deep into America, contributing to the suspicion and anger that has subsequently consumed American politics.
Just as litigation (including cost-benefit analyses) over agency rules waters them down, so too do fines that are so small, and settlements so mild, as to have the practical effect of repealing inconvenient laws. Consider JPMorgan Chase, the largest bank on the Street with the deepest pockets to dabble in politics and protect its interests with a squadron of high-priced legal talent. In 2012, the bank lost $6.2 billion by betting on credit default swaps tied to corporate debt, and then lied publicly about the losses. It later came out that the bank paid illegal bribes to get the business in the first place. That same year, the bank was accused of committing fraud in collecting credit card debt; using false and misleading means of foreclosing on mortgages; hiring the children of Chinese officials to help win business in violation of the Foreign Corrupt Practices Act; and much else. All this caused the Justice Department and the Securities and Exchange Commission to launch multiple investigations.
JP Morgan’s financial report for the fourth quarter of 2012 listed its legal imbroglios in nine pages of small print, and estimated that resolving all of them might cost as much as $6.8 billion. Yet $6.8 billion is a pittance for a company with total assets of $2.4 trillion and shareholder equity of $209 billion. Which is precisely the point: The expected fines did not deter JPMorgan Chase from ignoring the laws to begin with. No big bank or corporation will avoid the opportunity to make a tidy profit unless the probability of getting caught and prosecuted, multiplied by the amount of any potential penalty, exceeds the potential gains. A fine that’s small compared to potential winnings becomes just another cost of doing business.
Not even JPMorgan’s $13 billion settlement with the Justice Department in 2013, for fraudulent sales of troubled mortgages occurring before the financial meltdown, had any observable effect on its stock price. Nor, for that matter, did Citigroup’s $7 billion settlement in 2014, over the same sorts of fraud. Nor even Bank of America’s record-shattering $16.65 billion settlement in 2014. In fact, in the days leading up to the Bank of America settlement, when news of it was already well known on the Street, the price of Bank of America’s stock rose considerably. That was because many of these payments were tax-deductible. (The test for deductibility is whether payments go to parties who have been harmed. At least $7 billion of Bank of America’s $16.65 settlement, for example, was for relief to homeowners and blighted neighborhoods, which clearly would be deducted by the Bank from taxable income.)
Moreover, the size of the settlements paled in comparison to the bank’s earnings. Bank of America’s pretax income was $17 billion in 2013 alone, up from $4 billion in 2012. In 2014, Attorney General Eric Holder announced the guilty plea of the giant bank Credit Suisse to criminal charges of aiding rich Americans avoid paying taxes. “This case shows that no financial institution, no matter its size or global reach, is above the law,” Holder crowed. But financial markets shrugged off the $2.8 billion fine. In fact, the bank’s shares rose the day the plea was announced. It was the only large financial institution to show gains that day. Its CEO even sounded upbeat in a news briefing immediately following the announcement: “Our discussions with clients have been very reassuring and we haven’t seen very many issues at all,” he said. That may have been, in part, because the Justice Department hadn’t even required the bank to turn over its list of tax-avoiding clients.
When maximum penalties are included in a law, they are often quite low. This is another political tactic used by industries that do not want to look as if they’re opposing a law but want it defanged. In 2014, for example, General Motors was publicly berated for its failure to deal with defective ignition switches, which had led to at least thirteen fatalities. For decades, GM had received complaints about the ignition switch but had chosen to do nothing. Finally, the government took action. “What GM did was break the law. . . . They failed to meet their public safety obligations,” scolded Secretary of Transportation Anthony Foxx, after imposing on the automaker the largest possible penalty the National Highway Transportation Safety Act allows: $35 million. That was, of course, peanuts to a hundred-billion-dollar corporation. The law does not even include criminal penalties for willful violations of safety standards that result in death.
In 2013, Halliburton pleaded guilty to a criminal charge in which it admitted destroying evidence in the Deepwater Horizon oil spill disaster. The criminal plea made headlines. But the fine it paid was a mere $200,000, the maximum allowed under the law for such a misdemeanor. (The firm also agreed to make a $55 million tax-deductible “voluntary contribution” to the National Fish and Wildlife Foundation.) Halliburton’s revenues in 2013 totaled $29.4 billion, so the $200,000 fine amounted to little more than a rounding error. And no Halliburton executive went to jail.
Government officials like to appear before TV cameras sounding indignant and announcing what appear to be tough penalties against corporate lawbreakers. But the indignation is for the public, and the penalties are often tiny relative to corporate earnings. The penalties emerge from settlements, not trials. In those settlements, corporations do not concede they’ve done anything wrong; they agree, at most, to vague or paltry statements of fact. That way they avoid possible lawsuits from shareholders or other private litigants that have been harmed, and would otherwise use a conviction against them.
The government, for its part, likes to settle cases because doing so avoids long, drawn out trials that government agencies charged with enforcing the law can’t possibly afford on their skimpy budgets. In addition, because the lawyers in such agencies are paid a fraction of what partners in law firms hired by Wall Street banks and big corporations are paid, they are generally much younger and without the same experience, and don’t have nearly the same number of paralegals and other staff to collect documents and depositions in preparation for a trial; a settlement avoids the risk of an embarrassing defeat in court. Such settlements therefore seem to be win-wins, both for the corporations and the government. But they undermine the enforcement mechanism.
Six years after Wall Street’s near meltdown, not a single executive on the Street had been convicted or even indicted for crimes that wiped out the savings of countless Americans. It was well established, for example, that Lehman Brother’s “Repo 105” program—which temporarily moved billions of dollars of liability off the bank’s books at the end of each quarter and replaced them a few days later at the start of the next quarter—was intentionally designed to hide the firm’s financial weaknesses. This was a carefully crafted fraud, as detailed by a court-appointed Lehman examiner. But no former Lehman executive ever faced criminal prosecution for it. Contrast this with the fact that a teenager who sells an ounce of marijuana can be put away for years.
Mention should also be made of the large number of state judges and attorneys general who are elected to their positions, providing another channel for big money to influence how market rules are interpreted and enforced.
Some 32 states hold elections for judges of state supreme courts, appellate courts, and trial courts. Nationwide, 87 percent of all state court judges face elections. This is in sharp contrast to other nations, where judges are typically appointed with the advice and consent of legislative bodies. As former Supreme Court Justice Sandra Day O’Connor said, “No other nation in the world does that, because they realize you’re not going to get fair and impartial judges that way.”
Until the 1980s, judicial elections were relatively low-profile affairs. But beginning in the early 1990s, campaigns became far more costly and contentious. After the Supreme Court’s Citizens United decision in 2010 opened the floodgates to corporate campaign spending, spending on judicial elections by outside groups skyrocketed. In the 2012 election cycle, independent spending was $24.1 million, compared to about $2.7 million spent in the 2001–02 election cycle, a nine-fold increase. A 2013 study by Professor Joanna Shepherd of Emory Law School showed that the more donations justices receive from businesses, the more likely they are to rule in favor of business litigants. A Center for American Progress report also found corporate spending on judicial elections paying off for corporations. “In the span of a few short years, big business succeeded in transforming courts such as the Texas and Ohio supreme courts into forums where individuals face steep hurdles to holding corporations accountable,” wrote the authors, showing, for example, that the insurance industry in Ohio donated money to judges who then voted to overturn recent decisions the industry disliked, and energy companies in Texas funded the campaigns of judges who then interpreted laws to favor them.
State attorneys general, in charge of enforcing the rules by bringing lawsuits, are also subject to election and reelection, and they, too, are receiving increasing amounts of corporate money for their campaigns. An investigation by the New York Times in late 2014 found that major law firms were funneling corporate campaign contributions to attorneys general in order to gain their cooperation in dropping investigations of their corporate clients, negotiating settlements favorable to their clients, and pressuring federal regulators not to sue. The attorney general of Utah, for example, dismissed a case pending against the Bank of America, over the objections of his staff, after secretly meeting with a Bank of America lobbyist who also happened to be a former attorney general. Pfizer, the pharmaceutical giant, donated hundreds of thousands of dollars to state attorneys general between 2009 and 2014 to encourage favorable settlements of a case brought against the company by at least twenty states for allegedly marketing its drugs for unapproved uses. AT&T was a major contributor to state attorneys general who opted to go easy on the corporation after a multi-state investigation into the firm’s billing practices.
The public believes laws are enforced, and are enforced impartially. That is not the case. As America’s largest corporations have grown larger and more politically potent, they have tipped the legal scales in their favor—further entrenching and concentrating their wealth and power. This trend is not sustainable in our system of democratic capitalism, which depends for legitimacy on public trust in the rule of law.