WHEN CIVICS TEXTBOOKS DESCRIBE CONGRESS, THEY tend to focus on the legislative process. But the congressional power of oversight is an equally important part of effective government. The Constitution invests Congress with the responsibility of overseeing the executive branch, a critical part of our nation’s system of checks and balances. Proper oversight complements and strengthens the legislative process by identifying problems that may require new laws and by ensuring that existing laws are being executed as Congress meant them to be.
But the most basic oversight may also be the most important: simply ensuring that taxpayer money isn’t squandered. Nothing inhibits effective government quite like fraud, waste, and abuse; and nothing breeds cynicism faster. One major reason public confidence in government has ebbed so dramatically since I arrived in Washington in 1975 is that we are too often confronted by abuses of the public trust: the $600 Pentagon toilet seat, for instance, or Alaska’s “Bridge to Nowhere.” Effective oversight identifies such outrageous examples of government waste and holds those responsible to account.
Government has the capacity to be a unique and extraordinary force for good. But regardless of ideology or partisan proclivity, every American should support the pursuit of fraud, waste, and abuse since a well-functioning Washington benefits everyone—and besides, our tax dollars are paying for it. Congress has a crucial responsibility to make government as effective and efficient as possible and to make sure that the people’s money isn’t wasted, whether through incompetence or deceit. To this end, it’s vitally important that every facet of government be subjected to potential scrutiny.
The hub of this scrutiny in the House of Representatives is the Committee on Oversight and Government Reform, which is responsible for ensuring that federal laws and programs are being carried out as Congress intended. Its members help determine whether government programs should be continued, curtailed, or eliminated. Congress assigns each committee oversight jurisdiction over its particular area of competence—the Financial Services Committee covers banking, the Veterans’ Affairs Committee covers health care and benefits for military veterans, and so on. But Oversight is unique in that House rules give it nearly unlimited power to investigate any matter, regardless of whether another committee has concurrent jurisdiction. Its chairman is therefore entrusted with enormous power and latitude—and an accompanying obligation to use it responsibly.
I sat on the Oversight Committee for more than thirty years, as chairman from 2007 to 2008. Though oversight doesn’t get nearly the popular attention of major acts of legislation, I consider many of my accomplishments in this area to be every bit as significant as the laws I’ve worked on. Though legislation and oversight are often thought of as distinct processes, they are in fact very much conjoined. For example, absent the years of oversight hearings on pollution, Bhopal, and acid rain, the Clean Air Act might never have come into being. Effective oversight can also negate the need for legislation: Simply bringing cases of fraud, waste, and abuse to light can quickly bring them to an end.
In recent years, the Oversight Committee has managed to identify and address all sorts of major problems: private contractors like Halliburton and its former subsidiary KBR overcharging the U.S. government in Iraq; insurers fleecing the Medicare prescription drug program, and others exploiting federal crop insurance for billions of dollars; government and private contractors who endangered the lives of Hurricane Katrina victims in New Orleans while still squandering hundreds of millions of dollars; boondoggle defense contracts worth billions more that bought Marine expeditionary fighting vehicles that don’t run and deep-sea Coast Guard vessels that don’t float. Through these investigations and many more, the Oversight Committee has held government to account and saved taxpayers billions of dollars.
But as with so much else in government, the committee’s effectiveness has waxed and waned, depending on who controlled it and how they chose to use its powers. In fact, during my career, the Oversight Committee itself has shown how government can be a tremendous force for good—and how, when in the wrong hands, it can be an altogether different and harmful force.
AS A FRESHMAN CONGRESSMAN, I WAS ASSIGNED TO THE ENERGY and Commerce and the Science and Technology committees. Given my interest in health and environmental issues, Energy and Commerce was a perfect fit. But although Science and Technology did important work, I jumped at the chance to switch when a spot opened up on Oversight (then known as the Government Operations Committee) after my first term.
In 1977, Government Operations attracted some of the most active members of Congress, many of whom, like John Moss, were skilled subcommittee chairmen and masters of the art of oversight. Seeing them operate taught me a great deal that I later put to use as a chairman. And over the years, the committee performed a great deal of admirable work, investigating the progress of the war on cancer; pushing to open up government through the Freedom of Information Act; and bringing about procurement reform so that government (and thus taxpayers) pays less for goods and services. At President Carter’s behest, we also did much to help create two new federal departments, Energy and Education.
But when the Republicans took over the House in 1995, the focus shifted away from strengthening government performance. House Republicans were consumed with bringing down President Clinton and viewed the powers of the Oversight Committee—in particular, the power to issue subpoenas—as valuable tools to that end. In fact, the Republican leadership considered Oversight so valuable and promising that they allotted it the largest budget of any committee in Congress.
In 1997, Cardiss Collins of Illinois retired, making me the committee’s ranking minority member. At the same time, Dan Burton of Indiana took over as chairman. While I briefly held the hope that we might work together in a bipartisan fashion—I was no Clinton apologist and believed in strong oversight—that idea vanished quickly. Burton’s zeal to pursue any allegation against Clinton, no matter how trivial or farfetched, transformed the committee into a modern-day Star Chamber. (Before becoming chairman, Burton led a famous inquiry into the 1993 suicide of Vincent Foster, Clinton’s deputy White House counselor; convinced Foster was murdered, Burton re-created the event by shooting a pumpkin with a pistol in his backyard in an attempt to “prove” his theory.)
Burton and the Republican leadership wasted no time in getting down to business. One rule about government oversight that had applied since Senator Joseph McCarthy’s Red Scare was that the chairman had to gain the consent of the ranking member before issuing a subpoena. If they disagreed, the committee would convene and vote on the matter. The majority party usually prevailed, but the process allowed for the minority to air its position before any decision went forward. The reason this rule had stood for so long is that subpoenaing a witness is a serious matter: The full force of the United States government demands that a citizen appear and reveal private information. Unlike a civil subpoena, a congressional subpoena cannot be challenged in court. When Burton took over in 1997, he overturned this long-standing precedent and gave himself unilateral power to summon witnesses and disclose information.
And he immediately proceeded to abuse it. Burton became notorious for fishing expeditions, usually in pursuit of Clinton, in which he would subpoena witnesses left and right, cavalierly reveal embarrassingly personal details, and issue outrageous accusations that would garner newspaper headlines across the country, but could rarely be substantiated.
Among his passions was trying to prove that Clinton was systematically selling out the country to China. One of his first truly appalling abuses came when he subpoenaed the financial and telephone records of a sixty-five-year-old Georgetown University professor named Chi Wang, whom his staff suspected of being involved in an improbable scheme to sell national security secrets to China in exchange for campaign contributions. But it turned out that they mistook Professor Wang for someone with a similar name. When I pointed this out, Burton’s chief investigator admitted as much—but then proceeded to imply that Wang might nevertheless be guilty of something: “Whether he deserves a subpoena or not, we haven’t decided.” Here was an unmistakable example of unchecked and abusive government power. And rather than apologize, Burton’s staff covered their retreat by casting aspersions on an innocent man.
Such callous recklessness became typical. It was Burton who subpoenaed young Elian González to prevent him from being returned to his father in Cuba. Even after Burton stepped down, the Republican leadership continued to misuse the Oversight Committee, as in 2005 when they subpoenaed Terri Schiavo—a young woman left in a persistent vegetative state by cardiac arrest—to appear before the committee in order to prevent her husband from removing her from life support.
Burton forced the Clinton administration to turn over millions of pages of documents and required high-ranking White House officials to be cross-examined by committee staff in depositions—but even so, he constantly complained of being stonewalled. At one point, to dramatize this claim for the television cameras, he had his staff erect an enormous “stone” wall (papier-mâché, actually) against one whole side of a hearing room, and then hung pictures of various people whom he alleged to be stonewalling. The hearing didn’t generate a great deal of attention. But this arts-and-crafts project ruined the real wall, which had to be torn down and replaced at taxpayer expense. And we were the committee supposed to police government waste!
The turning point in the public’s perception of Burton came when he released transcripts of prison recordings of the private telephone conversations of Webster Hubbell, the associate attorney general and old friend of the Clintons’ who had been convicted for fraudulently billing his Arkansas law firm. Burton went on Nightline and Meet the Press to declare that the tapes implicated Hillary Clinton in the fraud. But my staff had carefully reviewed the same tapes and demonstrated that Burton or his staff had doctored the transcripts to omit key exonerating passages.
After the Hubbell fiasco, the press stopped responding to most of Burton’s wilder allegations, and his hearings no longer made the front page. But by that time he had inflicted widespread damage. Along with exacting an incredible financial and psychological toll on the many innocent people he subpoenaed, Burton’s actions ran up a steep, and entirely unjustified, bill for the U.S. taxpayers. The committee’s minority staff calculated that from 1997 to 2002, the years of his chairmanship, Burton issued 1,052 unilateral subpoenas, most to probe alleged misconduct by the Clinton administration and the Democratic Party, at a total cost of more than $35 million.
Regrettably, there are few internal or external checks on such willful abuses. The Republicans held power and wielded it in whatever way they saw fit—not only on Oversight, but on nearly every other committee as well. This amounted to a broad-scale abuse of the public trust. One of the hardest things in government, especially for a committee chairman, is to exercise judiciousness and restraint. Employing the full powers invested in that position is often necessary and appropriate. But our system has few restraints, and Burton’s lack of regard for rules and tradition undermined even these few. As Lord Acton famously declared, “Absolute power corrupts absolutely.”
AS BAD AS THINGS WERE ON OVERSIGHT DURING THE CLINTON years, they got much worse when George W. Bush became president. Suddenly, the Republicans lost all interest in holding the executive branch to account. Their approach toward oversight changed entirely. When it concerned Bill Clinton, nothing was too small to investigate; but if it involved George W. Bush, it seemed as if nothing was so big that it couldn’t be ignored—even if doing so had global consequences.
During the Burton years, the committee devoted more than 140 hours to hearings and depositions on whether President Clinton had misused his Christmas card list for political gain. But Republicans devoted fewer than ten hours to investigating reports that U.S. soldiers had tortured prisoners at Iraq’s Abu Ghraib prison. Nor would they investigate the White House’s role in misleading the public about Iraq’s weapons of mass destruction, the original rationale for the invasion.
This absence of oversight encouraged a belief that no one would be held accountable for mistakes or even explicit misconduct, and fostered a culture in which officials throughout the Bush administration felt free to act with impunity. Congressional Republicans resisted overseeing the Republican White House, even as unequivocal failures began to mount. The tragedy of approaching oversight this way was that it neglected the committee’s true purpose: Republicans paid too little attention to serious government failures that would have benefited from scrutiny and oversight, and instead devoted their efforts to investigating things like Martha Stewart’s insider trading in pharmaceutical stocks.
From the minority, my staff and I tried to make up for this willful avoidance of responsibility. We did this primarily by writing letters. Lots of letters. As the committee’s ranking member, I couldn’t hold a hearing. But I could request records and information from the White House or from government agencies, and draw attention to whatever issue we were examining by releasing the letter to the media, which often picked up the story. This became a useful strategy, deployed so often that The Washington Post dubbed me “The Man of Letters.”
Oftentimes we’d be stiffed, never receiving a reply. But sometimes agencies would come through. And on very rare occasions, even the Bush White House would respond. For instance, just after the Enron scandal broke, I wrote to Vice President Dick Cheney requesting information about meetings the vice president had held with Enron’s CEO, Ken Lay. Lay was well known as a big Republican donor and a close friend of the president’s, so no Republican chairman had dreamed of holding a hearing. It looked as if Congress was going to ignore what was then the biggest bankruptcy in U.S. history. That is, until Cheney’s office responded to my letter—and revealed that the vice president had met with Lay far more often than the public was aware. This opened a new line of inquiry that set the media in frantic pursuit.
At the same time, I formed a Special Investigations Division within the minority staff that interviewed whistle-blowers, pored over obscure government databases, and sometimes even went undercover. Because we were among the few people in Congress looking into Enron, whistle-blowers started coming forward. Taking a page from Attorney General John Ashcroft, who established a toll-free tip line to report suspicious behavior in the wake of the September 11 attacks, we established an Enron tip line and spread the word. This generated valuable new information, including nine videotapes of Ken Lay, the most damning of which captured him at a companywide meeting urging his employees to buy more Enron stock, even as he was frantically unloading his own holdings in anticipation of a share price collapse.
The Special Investigations Division eventually documented Enron’s influence on the White House energy plan. It also released reports on the politicization of federal science and the growth of government secrecy. For one investigation, it purchased the curricula being used by federally funded abstinence-only programs and demonstrated that the Bush administration was spending hundreds of millions of dollars to mislead teens about the basic facts of reproductive health.
Beginning in 2003, the Oversight Committee experienced a marked improvement when Tom Davis, a moderate Republican from northern Virginia, took over. Unlike Burton, Davis recognized the value of responsible oversight and tried, within the strictures imposed by the Republican leadership, to reassert Congress’s role. After the lobbyist Jack Abramoff was reported to have bilked Native American tribes and other clients out of millions of dollars, Davis agreed that the committee should act, and we jointly commenced an investigation into Abramoff’s contacts with the White House. Davis also agreed to hearings on Halliburton’s abuses in Iraq. In both cases, he became a partner in demanding information and pursuing the facts. But there were always limits on what we could do together. Though we were allowed to ask Abramoff’s law firm to document his contacts with the White House, Davis would not consent to demand that the White House release its own records. And though we requested Defense Department audits of Halliburton’s overbilling, we could not request documents that might have shed light on the role of Vice President Cheney, once head of the company.
Nevertheless, these joint endeavors were highly productive. The purpose of such hearings is not just to hold people to account and shine a spotlight on those who have abused the public trust, although these are important functions. Our goal is also to learn why and how the government malfunctions when it does, and what can be done to fix the problem. Often, patterns emerge that shed light on a given failure. A clear pattern in our investigations of the Bush administration was the government’s growing use of private contractors to perform and even manage jobs that were once the direct responsibility of government. During Davis’s tenure, and then during my own, one of Oversight’s primary targets of inquiry thus became the vast and sudden increase of private contracting and the myriad ways—like “no-bid” and “cost-plus” contracts—in which these contractors squander taxpayer money.
My concern originated early in the Iraq War, when Halliburton was granted an enormous no-bid contract. Halliburton had a record of overcharging the government when it contracted to build barracks and feed U.S. troops in Yugoslavia. On closer inspection, this practice proved widespread. Not only were company officials marking up the price of everything from laundry ($100 a bag) to Coca-Cola ($35 a case); their employees were staying at five-star Kuwaiti hotels while U.S. troops slept in tents. But the full extent of the waste only became apparent after we dug deeper. Private companies like Halliburton often subcontract to smaller firms, which in turn subcontract to others, charging a fee at each step along the way, usually a percentage of the overall cost. So as a job worked its way down through multiple subcontractors, each added his fee to the bottom line. This is known as “cost-plus” contracting. One Halliburton official told us that the company mantra was “Don’t worry about price. It’s ‘cost-plus.’” One needn’t be a math whiz to understand how quickly this system inflates costs and even gives contractors an incentive to run up enormous bills.
The government compounded this problem by handing out no-bid contracts. The main argument conservatives make for wanting to outsource government work to the private sector is that the discipline of the free market will drive down the cost to taxpayers. But rather than have companies compete to provide the best price, the government did precisely the opposite, dividing Iraq into fiefdoms and dispensing no-bid contracts by geographic region. Halliburton got a contract for all the oil-related work in the south, Parsons in the north; Washington Group International did all electricity-related work in the north, while Perini Corporation got everything in the south. Had officials set out to design the least efficient way to rebuild Iraq they could hardly have topped this approach. It was analogous to hiring a different contractor to fix every room in your home and telling them, “Just fix what you think you need to and charge me 10 percent more than whatever it costs you—and feel free to pass the work on to whomever you like. Don’t worry about the cost.” Chances are you’d find yourself paying top dollar for poor service.
The reliance on private contractors was not limited to Iraq, nor was the no-bid, cost-plus approach. The same thing was rampant in the clean-up of Hurricane Katrina. Contractors would hire subcontractors, who would end up hiring a guy with a pickup truck to remove debris. Everyone added their fee, so everyone profited—except taxpayers, who were left with a $100 tab for a $10 job.
Why was this being allowed to happen? And why didn’t the government clamp down? My investigators eventually discovered the answer. The job of oversight and management itself had also been handed over to private contractors, so there was no longer even a core of federal workers to monitor the situation. Government’s most important tasks—national security, disaster relief, war—were systematically being handed off to others. The Oversight Committee issued a report in 2007 showing that spending on private contractors had more than doubled under President Bush, from $203.1 billion in 2000 to $412.1 billion in 2006, while no-bid contracts had tripled, from $67.5 billion to $206.9 billion. Government auditors had identified 187 contracts during those six years—valued at $1.1 trillion—as being plagued by overcharges, wasteful spending, or mismanagement.
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ONE OF THE GREAT FRUSTRATIONS OF LIFE IN THE MINORITY IS that the rules don’t offer many ways of blocking the kind of investigations that were Burton’s specialty. Majority power, especially in the House, is near absolute. But that doesn’t mean there aren’t constructive ways for members in the other party to agitate on issues that really do deserve investigation. An important lesson from the early years of the Clean Air fight was that even if you lack the strength to pass a good law, great benefits can derive merely from getting important information before the public. The most we could manage in 1985 was the Toxic Release Inventory; but the data this later produced, documenting the enormous level of airborne pollution, shifted the legislative debate and became a big step toward a landmark law. Similarly, while we couldn’t stop Burton, we could, even from the minority, compile a public record on neglected issues that needed congressional oversight.
We realized early in Burton’s tenure that there was no point in spending all our time and staff resources responding to what he wanted to do. After the Hubbell affair, his investigations stopped gaining traction, so we devoted more and more time to addressing problems that urgently needed government attention. House precedent allots the minority one-third of the committee’s substantial budget and staff. Although I didn’t control the gavel, and therefore could not convene hearings, nothing was stopping us from conducting our own investigations of the issues we deemed important and making the findings public. While this method didn’t carry the televisual oomph of a high-profile hearing, our reports did carry the imprimatur of the U.S. Congress, and that was a pretty big deal—often enough to make the kind of impact that brings meaningful change.
Our first report looked into the rising price of prescription drugs. Drawing on data from a number of federal agencies, the staff determined that uninsured seniors routinely had to pay more than twice as much for drugs as HMOs and other large purchasers. Tom Allen, a Maine Democrat, took a particular interest. High drug prices were a major issue for his constituents, given their proximity to Canada and its lower prices, and Allen asked if we could tailor a report to his district. We did, and it became the lead story on the local news. Democrats Jim Turner of Texas and Tom Udall of New Mexico requested reports for their districts, and got a similar reception. Word spread quickly, and soon dozens of members were asking for their own “Waxman Reports,” as they became known. District-by-district comparisons of high drug prices began showing up in newspapers across the country. Turner convinced President Clinton to include the issue in his 1999 State of the Union address, which added to the momentum. The movement to create a Medicare prescription drug benefit originated not in Washington but at the grass roots. It was partly energized, I believe, by these reports.
The amount of attention frankly surprised us. Several members told me that nothing they had done in their career had generated as much interest as publicizing their local findings. So we decided to expand our product line.
We were soon pumping out reports comparing U.S. drug prices to those in England and Canada, and others comparing the cost of drugs used on humans with veterinary drugs (veterinarians often used the same drugs at a dramatically lower cost). Then we branched out into reports on classroom overcrowding and nursing home abuses. Many of these studies were produced at the request of Democratic members, but we also conducted investigations for Republicans who recognized their value. We joined with Republican senator Susan Collins of Maine to examine the involuntary incarceration of mentally ill youths. Our work for Representative Steven Largent, an Oklahoma Republican, made national headlines for revealing that online file-sharing programs bombarded kids with pornography. All told, the minority staff produced more than one thousand individual reports during my tenure as ranking member.
Through these creative and roundabout means, we managed to keep up some oversight during the twelve obstinate years that Republicans reigned over the House. But these were stopgap measures that couldn’t possibly do the job of a fully engaged and active committee, and I often longed for the day when Democrats would regain power.
WHEN THAT DAY FINALLY ARRIVED IN JANUARY 2007, I TOOK OVER as chairman of the Oversight Committee. Having witnessed so much abuse of power and so much neglected responsibility from our days in the minority, my Democratic colleagues and I were determined to right the ship. We settled on a three-part approach. First, we would concentrate on pursuing fraud, waste, and abuse of resources. Second, we would ensure that government was working as it should be, taking particular care to examine the agencies that had declined most precipitously under President Bush, such as the Federal Emergency Management Agency—FEMA—which had performed so poorly during Hurricane Katrina. And lastly, we would once again hold the executive branch accountable for its performance, as the Constitution requires. The excesses of the Burton years and the neglect during Bush’s presidency had done plenty to harm the country, but also furnished us with a powerful model of how not to behave.
To convey to a disillusioned country how much change we had in mind, my staff and I worked overtime as the new Congress approached so that we could get going quickly. We opened with four consecutive days of oversight hearings, each day designed to highlight one of the more egregious examples of fraud, waste, and abuse that successive Republican Congresses had ignored.
On Tuesday, February 6, we examined an audit report from the Special Inspector General for Iraq Reconstruction that revealed that $8.8 billion—literally 363 tons in shrink-wrapped packages of $100 bills—had been flown into Iraq on 230 military cargo planes, delivered to the Coalition Provisional Authority, and had gone missing. It had been handed out to Iraqi officials with no record of who got what or where it went. The man responsible, Bush’s former CPA administrator, L. Paul Bremer, admitted that the money had simply vanished.
On Wednesday, February 7, we looked at Blackwater USA, the private military contractor accused of profiteering by the families of four Blackwater employees who had been lynched in Fallujah and their bodies burned and dragged through the streets, a horror videotaped and broadcast worldwide. The hearing revealed that Blackwater had failed to provide armored vehicles and skirted critical safety measures, at the cost of U.S. lives. This spurred the Army to withhold $19.6 million from Halliburton, which had subcontracted with Blackwater to provide armed security guards.
On Thursday, February 8, we held a hearing on the mismanagement of major Homeland Security Department projects outsourced to private contractors, including the Coast Guard’s Deepwater program, which had produced ships that couldn’t stay afloat. It turned out that managers of the Coast Guard’s $24 billion fleet overhaul program had covered up a Navy engineering report that showed that design flaws in the flagship cutter slated to become the cornerstone of the Coast Guard’s new fleet could cause the hull to buckle. Fixing each of the faulty vessels doubled the cost to taxpayers from $517 million to $1 billion. The report concluded that the problems had arisen from a fundamental lack of oversight.
On Friday, February 9, we turned to drug company profiteering through systematically overcharging government health programs like Medicare, Medicaid, and the Public Health Service, at a cost of billions of dollars. By law, drug companies must offer Medicaid their lowest prices, but they had repeatedly conspired to get around this requirement. Companies including Pfizer, Schering-Plough, GlaxoSmithKline, Astra Zeneca, and Bayer had to pay billions of dollars in civil damages and criminal penalties to federal and state governments.
Over the next two years, we returned again and again to the theme of wasteful spending, uncovering abuses that saved taxpayers billions of dollars. Having documented waste in the federal crop insurance program, we worked with the House Agriculture Committee to cut more than $3 billion in unnecessary subsidies. After we demonstrated that private insurers had overcharged the government by more than $600 million to provide workers’ compensation coverage in Iraq, we joined with the House Armed Services Committee to close the loophole.
And this was only the beginning. Other hearings prompted further long-overdue reforms. We revealed that FEMA was housing families displaced by Hurricane Katrina in trailers with dangerous levels of formaldehyde—and that after field workers alerted the agency’s leaders in Washington they were instructed to ignore the threat, since verifying the trailers’ toxicity “would imply FEMA’s ownership of this issue.” The ensuing public outrage got the families into safer shelter. A hearing with the head of Blackwater highlighted the company’s reckless, shoot-first practices, and brought new controls on private security contractors in Iraq.
At the same time, we were seeking to make top government officials accountable. Lurita Doan, head of the General Services Administration, had tried to divert agency resources to help elect Republicans in close races, and Howard Krongard, the State Department’s inspector general, had stymied an investigation into Blackwater, on whose advisory board his own brother served (which he denied under oath). Both officials were forced from office. We also established, and let the country know, that dozens of top White House staffers were evading the requirements of the Presidential Records Act and shielding their e-mail from scrutiny by using outside accounts. And in two of the highest-profile hearings of the Bush presidency, we laid out how senior White House officials had revealed the identity of a covert CIA agent, Valerie Plame, and investigated why the Army sought to keep from the public and the family of Pat Tillman—the football hero turned Army Ranger after 9/11—that he had been killed by friendly fire while serving in Afghanistan.
THE OVERSIGHT COMMITTEE’S JURISDICTION IS NOT LIMITED TO government, extending to almost any area, including the private sector. Early in my chairmanship, we became deeply involved in investigating what would become the frightening collapse of the U.S. economy in the autumn of 2008.
What first caught our attention, well before the recession, was the issue of CEO pay. By the time I took over in 2007, the skyrocketing amounts being paid to executives of the nation’s largest companies had begun to worry me, because it raised important questions about corporate governance: Not merely that the size of these payouts gave offense—some ranged higher than $100 million—but that they had become so enormous that they were skewing the way businesses operated.
In the 1980s, the CEOs of the nation’s largest companies were paid forty times more than the average employee. By 2007 they were making about six hundred times more. At a typical company, a staggering 10 percent of corporate profits went to paying top executives. Many academic experts, financial analysts, and investors had come to regard this trend as the index of a fundamentally broken way of running a company. As Warren Buffett remarked, “In judging whether corporate America is serious about reforming itself, CEO pay remains the acid test.” There seemed to be no serious signs of reform.
To get a better handle on what was happening, the committee staff conducted a broad survey of how the 250 largest companies established executive pay. They turned out to rely heavily on independent consultants specializing in executive compensation who routinely had a major conflict of interest—namely, that the bulk of their income derived from consulting for the very same executives whose salaries they set. Our report found that on average these supposedly disinterested consultants earned $200,000 to advise a company about executive pay and another $2 million to provide other services to the same company. So the bulk of the consultants’ income depended upon the goodwill of the very CEOs they were being paid to overpay, an arrangement often hidden from shareholders. They were anything but “independent.”
In December, we held a hearing to highlight the report’s findings and examine this troubling practice. As a result of this, and of ensuing shareholder outcry, many companies announced that they would only hire consultants free of such conflicts.
But problems of corporate governance did not disappear. Early 2008 brought the subprime mortgage meltdown that eventually drove the American economy into collapse. To the disgust of people everywhere, the CEOs of some of the companies directly responsible for the mortgage mess received payouts of hundreds of millions of dollars, even as their firms lost billions. Here was a glaring example of lack of accountability, whose effects wound up touching nearly every American.
In March, we convened a hearing and invited three of them to testify: Charles O. Prince III, formerly chairman and CEO of Citigroup; Stanley O’Neal, formerly chairman and CEO of Merrill Lynch; and Angelo Mozilo, the founder and CEO of Countrywide Financial Corporation. Soon after the hearing was announced, I got a sense of just how influential these men were. Countrywide’s headquarters is located in my district, and though I’d never met Angelo Mozilo, calls began to pour in from important people in California who tried to change my mind about having Mozilo testify or suggested that I postpone the hearing. Nancy Pelosi, the speaker of the house, was subjected to a similar barrage, but agreed that we should go forward.
The hearing sought to answer the question, How can a few executives do so well when their companies do so poorly? In 2007, the companies had lost a combined $20 billion, yet Mozilo collected $120 million; O’Neal $161 million; and Prince, who was actually fired, was still awarded $68 million and millions more in perquisites like a car and driver. Though each executive defended his pay, the hearing illustrated the massive lack of accountability on Wall Street and how its system of compensation contributed to the mortgage boom, while giving executives huge incentives to take the risks that eventually caused the mortgage market to implode.
By the time Congress returned from summer break, the economy was falling apart and Wall Street was being ravaged. By September, the Federal Reserve and the Treasury Department had narrowly averted a Bear Stearns bankruptcy, bailed out the insurance giant AIG for $85 billion, and let Lehman Brothers fail, freezing credit markets worldwide and necessitating the emergency $700 billion bailout known as the Troubled Asset Relief Program. Speaker Pelosi charged Barney Frank of Massachusetts, chairman of the House Financial Services Committee, with putting together a bailout package, and asked me to conduct a series of hearings to find out how we had arrived at such a calamitous point. In October, as the global economy teetered on the verge of collapse, we held four high-profile hearings, each examining a different component of the disaster.
Our purpose was to find out why the financial system fell apart, where it broke down, and why regulators had been unable to warn us or stop it from happening. We began on October 6 and 7 with hearings that included Lehman Brothers CEO Richard Fuld, who had just presided over the largest bankruptcy in U.S. history, and Robert Willumstad and Martin Sullivan, the former CEOs of AIG, whose reckless trading in credit default swaps had put the entire U.S. economy at risk. Though Fuld refused to accept responsibility, blaming Lehman’s failure on “a litany of destabilizing factors” beyond his control, the thousands of pages of internal documents that our investigators examined portrayed a culture where huge bonuses and the lack of any consequence for failure encouraged reckless, highly leveraged bets with billions of borrowed dollars that wiped the company out when housing prices started to drop. Even after destroying his firm, Fuld departed a rich man, having “earned” more than $500 million.
Like Lehman Brothers, AIG had grown mighty by taking excessive risks, in this case insuring other companies’ investments by issuing “credit default swaps”—an unregulated $62 trillion market that AIG had pioneered—that it could not pay off when these investments went bad. And like Lehman Brothers, AIG’s top executives earned hundreds of millions of dollars. In fact, the man most directly responsible for destroying the company, Joseph Cassano, head of its financial products division, received $280 million—and then, after being fired, was awarded $34 million in unvested bonuses and placed on a $1 million-a-month retainer. Why would AIG keep him on the payroll? To subject him to a noncompete clause, the CEOs explained, so that he could not go to work for a competing firm.
This infuriating Wonderland logic was trumped only by the executives’ arrogant refusal to change their ways. The week after the government had to give it $85 billion, AIG sponsored a lavish retreat at a San Diego spa. An alert constituent spotted an announcement in a local newspaper and called Karen Light-foot, a committee staffer. Our investigators obtained billing invoices from the resort showing that AIG had spent $440,000 to house its executives in presidential suites at more than $1,000 per night, including $150,000 on food and $230,000 on spa treatments—all while being propped up on taxpayer dollars. News of the retreat dominated the next day’s hearing and, for many Americans, crystallized the attitude of reckless entitlement that suffused Wall Street and led directly to the financial collapse.
Our hearings then broadened to the credit rating agencies that had vouched for the toxic mortgage bonds and to the government regulators who enabled the speculation. On October 22, the CEOs of Moody’s, Fitch, and Standard & Poor’s, the firms that acted as gatekeepers by assigning quality ratings to bonds, appeared before the committee. Like the finance executives before them, they pleaded their innocence, claiming that, as Moody’s CEO Ray McDaniel put it, “virtually no one… anticipated what is occurring.” That turned out to be false.
Witnesses unhappy about testifying pursue a number of tactics to thwart our investigators. The ratings agencies tried to bury us in paper. A request for internal documents brought hundreds of thousands of pages just before the hearing, apparently in the hope that damning evidence would be impossible to find amid all the detritus. To meet this challenge, staff from every part of the committee dropped what they were doing to embark on an emergency document-reviewing marathon—an exercise that paid off.
To Ray McDaniel at the witness table, we were able to show that someone had indeed anticipated exactly what was occurring as the subprime bubble inflated: McDaniel himself. In a confidential presentation in October 2007, he had warned his board of directors that in their unbridled pursuit of revenue, the ratings agencies were competing to give high ratings to risky bonds, sacrificing standards for money. This “dilemma,” McDaniel had warned, posed a “very tough problem” for the company. “Unchecked, competition on this basis can place the entire financial system at risk.” And indeed, it did. As another Moody’s executive put it, “We sold our soul to the devil for revenue.”
Here again was a blatant and deadly conflict of interest. The credit rating agencies were paid by the bond issuers rather than bond buyers—which gave them, like the executive compensation consultants, an overwhelming incentive to please the firms that supplied their handsome revenues, rather than to issue objective assessments of bond quality, as they were supposed to. Hundreds of billions of dollars of risky subprime mortgage bonds were thus passed off as AAA-rated safe investments. And when it turned out otherwise, the disparity brought on a global recession.
Our pivotal hearing came the next day, October 23, when Alan Greenspan, the legendary former head of the Federal Reserve, joined other regulators to explain how the government had failed to prevent the crisis. Since the Reagan years, the prevailing attitude in Washington had been that the market always knew best. The Federal Reserve had the authority to stop the irresponsible lending practices that fueled the subprime market, but Greenspan rejected pleas to intervene. The SEC could have demanded higher credit rating standards, but did not. The Treasury Department could have forced better oversight of financial derivatives, but declined to. The deregulatory philosophy that marked the age became so powerful that it trumped governance. A point was reached when nothing kept the markets honest.
When my turn came to ask questions, I quoted some of Greenspan’s views on regulation, such as the claim that “There’s nothing involved in federal regulation which makes it superior to market regulation.” My question for him was simply “Were you wrong?”
“Partially,” he replied.
When I later pursued the point, I asked directly, “Well, where did you make a mistake, then?”
“I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”
A moment later, he went further.
“What I am saying to you is, yes, I found a flaw, I don’t know how significant or permanent it is, but I have been very distressed by that fact.”
“You found a flaw?”
“I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.”
“In other words, you found that your view of the world, your ideology, was not right, it was not working?”
“Precisely. That’s precisely the reason I was shocked, because I had been going for forty years or more with very considerable evidence that it was working exceptionally well.”
Greenspan’s testimony reverberated around the globe. The man regarded as the high priest of high finance—“The Maestro”—had candidly admitted that unfettered markets and lax regulation had been principal causes of the collapse. It was something that no one had expected, a gravely fitting coda to our hearings, and a bookend of sorts to the Age of Reagan that had now drawn to its end.
THE RECKLESS GREED OF WALL STREET, THE REGULATORY FAILures, and the extraordinary waste, fraud, and abuse uncovered in our hearings share a common origin. They all stem from an ideology that holds that government intervention is inherently harmful and private sector actions inherently good. Ultimately, Greenspan and Bush committed the same error of believing that the private sector, left unregulated, would act in the public interest. Halliburton, Blackwater, Lehman Brothers, AIG, the credit rating agencies, and even high government officials exploited this system to amass vast fortunes before the bottom fell out. The really monstrous injustice is that the CEOs keep their millions, while ordinary citizens bear the brunt of the economic collapse as workers, home owners, and savers foot the bill as taxpayers to clean it all up.
Along with its shocking waste and dangerous inefficiencies, this approach to governing is fundamentally out of step with the American people. Government has a basic obligation to safeguard the money it collects, and Congress plays a vital role in this process. But during the eight years of the Bush presidency and the twelve years that Republicans controlled the House of Representatives, the American public came to see a staggering disregard for government, and especially for government regulation.
But the tenet of Republican faith that insists government oversight and regulation is unwarranted and harmful was put to the ultimate test when the U.S. economy began to collapse in 2008. Suddenly, the drawbacks of allowing industry to regulate itself became apparent to all. The bankruptcy of this philosophy was ratified by the American people on Election Day 2008, when they sent Barack Obama, a Democrat, to the White House.