Power and money: The goal of D.C.'s elite shifts from influence to the big score

Staff Writer
Columbus CEO

(c) 2013, The Washington Post.

WASHINGTON — I'd been at The Washington Post only a few months in 1988 when the managing editor, Robert Kaiser, walked into my office, closed the door and tossed onto my desk the section from that day's paper containing the list of recent home sales. One sale was circled: mine.

His message was that I'd broken an unwritten rule by buying an $830,000 house in an upscale D.C. neighborhood. Post journalists were not supposed to call attention to themselves in that way, he explained. I had chosen a house that didn't reflect my proper place, as a mid-level editor, in the pecking order of Washington.

The son of a diplomat and academic, Kaiser grew up in a Washington where your place in the social order wasn't determined by how much money you had but by how much power and influence you had and how much respect you commanded. It was all about what you did and what you knew, not what you had.

Even the few who had wealth abided by the old-money ethic that you didn't flaunt it — and most certainly you didn't talk about it. Washington back then thought of itself as a city that existed for one purpose, to serve the public.

If that strikes you today as incredibly hokey and naive, consider it a measure of how much the culture of Washington has changed in the past 30 years. In almost every way, the region continues to be shaped by the presence of the federal government. But in recent years, the idea of "serving the public" has taken on a somewhat different meaning — one less rooted in sacrifice, stewardship and the chance to make a difference, one more given to celebrity, manipulation and the chance to make a big score.

This transformation was not part of some grand strategy hatched over lunch at the Metropolitan Club to make this the richest region in the country. Nor was it some mysterious breakdown in the moral fiber of those living in the capital. According to those who lived through it, the explanation is a whole lot more simple: The nation changed and Washington changed with it.

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In the decades after World War II, Washington was something of a middle-class paradise, a company town where a rapidly growing government provided reliable jobs and steady income to a wide range of Americans who flocked here — black and white, urban and suburban, high skilled and low, ambitious and risk-averse.

That's not to say there weren't plenty of people who were poor and near-poor, many of them black and living in segregated ghettos. In 1969, the District of Columbia had a poverty rate of 17 percent, well above the national average, but for the wider Washington metropolitan area, the rate was half that, and well below the rest of the country.

What passed for "wealthy" back then were mostly people with comfortable incomes — doctors and lawyers, bankers and retailers, auto dealers and small-time home builders, most of them white. They lived in nice but not fancy houses in nice but not terribly expensive neighborhoods. They drove Fords and Buicks and Studebakers, not Cadillacs and Lincolns (there were no Mercedes-Benzes and Land Rovers around here back then). Perhaps they were members of a country club or had a small place on the Eastern Shore. Most of them had household help. More than a few sent their children to private schools.

None of this required a huge amount of money. Washington was then still a relatively small Southern city with a small population. Land was plentiful and cheap. Even private schools and clubs, while selective in all sorts of unpleasant ways, weren't particularly expensive or lavish. In those days, even college professors, journalists and higher-ranking government officials could live very comfortable lives without being particularly rich.

A good deal of Washington's wealth was from somewhere else. There was the chemical fortune of the Belins, the cereal fortune of Marjorie Merriweather Post, the steel fortune of Duncan Phillips (whose artworks form the basis of the Phillips Collection) and the Wall Street fortune of Eugene Meyer (who came to Washington to run the Federal Reserve and later bought The Washington Post).

Homegrown wealth was mostly real estate wealth, much of it in the hands of developers — most of them Jewish — who built the homes, apartment buildings and offices in which all those federal employees lived and worked. The wealthiest and best known, Morris Cafritz, had a socialite wife who threw big parties and a big and active charitable foundation. But in an era when anti-Semitism was still a reality, the others kept a low profile and kept to themselves. They attended regular Monday lunches at Duke Ziebert's, retreated to a surburan country club on weekends and to Palm Beach, Fla., for winter holidays.

It is more than a bit ironic that the roots of Washington's new wealth can be traced to Ronald Reagan, an avowed anti-Washington politician. Reagan came to the capital with the aim of defeating communism and shrinking the federal government. And both of those turned out to be a boon to Washington's contracting industry.

There had always been government contractors, of course, the most important of which were the big defense contractors that made tanks and ships and planes somewhere other than Washington. Those who ran the industry took care that nobody got the impression that they were getting rich off the taxpayers. Although there were the occasional scandals involving bribes and lavish hunting lodges, for the most part executive salaries in the industry were restrained and facilities were modest, as were reported profits and dividends.

That same ethic was embraced by the service contractors that sprouted up along the Beltway in the '60s and '70s. The founders genuinely felt that while their companies were private and profit-making, they were involved with public service no less than people working in the government, where many of them once worked.

"Money wasn't driving us," recalls Earle Williams, the former president of BDM, one of the first big technology contractors in Virginia. "We really thought that we were doing important and interesting work for the country, and that we could do it better and cheaper than the government."

Another was Charles Rossotti, a business consultant and systems analyst who at 29 became an assistant secretary of defense before leaving to co-found American Management Systems, which he led for more than 20 years.

"You didn't flaunt that you were getting rich off the government, and for a good reason — because you weren't," Rossotti recalls. "It wasn't a money machine back then."

Now it is. That's not to say there isn't still a deep strain of public service running through places like Booz Allen and CACI. But today it co-exists with an equally important obligation to generate a big payday for owners, investors and top executives.

You almost can track the change through the history of Williams' BDM. It went public in 1981; was sold to Ford Aerospace in 1988; was taken over by the Carlyle Group, then a fledgling private-equity group, in 1990 before being sold in 1997 to TRW, which itself was bought by Northrop Grumman in 2002. The defense buildup of the 1980s, the post-Cold War consolidation of the 1990s, the push toward outsourcing and the surge in homeland security spending after the Sept. 11, 2001, attacks — all of these combined to turn Washington's contracting firms into hot properties for investors. Suddenly they were assets to be bought and sold, merged and restructured. And in the process, great personal fortunes were created.

You knew something had fundamentally changed by 1993 when General Dynamics, which had recently moved its headquarters from St. Louis to Washington, revealed that its chief executive, former astronaut William Anders, had received a compensation package valued at $29 million. Although many were outraged, it wasn't long before other executives were earning similar paydays. Norms of behavior quickly changed.

Today, it is common for Beltway entrepreneurs to start a contracting firm with the expressed intent of selling it to a bigger firm or a private-equity group within five years — then to use the proceeds to do it all again.

"It's a totally different culture now," says Williams, somewhat wistfully.

As for Rossotti, he sold his company and went on to head the Internal Revenue Service before landing at the Carlyle Group, where he oversees some of the technology companies the private-equity firm has acquired.

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Other sectors went through a similar transformation.

Washington's real estate business had always been a local affair, developers and builders providing the equity for their own and each other's projects, and local banks financing the rest. But the '80s saw the influx of outside money from insurance companies, real estate investment funds and big banks. And with it came a new generation of more aggressive developers willing to build on speculation, take on more leverage and spend more on architectural design. When the market was booming, these projects generated profits earlier generations could not have imagined. But when the market turned in the early '90s, many were wiped out, or nearly so.

At the same time, the bank consolidation that was sweeping the country created a new class of multimillionaires drawn from the owners of local banks who sold out and the investment bankers at firms like Friedman, Billings and Ramsey who helped them. And after the savings-and-loan industry collapsed, many Washington fortunes were made by shrewd investors clever enough to pick up unoccupied office buildings and empty shopping centers for pennies on the dollar.

At around the same time Bill Anders was making waves with his pay package at General Dynamics, a similar melodrama was playing out at Fannie Mae, the housing financing giant.

As a private, profit-making company chartered by the federal government to ensure a steady flow of mortgages, Fannie had always been run more like a public utility. But that started to change in the late '80s when mortgage finance became more complex and Fannie found itself competing with Wall Street for talent, capital and customers.

This shift only became apparent in 1991 when Fannie announced that its longtime chief executive David Maxwell, who had brought the company back from the brink of bankruptcy, was retiring with a lump-sum retirement package of $27 million. There was a firestorm of protest until Maxwell — who was much more "old school" and had planned to give most of it away — agreed to a reduced package. But from that point on, Fannie — along with its mortgage twin Freddie Mac and student loan financier Sallie Mae — seemed to drop all inhibitions about doing well by doing good. Together, they led the way in turning Washington into a minor-league financial center, with many of the Wall Street trappings.

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A similar transition took place along K Street, where Washington law began to feel like L.A. law and New York law as out-of-town firms set up offices. To prevent poaching of their top lawyers, venerable local firms gave up the tradition of pay parity among partners in favor of a compensation system better characterized as "eat-what-you-kill." The ratio of partners to associates nearly doubled. And entire groups of lawyers in hot practice areas, grumpy about having to "carry" the rest of the firm, began jumping to competitors, taking their clients with them.

Suddenly, the top partners in the top Washington firms weren't just living out comfortable lives in Cleveland Park and Chevy Chase — they were rich, earning two or three times what they would have in the old days. They were also working harder and under more pressure and, by their own admission, enjoying it less.

What distinguished Washington lawyering from lawyering elsewhere was its link with government service. Generations of Washington lawyers came to firms after clerking for a judge or working at the Justice Department, a regulatory agency or a congressional committee. Their competitive advantage was that they understood the system and knew the people inside of it. To maintain that advantage, firms encouraged even their most senior lawyers to provide free advice to top policy makers or to return to government service whenever opportunities arose.

The logic behind this "revolving door" was that it was as beneficial to the government as it was to the lawyers. The government could deal with agents for private interests who were knowledgeable and sophisticated; while the lawyers could charge a premium for their wisdom and relationships. Lawyers like Tommy Corcoran, Clark Clifford, Lloyd Cutler and Bob Strauss epitomized this practice.

But in post-Watergate Washington, this traditional influence game has evolved into something less benign and more lucrative. There is noticeably less of an emphasis on the public service aspect of it and a lot more emphasis on the cashing in.

This evolution was best described a few years ago in an eye-opening book, "So Damn Much Money," that chronicled the rise of lobbyist Gerald S.J. Cassidy, a former aide to Sen. George McGovern and Democratic Party lawyer who pioneered the business of winning "earmarked" appropriations for universities and other clients. The book's author was none other than my aforementioned Post colleague, Bob Kaiser.

Cassidy's influence peddling was qualitatively different than that of the Washington "wise men" of the earlier era, much more tied up in the process of raising campaign money for politicians than helping them run the country. For Kaiser, Cassidy's success, along with his wealth, was a powerful metaphor for how Washington had been changed and corrupted by money.

Cassidy "had no particular stature in the community, no great reputation to trade on," wrote Kaiser, contrasting him with Clark Clifford, a former secretary of defense who was an informal adviser to Democratic presidents from Truman through Carter. "Clifford worked hard to preserve his standing as a wise elder statesman, one presidents turned to in moments of crisis. Cassidy had no such pretensions. He used his ingenuity and his uncanny ability to exploit the ingenuity of others to get rich."

But the reality was that by the time Cassidy was reaching his prime, even Clifford had succumbed to the lure of money, using his political influence to allow a corrupt foreign bank, BCCI, to secretly take control of Washington's largest bank, where he served as chairman. Revelations that he earned millions from speculating in the bank's stock, using money borrowed from BCCI, permanently tarnished his reputation.

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Around the corner from my old place in Wesley Heights was a house owned by Paul Connolly, partner in the fabled Washington law firm of Williams & Connolly. His widow eventually sold the house to Robert Kettler, a second-generation real estate developer who proceeded to spend the next year in an expansive and lavish renovation that included a private squash court in the basement.

Unfortunately for Kettler, it wasn't long before the real estate market crashed and his bankers forced him to sell it to pay off his business debts. The buyer was a wealthy Republican congressman from California, Michael Huffington, and his glamorous wife, Arianna; more renovations ensued. By 1997, however, Huffington had lost his $28 million bid for a California Senate seat and had divorced Arianna. So the Huffington's left Washington and sold the property to Ron and Beth Dozoretz, wealthy Democratic fundraisers with close ties to the Clintons. Another round of renovations.

The transformation of the old Connolly place has always seemed to me a metaphor for how money has changed Washington. All this new wealth, along with the influx of all those new people, have had the effect of bidding up the price of that comfortable lifestyle that many Washington professionals once enjoyed. With so many more people now competing for the houses in those desirable neighborhoods, the places at the those private schools, the club memberships and the good seats at sporting events, the cost of these status goods is now two or three times what it used to be. For many, they are out of reach.

But if Washingtonians are making and spending more, they are also giving more of it away. Compared to the days when the Cafritz and Meyer foundations were the only games in town, the number of family foundations has exploded with many of the city's new millionaires committing serious time, talent and money to charities, schools and cultural organization. Terry Golden, the former head of the Federal City Council, says the recent explosion in local philanthropy reminds him — in a good way — of the philanthropic effort he witnessed in Dallas during the energy and real estate boom of the 1970s.

One of the most generous has been David Rubenstein, a founder of the Carlyle Group, who has donated lavishly to institutions ranging from the Kennedy Center to the repair of the Washington Monument as part of his pledge to give most of his billions away. As Rubenstein sees it, Washington's traditional skepticism toward money and wealth has given way to a attitude of grudging acceptance.

"Nobody — not even my mother — tells me they respect me for helping to build a successful company and creating a lot of wealth," said Rubenstein, who came to Washington as a young lawyer in the mid-'70s to work in the Senate and later in the Carter White House. "But people come up all the time and tell me they respect me for giving it away."

Washington always thought of itself as the place to change the world. But over the past 30 years, what's been more remarkable has been how the world has changed Washington, no more so than in the way Washingtonians think about money and wealth.

bc-pearlstein (TPN)