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“As Treasury secretary under Clinton, Rubin was the driving force behind two monstrous deregulatory actions that would be primary causes of last year’s financial crisis: the repeal of the Glass-Steagall Act.. and the deregulation of the derivatives market.” Matt Taibbi in Obama’s Big Sellout It may be time to look once again at what Larry Summers and his Rubinomics gang did in Russia in the mid-1990s and to Third World countries during his tenure as World Bank economist to see what kind of future is being planned for the U.S. economy over the next few years. Throughout the Soviet Union the neoliberal model established “equilibrium” in a way that involved demographic collapse: shortening life spans, lower birth rates, alcoholism and drug abuse, psychological depression, suicides, bad health, unemployment and homelessness for the elderly (the neoliberal mode of Social Security reform). Michael Hudson |
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| Robert Rubin, having been one of the single most destructive
forces over the last two decades (Greenspan gets more heat because
he was more visible, but Rubin has long had enormous sway) continues
to have influence, not simply through his large network of well
placed protégés (Larry Summers and Timothy Geithner as the most
visible examples), but his ability to command attention Marshall Auerback |
Rubin was the central figure in the counterrevolutionary plot of getting rid of New Deal regulation, establishing the dominance of financial sector as well as the economic rape of Russia and other former Soviet block countries (the gang known as Harvard Mafia included Summers, Andrei Shleifer and several other figures in Clinton administration. ). To say that he is a white collar criminal means probably to underestimate its importance ;-). He is/was as close to financial Mafiosi as one can get. In the same line as Hodorkovski, Gusinski and other Russian robber barons.
During Clinton administration he served essentially as Sandy Weill lobbyist and promoted extremely dangerous and reckless proposition that regulating the financial sector is counterproductive and unnecessary. That helped him to land a dream job in Citibank after his tenure in Clinton administration (revolving doors, you know). Well, basically after they made their reform led by Clinton and Bob Rubin, instead of coherent system of regulation you had like four-color linguini in a bowl. It's all mixed up together.
While Reagan initiated the switch of power balance in favor of the FIRE sector, creating condition for FIRE dominated economy and debt-induced growth, it was Clinton and Rubin who made FIRE dominance irreversible. Rubin also was the man who helped to convert Goldman Sachs into giant hedge fund and proprietary trading desk.The U.S. government is now Citigroup’s largest single shareholder. The firm is currently on its third CEO (and some regulators are pressing for yet another change at the top); it has gone through almost a half dozen CFOs, numerous management changes during its sordid history, and endless regulatory turmoil.
Throughout the good times and bad, there’s been one constant—Bob Rubin. And consider the following: Citigroup was technically illegal when it was founded by Sandy Weill and John Reed back in 1998 because it combined both commercial and investment banking, but with the help of Rubin as Treasury secretary, the law that would have prevented the supermarket model from working—The Glass-Steagall Act— was dismantled. Citigroup survived, and Rubin was rewarded with his dream job: Lots of money and little if any management responsibility.
Some relevant episodes taken from Rubin's career:
1979 Arb desk losses on oil: Head Rubin "Remaining detached was often no mean feat. For one thing, Rubin, as part of his job, was sometimes gambling with a third of his partners' retirement money. In 1979, for example, he took a number of arbitrage positions that depended on the expectation that inflation and oil prices would continue high. When oil prices and inflation dropped, many of his investments plunged. "We had one month in which we lost more money than the firm made in any prior year," he remembers. "But most people had internalized this sort of thing and the senior management, particularly, was very good about saying, Look we understand once in a while things like this will happen. It doesn't mean people weren't nervous because they were -- hell, I was nervous." From the NY Times, see also Big Deal: Mergers and Acquisitions in the Digital Age, by Bruce Wasserstein, page 574.
1986 fixed income division losses on interest rates: Co-head Rubin "had learned his lessons in risk from the financial markets. In 1986, as losses at the fixed income division of Goldman Sachs mounted to $100 million, Rubin discovered that there are implicit interest rate options embedded in many fixed income products. If the rates drop then homeowners would refinance their mortgage at lower rates and corporations would exercise their call provisions to refinance their bond debt." Risklatte see also Fischer Black and the revolutionary idea of finance, by Perry Mehrling
1992 losses on Mexican bonds before Rubin joined the Clinton Administration in 1993: "From 1992 to 1994, [Goldman] had purchased $5.2 billion of Mexican bonds on behalf of its clients or its own portfolio, one-fifth of the total. These were the very bonds that Rubin's bailout was to salvage." From Blood Bankers, by James Henry, page 296.
2002 Citi bad loans to Brazil and Enron: "American banks have about $25.6 billion in outstanding loans to Brazilian borrowers. Citigroup, the biggest lender to Brazil, has $9.7 billion in Brazilian loans." That's right. Forty percent of the U.S. bank exposure in Brazil is the fault of America's biggest and dumbest bank. And who is the resident financial wizard at Citigroup? "Robert H. Rubin, who was treasury secretary under President Clinton and engineered international rescue packages for Mexico, Russia and many Asian countries, is now a Citigroup director." From The American CauseA common unifying thread is the repetitive, spaced out by 5-10 years on average, spectacular blow up, the result of the bursting of yet another bubble of his own creation, for which not only would Bob not get punished, but would either frame, or be the beneficiary of, policies that would provide a generous backstop, and would subsequently progress to ever loftier positions of responsibility, both private and public.
Is this the same theme now seen with now only the five core TBTF firms, but mostly with Goldman Sachs? Is it surprising that moral hazard has now enveloped the very fabric of finance, after one of its core progenitors has been pacing the halls of both Goldman (and now nationalized Citi) and numerous administrations over the past 40 years?
An unregulated financial sector proved to be exceptionally dangerous to the economy. With no progress in enforcing regulations that diminish those risks, we might see some large failures in the future with subsequent bailouts fueling another round of consolidation among TBTF firms.
Rubin influence extended to the Obama administration where his allies
call the shots.
As Matt Taibbi noted in
Obama's_Big_Sellout
‘While Rubin’s allies and acolytes got all the important jobs in the Obama administration, the academics and progressives got banished to semi-meaningless, even comical roles. Kornbluh was rewarded for being the chief policy architect of Obama’s meteoric rise by being outfitted with a pith helmet and booted across the ocean to Paris, where she now serves as America’s never-again-to-be-seen-on-TV ambassador to the Organization for Economic Cooperation and Development. Goolsbee, meanwhile, was appointed as staff director of the President’s Economic Recovery Advisory Board, a kind of dumping ground for Wall Street critics who had assisted Obama during the campaign; one top Democrat calls the panel “Siberia.”Joining Goolsbee as chairman of the PERAB gulag is former Fed chief Paul Volcker, who back in March 2008 helped candidate Obama write a speech declaring that the deregulatory efforts of the Eighties and Nineties had “excused and even embraced an ethic of greed, corner-cutting, insider dealing, things that have always threatened the long-term stability of our economic system.” That speech met with rapturous applause, but the commission Obama gave Volcker to manage is so toothless that it didn’t even meet for the first time until last May.’
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Apr 12, 2017 | economistsview.typepad.com
http://cepr.net/blogs/beat-the-press/robert-rubin-who-made-a-fortune-on-the-housing-bubble-argues-for-preserving-wall-street-s-power-over-the-fedApril 12, 2017
Robert Rubin, Who Made a Fortune on the Housing Bubble, Argues for Preserving Wall Street's Power Over the Fed
The Federal Reserve Board has more direct control over the economy than any other institution in the country. When it decides to raise interest rates to slow the economy, it can ensure that millions of workers don't get jobs and prevent tens of millions more from getting the bargaining power they need to gain wage increases. For this reason, it is very important who is making the calls on interest rates and who they are listening to.
Robert Rubin, who served as Treasury secretary in the Clinton administration, weighed in * today in the New York Times to argue for the status quo. There are a few important background points on Rubin that are worth mentioning before getting into the substance.
First. Robert Rubin was a main architect of the high dollar policy that led to the explosion of the trade deficit in the last decade. This led to the loss of millions of manufacturing jobs and decimating communities across the Midwest. Second, Rubin was a major advocate of financial deregulation during his years in the Clinton administration. Finally, Rubin was a direct beneficiary of deregulation, since he left the administration to take a top job at Citigroup. He made over $100 million in this position before he resigned in the financial crisis when bad loans had essentially put Citigroup into bankruptcy. (It was saved by government bailouts.)
Rubin touts the current apolitical nature of the Fed. He warns about:
"Efforts to denigrate the integrity of the Fed's work, and to inject groundless opinion, politics and ideology, must be rejected by the board - and that means governors and other members of the Federal Open Market Committee must be willing to withstand aggressive attacks."
It is important to recognize that the Fed is currently dominated by people with close ties to the financial industry. The Fed Open Market Committee (FOMC) which determines interest rate policy has 19 members. While 7 are governors appointed by the president and approved by Congress (only 4 of the governor seats are currently filled), 12 are presidents of the district banks. These bank presidents are appointed through a process dominated by the banks in the district. (Only 5 of the 12 presidents have a vote at any one time, but all 12 participate in discussions.)
It seems bizarre to describe this process as apolitical or imply there is great integrity here. Rubin's claim is particularly ironic in light of the fact that one of the bank presidents was just forced to resign ** after admitting to leaking confidential information on interest rate policy to a financial analyst.
There is good reason for the public to be unhappy about the Fed's excessive concern over inflation *** over the last four decades and inadequate attention to unemployment. This arguably reflects the interests of the financial industry, which often stands to lose from higher inflation and have little interest in the level of employment. It is understandable that someone who has made his fortune in the financial industry would want to protect the status quo with the Fed, but there is little reason for the rest of us to take him seriously.
* https://www.nytimes.com/2017/04/12/opinion/dont-politicize-the-federal-reserve.html
** https://www.nytimes.com/2017/04/04/business/lacker-leak-fed.html
*** http://cepr.net/documents/Getting-Back-to-Full-Employment_20131118.pdf
-- Dean Baker
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Jan 11, 2017 | economistsview.typepad.com
Peter K. : January 10, 2017 at 06:55 AM , 2017 at 06:55 AMhttp://economistsview.typepad.com/timduy/2011/01/what-is-rubins-legacy.htmlPeter K. -> Peter K.... , January 10, 2017 at 06:59 AMMonday, January 03, 2011
What Is Rubin's Legacy?
by Tim Duy
As the candidates for the next NEC chair narrow, a debate has erupted regarding the suitability of candidates either too directly related to former US Treasury Secretary Robert Rubin or Wall Street. Mark Thoma came out first:
I still think a break from the Wall Street connected side of the Clinton administration would have political value.
Brad DeLong subsequently declared his support for Gene Sperling. Next up was Felix Salmon, who, like Thoma, notes that the three leading candidates, Gene Sperling, Roger Altman, and Richard Levin, are all "multi-millionaires with close ties to Wall Street." He singles out Sperling for a particularly harsh criticism, first questioning the nature of Sperling's ties to Wall Street:
...there's Sperling, who in some ways is the worst of the three when it comes to grubbing money from Wall Street.
Salmon relies on Ezra Klein to paint a picture of Sperling as a low-class influence peddler, and then extends his attack to Sperling's competence:
Noam Scheiber does his best to defend Sperling, but is far from persuasive-the general picture he paints is of a man whose heart might be in the right place but who never seems to get anything done. The last time he was at the NEC he sat quietly by while Treasury pushed through various deregulatory measures; within the Obama administration his main claim to fame seems to be the bank tax, which never actually got enacted.
Finally, he echo's Thoma's concerns:
More generally, Sperling has done nothing to counter the general impression that he's one of many Rubinites in the administration, in the context of a political atmosphere where one of the few points of agreement between the right and left is that the departure of Summers can and should be taken as an opportunity to finally put as much distance between Obama and Rubin as possible.
This elicits a response from DeLong, who defines himself as a long-time Rubinite and launches into a spirited defense of Rubin:
Robert Rubin went to work for the Clinton Administration in 1993 with four goals: (1) to make the decision-making process work smoothly; (2) to match the tax revenues of the federal government to its spending commitments; (3) to make the tax and transfer system more progressive so that people like him paid more and America's working class paid less; and (4) to make the financial system work more smoothly and transparently and so diminish the rents earned because of market position and institutional connections by people like him.
(1), (2), and (3) were big successes. (4) was a failure--the belief that financial deregulation would diminish Wall Street payouts because organizations like Goldman Sachs would face new competition from deep-pocket commercial banks--turned out to be wrong. Why it was wrong I do not understand. But it was a failure. However, it was not a catastrophic failure--it was not the repeal of Glass-Steagall that caused our current downturn, but rather other and different regulatory failures long after Rubin had left office...
DeLong does acknowledge that Citigroup shareholders have a legitimate gripe, and so do the American people:
I think that if you are an American or a citizen of the world you have a beef with Rubin for believing--as I did--in the "Greenspanist" doctrine that the Federal Reserve had the tools to put a firewall between finance and employment and should thus regard bubbles principally with benign neglect.
What I find curious is that DeLong neglects to mention what I believe was a central element of the Rubin agenda, and an element that was in fact the most disastrous in the long run - the strong Dollar policy.
The strong Dollar policy takes shape in 1995. At that point, Rubin made it clear that the rest of the world was free to manipulate the value of the US Dollar to pursue their own mercantilist interests. This should have been more obvious at the time given that China was last named a currency manipulator in 1994, but the immensity of that decision was lost as the tech boom engulfed America.
Moreover, Rubin adds insult to injury in the Asian Financial Crisis, by using the IMF as a club to enact far reaching reforms on nations seeking aid. The lesson learned - never, ever run a current account deficit. Accumulating massive reserves is the absolute only way to guarantee you can always tell the nice men from the IMF and the US Treasury to get off your front porch.
In effect, Rubin encourages the US to unilaterally enact a new Plaza Accord on itself. Michael Pettis reminds us of what the Plaza Accord meant for Japan:
Not only did Tokyo wait way too long to begin the rebalancing process, but when the rest of the world (i.e. the US) refused to absorb its huge and expanding trade surplus and forced up the value of the yen, Tokyo made things worse – it counteracted the impact of the rising yen by expanding investment, expanding credit, and lowering interest rates. This accelerated Japan's structural imbalances, set off a further frenzied rise in asset prices and capacity, and worsened the eventual adjustment. This also seems to have happened after China began revaluing the RMB after July 2005.
This sounds like an eerily similar story. To counteract the impact of the rising trade deficit, US policymakers increasingly relied on asset bubbles to support domestic demand. It goes beyond benign neglect, which assumes you know acknowledge you have a bubble. US policymakers didn't even see the train wreck ahead. They simply enjoyed the fruits of the bubble thinking it reflected sound economic policy. Back to 2005:
Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.
U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.
At least Japan had the excuse that they were forced into the Plaza Accord, perhaps justifiably given their expanding current account surplus of the time. Rubin has no such excuse - the strong dollar policy was entirely a self inflicted wound that goes far beyond simple "benign neglect" of bubbles. To be sure, Yves Smith argues in Econned that Asian central banks were threatening to sell Dollar assets, but adds that the main motivation was supporting Japan. Most importantly, Rubin entirely missed how Chinese policymakers would take advantage of America's newfound love for an artificially strong currency.
But did he really miss it? Wall Street was making money hand over foot intermediating the current account deficit, which raises the question that many of us still have: Was Rubin working for the American people or Wall Street? As far as I can tell, the greatest coup of the last two decades was how easily Wall Street managed to secure the support of Democrats, knowing of course they always had the support of Republicans.
And what has been the ultimate achievement then of the Rubin era? A lost decade for jobs and industrial production and a massively unbalanced global economy. The promised compensating job surge in other sectors has so far been absent. Ultimately, didn't Rubin simply lay the foundation for today's economy that is decried by DeLong?:
From here it does look like a two-tier, profit-driven recovery--no parking places within a quarter mile of Tiffanys and long lines at Williams and Sonoma and Sur la Table, with people buying $12 cans of almond paste, while some of my daughter's high school classmates are now being told they cannot afford to go to college next year.
And by the way, it is not clear that we did China any favors either by the strong Dollar policy, as they are now faced with a massive internal rebalancing act - there is no guarantee anymore that China is the future, nor that China will escape the fate of Japan.
I agree with DeLong that being associated with the Wall Street, the Clinton Administration in general and Rubin in particular should not alone disqualify one from serving in the Obama Administration. But we shouldn't give Rubin a free pass either. The strong dollar policy reinforced and entrenched massive and disruptive distortions to patterns of global consumption and production. Unwinding those disruptions is proving to be very costly. The long-term impact of the strong Dollar policy needs to be counted among Rubin's legacies.
Staring down the barrel of a Trump presidency, how prophetic were Duy's words. Rubin helped give us Trump.JohnH -> Peter K.... , January 10, 2017 at 08:20 AMBut for some reason certain progressive neoliberals want us to forget this. Wonder why.
Plus ca change, plus c'est la meme chose. The Wall Street banking cartel controls the Fed, Treasury, and the NEC...but it's only bad, according to 'liberal' economists when a Republican appoints these guys...Obama got shielded from criticism.John San Vant -> JohnH... , January 10, 2017 at 11:48 AMlol,wall street banking cartel has controlled everything from the 19th century commodity money to BW to the modern dollar standard every since Andrew Jackson gave them the power in the 1830's in the US. Of course New York replaced London in the 1930's.John San Vant -> Peter K.... , January 10, 2017 at 11:49 AMThe the Trump Presidency ends with recession, what then when another Obama type takes office in 2021?
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Oct 06, 2016 | economistsview.typepad.com
Tom aka Rusty: Thursday, October 06, 2016 at 03:52 AM
The financial crisis commission recommended that Chuck Prince and Robert Rubin be prosecuted, which of course did not happen.Tom aka Rusty -> reason ... , Thursday, October 06, 2016 at 05:24 AM... ... ...
Crime does pay.
Globalism is all about big finance, don't you get it? The peasants are useful political tools.RC AKA Darryl, Ron -> Tom aka Rusty... , -1"Globalism is all about big finance..."DrDick -> Tom aka Rusty... , -1[A lot of people do not get that which in inherent in the financialization of non-financial firms meme, the basis for all of the charms of modern corporatism; outsourcing, merging, downsizing, and offshoring along with the complementary low wages and layoffs. The issue with public education has always been that fools make more useful tools.]
However, no one on the actual "left" is a fan of finance or anyone actively involved in it. To my knowledge, Rubin is universally loathed on the left and loved on the right and by centrists (who are the people you are actually speaking of).
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Oct 06, 2016 | economistsview.typepad.com
Tom aka Rusty -> Peter K.... Thursday, October 06, 2016 at 06:33 AM , Thursday, October 06, 2016 at 06:33 AM
In December 2008 The Wall Street Journal did a vicious smack down of Rubin, who received $115M in compensation from Citi over eight years but claimed he had "no line responsibilities."likbez -> Peter K.... October 06, 2016 at 09:07 AM , October 06, 2016 at 09:07 AMRubin encouraged Citi to increase risk but when the bubble popped he blamed the people below him.
Whatever you call him, he was not only incompetent but he was a rat.
Peter,Rubin is a neoliberal. He can't be center-left (even if we assume that modern US center-left means moderate republicans; some people even claim that Hillary is center-left ;-) and he can't be anti globalization.
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Oct 06, 2016 | economistsview.typepad.com
anne : October 06, 2016 at 05:42 AM , October 06, 2016 at 05:42 AM
http://cepr.net/blogs/beat-the-press/robert-rubin-the-man-who-gave-us-bubble-driven-growth-shares-his-wisdom-in-the-wapoRC AKA Darryl, Ron : , Thursday, October 06, 2016 at 04:16 AMOctober 5, 2016
Robert Rubin, the Man Who Gave Us Bubble Driven Growth, Shares His Wisdom in the WaPo
The Washington Post gave a column * to Robert Rubin, the man best known for setting the U.S. economy on a path of bubble-driven growth in the late 1990s, the opportunity to share his wisdom on the economy. Unsurprisingly, Rubin proposes to cut Social Security and Medicare, as he has in times past. Of course Rubin is not likely to need these programs since he earned over $100 million in his stint at Citigroup in the housing bubble years. The Financial Crisis Inquiry Commission recommended that the Justice Department investigate Rubin's conduct at Citigroup during this period but for some reason it seems the Justice Department did not follow through.
-- Dean Baker
RE: Here's how America should play its winning hand for long-run economic growthPeter K. -> RC AKA Darryl, Ron... , Thursday, October 06, 2016 at 06:16 AM[Robert Rubin tells us how it should be done. There is no small irony in that.]
...For too long, we have been caught in a vicious cycle: Failure to achieve inclusive growth has undermined the public trust and Congress's commitment to governing that, in turn, is necessary to achieve inclusive growth. If we act on the policies that promote inclusive growth, we could restore support for governance and initiate a virtuous cycle, spurring further constructive policy...
[Could that public trust thingy have to do with the aftermath of decades of financial deregulation and offshoring of jobs? Bob wants us to increase public investment and reduce the public debt of course.]
"Failure to achieve inclusive growth has undermined the public trust"JohnH -> RC AKA Darryl, Ron... , Thursday, October 06, 2016 at 07:58 AMThey have achieved nice profits for the overclass.
But Bob is right. (I recommend Benjamin Friedman's book The Moral Consequences of Economic Growth. Prosperity leads to tolerance and an open society. Stagnation leads to Brexit and Trump or worse.)
Too bad Bob's policies (dump Bill Clinton spending bill, strong dollar, bubble-fueled growth, corporate free trade, deregulation, deficit reduction) lead to popping bubbles which create a stagnating economy if not booming profits for the one percent.
Yes, inclusive growth is a huge problem, largely ignored until now. It was just too easy to pander to the predatory class with investor friendly trade agreements and trickle down monetary policy.
https://www.washingtonpost.com/local/social-issues/white-working-class-men-increasingly-falling-behind-as-college-becomes-the-norm/2016/10/05/95610130-8a51-11e6-875e-2c1bfe943b66_story.htmlNow the predatory class claims to be aghast at what its policies have enabled--Trump. But are Trumps policies really the problem...or is the problem that doesn't use the reassuring, coded language that the predatory class has carefully crafted to cover its exploitation?
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April 17, 2014 | NYTimes.comSimon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz professor of entrepreneurship at the M.I.T. Sloan School of Management and co-author of "White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You."
The global financial crisis that broke out following the collapse of Lehman Brothers in September 2008 was a big shock. This is literally true in terms of the impact on investors and market prices; a wide range of financial variables moved rapidly in unexpected and worrying directions. But what happened was also a shock to the realm of ideas about finance.
Before September 2008 - or at least before 2007, when some of the underlying problems first became more clearly manifest - the prevailing consensus among officials and specialists was that financial innovation was a good thing. In isolated instances, a particular new product might not work out as planned, as happens, for example, with medical innovation. But over all, the consensus went, financial innovation led by the private sector was making the system safer and more efficient.This view was wrong.
In its day, this line of thinking justified the legal and regulatory changes that allowed some banks to become very large and to build up a much more complex range of activities in the 1990s and early 2000s, including through various kinds of opaque derivatives transactions.
In retrospect, much of the financial innovation in the previous decades built up risk for the financial system in ways that were not properly understood by regulators or, arguably, by management at some of the largest banks.
Of course, some bankers knew exactly what they were doing as their companies increased their debt relative to their equity. On average, large complex global banks had about 2 percent equity and 98 percent debt on the liability side of the balance sheet before the crisis, meaning they were leveraged 50:1 (the ratio of total assets to equity).
The good news is that the official consensus was shattered in 2008, and is not coming back. Systemic risk slapped everyone in the face with an undeniable wake-up call.
However, the process of reforming the financial system is still at an early stage. The Dodd-Frank financial reforms of 2010 represent a useful start - including the Volcker Rule's restrictions on excessive risk-taking - and the recently adopted Basel III framework for capital regulation nudges equity requirements higher.
But the world's largest banks will, by one informed estimate, end up - as things currently stand - with about 3 percent equity and 97 percent debt as the average structure of their balance sheet liabilities. In the United States, if the latest leverage rule is implemented and enforced properly, this will become 5 percent equity and 95 percent debt for the biggest eight banks by 2018. While 20:1 is better than 50:1, this is still not enough equity to assure a reasonable degree of financial stability in the foreseeable future.
The argument about finance has now shifted and is much more about whether capital requirements for the largest banks should be increased further. Those opposed to such a move offer three reasons why big banks should not be required to fund themselves with much more equity.
First, some people contend that the crisis of 2008 was a rare accident and Dodd-Frank fixed whatever problems existed. This is completely unconvincing - particularly because many of the same people have spent much of the last four years opposing and delaying financial reform.
Most importantly, it ignores the ways in which incentives and rules have changed since the 1980s. As James Kwak and I asserted in "13 Bankers," the structure of the financial system is quite different now from what it was in 1980. In particular, the largest banks have become much bigger and more able to take on (and mismanage) much more risk.
The second argument is that the costs of the crisis were not huge, so there is no reason to fear a repeat. This is the view sometimes associated with former Treasury Secretary Timothy Geithner. (Mr. Geithner has a book coming out soon, and it will be interesting to see his current position on this point).
But the impact of any financial crisis is not measured primarily in terms of whether the Treasury made or lost money on specific investments. The criteria instead should be what happened to output and jobs, as well as what the impact was on the country's fiscal accounts. How much more public debt do we have now relative to what we had before - and what kind of lasting negative effects will that have?
Mr. Kwak and I took this on in "White House Burning," putting the recent surge in public debt in the longer-run context of American fiscal policy. No matter how you look at it, the financial crisis was a complete disaster for the real economy and, given the way fiscal politics work in the modern United States, for the budget and for investments in any kind of physical infrastructure and education.
The third counterargument is that large complex financial institutions are needed because they provide some sort of magic for the broader economy. This still seems to be the view of some people at the Federal Reserve Bank of New York, which recently published a set of research papers on the topic.
But the benefits they find are small relative to the potential costs. Anat Admati and Martin Hellwig's "The Bankers' New Clothes" makes the vulnerability of modern banking abundantly clear.
A recent report from the International Monetary Fund finds that the United States and other governments are providing large implicit subsidies to these big banks: The prospect of potential government support lowers their funding costs by about 100 basis points (one percentage point).
Many people are involved in the official sector's rethinking of finance. This is the lasting contribution from books such as Sheila Bair's "Bull by the Horns," Neil Barofsky's "Bailout" and Jeff Connaughton's "The Payoff." In government circles, key decision makers were swayed by officials including Thomas Hoenig and Jeremiah Norton (both of the Federal Deposit Insurance Corporation) and Sarah Bloom Raskin (then on the Board of Governors of the Federal Reserve System; now at the Treasury Department). As chairman of the Commodity Futures Trading Commission, Gary Gensler had an immensely positive impact, both directly on the regulation of derivatives and also more broadly.
The Democratic senators Sherrod Brown of Ohio, Jeff Merkley of Oregon and Carl Levin of Michigan and Ted Kaufman of Delaware (who has since left the Senate), along with David Vitter, Republican of Louisiana, played key roles in shifting opinion. Elizabeth Warren's work, both before and after her election to the Senate from Massachusetts, has also had great influence.
Of all the civil society organizations seeking to promote financial stability, Dennis Kelleher's Better Markets stands out for its major impact through a relentless surge of arguments, comment letters and research. Its report on the cost of the crisis made clear beyond any reasonable doubt that the crisis had profound negative consequences for millions of people.
Many other officials have also shifted their views in important ways. We are not going back to the old ways of thinking about finance, and allowing for changes in these theories is an essential part of any modern economy. Finance needs to be regulated effectively, and large banks should fund themselves with much more equity than is currently the case.
Selected Skeptical Comments
toom, germany 19 June 2014
The basic question is whether financial trickery and juggling can produce wealth? Certainly these tricks produce wealth for the bankers on Wall St. But how about the rest of us?
The answer is "maybe, sometimes". The pension funds profited from 1980 to 2007 and then again after 2010, with help from the Fed. However the wealth increase from 1980 to 2000 was mainly from the export of manufacturing jobs from the US to China. That will never occur again.
So we are stuck with 1% return on investment, unless trickery or some new invention (a new kind of cell phone, or more broadband or alternate energy?) occurs.
jack waymire, sacramento, ca 22 April 2014
Sure 20:1 leverage on balance sheets is better than 50:1 leverage, but the intellectuals are missing the point. Who wins when banks are excessively leveraged? Shareholders? Clients? The U.S. economy? I submit the primary beneficiaries are the executives who run the banks. They make decisions with impunity. Increased leverage increases profits which increase executive bonuses. Shareholders may benefit if company stocks rise in value. Highly leveraged balance sheets create a huge risk for all Americans - except the executives who made the decisions to leverage the balance sheets and get into businesses they barely understand.
Justin, Ohio 18 April 2014
You nail it perfectly. But we need to ask broader question: Is American Dream a myth?
It seems to me American Dream is clearly a form of both myth and illusion and propaganda used by the upper classes to keep the lower classes or the 99% in their place.I'm shocked!, America 17 April 2014
"The second argument is that the costs of the crisis were not huge, so there is no reason to fear a repeat."
Let's find the person who said that and feed him to the tens of millions of unemployed people.
Jeff Atkinson, Gainesville, GA 17 April 2014
It's pretty simple. TBTF bank managers want to be regulated and paid like hedge fund managers but with a huge edge in the form of implied government assurances for their suppliers of capital. Such assurance can be purchased cheaply with political contributions and post government jobs for regulators.
Robert Baesemann, Los Angeles CA 17 April 2014
Bravo. I was prepared to read a rehash of the Collected Scientific Papers of Jamie Dimon," but this piece is very informative and helpful. The most critical issue on my horizon is the stability of the financial system. What I ask is whether or not the system is as stable as it was in 1998, or is it still teetering the way it was in 2007. In 2008, we observed the failure of Lehman, the rescue of several others (Merrill merged into BofA), and the failure and rescue of two money market funds that failed to make the buck. This seems to have been a global run on the banks which was cut off, but narrowly cut off. If there is a next time, the 2008 experience will only cause the fingers on the triggers to be quicker than they were in 2008. This seems to mean that we are not far removed from the lethally dangerous circumstances of 2008.
Thank you for pointing out the need for better financial regulation. As I recall, under Glass-Steagall commercial banking and investment banking were separate (no Merrill-BofA unions) and commercial bank reserve requirements were set by the FED at 20% to 25% or 4 to 1 or 5 to 1. In those days, commercial banks could not make profits like investment banks, but they could not drage the entire world into Depression. Investment banks were left to deal with people silly enough to gamble on Wall Street rather than Las Vegas. Oh for those halcyon days.
Murray Kenney, Ross, CA 17 April 2014
More equity = less lending. Less lending = less capital, particularly for small and medium sized businesses and for consumers with weak credit histories. Less capital for small and medium sized businesses and moderate income consumers = less economic growth.
That's why European Governments have resisted higher capital levels. They'd rather backstop their banks and treat bank debt as an off balance sheet liability of their governments than acknowledge the problem created by slow economic growth, excess supply, weak demand and low interest rates.
Michael F. Rhodes, Vancouver, Canada 17 April 2014
That is bunk. Financial alchemy has been tried in history (4th century Rome, post-war Germany and Basel risk weights). They don't work. Value creation, not finance creation, drives durable economics. Stop the apologetics. Tell people to work harder.
Manuel Morales, San Juan, Puerto Rico 17 April 2014
Financial illusions may be stronger than they may have ever been.
Professor Johnson writes that the financial crisis was a complete disaster to the real economy. Dennis Kelleher estimates a $12.8 trillion debacle in that same real economy with a negative impact that will be felt for years, if not decades, to come.
The doyens and shamans of 'high finance' have only received timid penalties for the global destruction they triggered while companies in the tangible economy, causing much less damage, are oftentimes chastised much more strongly and receive relatively far stricter punishments.
Regrettably the all-inclusive list of wizards of Wall Street are doing fine, are much alive and vigorously kicking while working compulsively to find 'innovative' and ingenious maneuvers to outfox regulations while moving higher on the 1% list.
The distressed state of affairs caused by the Great Recession may prove not to be the Main Event. Only time will tell.
Bob Feinberg, DC area 18 April 2014
At a recent event in Washington, Mr. Kelleher drastically raised his estimate of the embedded cost of the ongoing crisis due to overvaluation of swap positions of the TBTF banks. No one seems to know what this exposure is, and the prevailing view is that this is minimal because the positions net out.
The people who say this are the same ones who minimized the practices that gave rise to the 2008 episode of the ongoing, permanent crisis. The positions don't necessarily net out unless they are opposing sides of the same trade.
To estimate this exposure at several times the GDP of the US is probably conservative, but no one seems to know. Meanwhile the efforts of the so-called regulators are directed at preventing a so-called "default event" that would require these losses to be recognized.
BB, Orlando 17 April 2014
An excellent article. I completely agree that "Finance needs to regulated effectively and large banks should fund themselves with more equity." However, this is not going to happen until there are major political changes in the United States. The country is not a democracy, but a plutocracy. Wealthy people have benefited immensely by the status quo whereas the middle and lower classes have been devastated. This is because the government and the supreme court are controlled by big business. All elected government officials get in office with big business funding and they will act accordingly. The supreme court has exacerbated this situation by ruling that there should be no limits on campaign contributions. Campaign contributions need to be severely limited so educated, capable people from the middle and lower classes have an equal chance to play a significant role in government. How about a physicist as president(eg Ms Merkel)!.
Only a wealthy person such as Timothy Geithner would have the opinion that the costs of the financial crisis were not huge. He would feel differently if he was standing in the unemployment lines. The current plutocracy wants big profits which mean shipping jobs overseas, lower wages and more unemployment.
Dryly 41, 17 April 2014
Every thing that Professor Johnson says is spot on. Indeed, he is the only major economics professor that has identifies the source of the September 15, 2008 collapse of our financial system for the first time since October of 1929.
He is also the only one who has pointed out that Dodd-Frank didn't fix the problems created by the reversion to the Laissez Faire of Harding, Coolidge, Hoover and Mellon from the "strict supervision" of FDR.
We will once again return to "strict supervision" of finance. The only question is whether we do it before or after the next financial collapse. A wise and prudent nation would do it before but there is insufficient wisdom and prudence at this unfortunate time in American history.
Bob Feinberg, DC area 18 April 2014
Prof. Admati is another relentless leader of this debate. While the calls for stricter regulation of banks have grown louder, the opposition by the industry has hardened, and industry executives and lawyers are still running policy. This industry is, in effect, regulated by its own lawyers. To have meaningful regulation of this dangerous industry would required Transparency, Independence, and Accountability, all of which have been lacking throughout the decades of the ongoing, permanent crisis, and they still are.
Ms B, Buffalo 17 April 2014
Back in the 80's a local savings bank went "big time" around here with fancy deals in Florida and Texas. The deals were put together with the bank as lender with a piece of the ownership/equity as well. They bankers thought it was the cats meow, the cutting edge of sophisticated banking. The deals all tanked and the bank went down. Same nonsense now with different players and an even better means of obfuscation and rent seeking. Today, unfortunately the banksters are above the law and burning town the country has no consequences.
Larry L. Dallas, TX 18 April 2014
Here's a fact about the Oil Boom and the S&L Mess that happened in its midst that few people know:
EVERY SINGLE STATE BANK IN THE STATE OF TEXAS WENT UNDER IN THE AFTERMATH.
The 2008 Crisis was that smaller crisis writ large on the national and global scale. The fact that two idiots from Texas (Armey and Gramm) had a hand in the elimination of the Depression-era financial regulations that eventually led to 2008 just show that idiots are not capable of learning from prior experience.
Mark T, is a trusted commenter New York NY 17 April 2014
This sounds like a valedictory and indeed I hope it is the last post on this topic on which so much has been said (and repeated, and repeated).
One official unwisely unmentioned is Daniel Tarullo who is at the forefront of the push for greater macroprudential regulation. Among authors who should have been mentioned are Viral Acharya who has published a lot on systemic risk, Raghuram Rajan's Fault Lines is essential to understand the role of debt in the political economy of the post-gold-standard Western economies; and no analysis of the crisis is worthy of mention unless it faces up to the role that bank capital regulations played in shaping the portfolios of banks, which one can explore in Friedman's Engineering the Financial Crisis.
The post manages to discuss the financial crisis without once even alluding to the role of the GSE's and their politically driven acquisition of credit risk despite being overleveraged, through use of the implied government guarantee. Nor does it touch on the foreign role in the chase for yield, the connection between the trade deficit and the issuance of debt securities to countries with trade surpluses, or the mismatch between pension promises and pension funding that is one of the major sources of the growth of financial risk over the past two generations. Everything gets laid at the feet of 13 bankers. Unbelievable, yet so convenient, since it allows a whole sector of the elite to ignore the consequences of their policy preferences.
Larry L, Dallas, TX 17 April 2014
The problem with your argument is that same people who wanted to eliminate the Depression-era regulations were also the same people who wanted free trade which offshored a significant of the country's job base (and therefore its tax base and consumer spending capacity).
The result was higher federal deficits (which led to 5-fold increase in the national debt within a generation), higher gov't spending on transfer payments to make up for that lost personal income, a higher trade deficit from all of the imports and the reduced domestic expenditures on everything from education, R&D and infrastructure as a % of GDP.
The very same people who gave us the Financial Crisis were also responsible for the vicious cycle in the real economy.
E.T. Bass, SLC 18 April 2014
More to the point:
A bubble burst. "Bi-partisan" efforts at "home ownership" blew up, due to very highly questionable home mortgages. Which caused Lehman and Govt. Motors to blow up.
Outcome: second worst economic disaster in 100 years.
Today -- the most anti-small business president in history (per N.F.I.B.) who publicly snarls at the U.S. House and the slowest economic recovery in 100 years.
Res ipsa. Entirely predictable.
Steve, Raznick 17 April 2014
To be very clear, very precise, the banks were completely incapable of anything approaching accuracy when it came to the risks they took. Enough with this myth that these are unbelievably intelligent people who having attended a school with name people recognize inculcates them with special powers of divination.
We have 5 financial lobbyists for every congressmen. Just one illustration of how the game is tilted. Those lobbyists do not care about the financial security and welfare of the people. They care only about themselves and thwarting passage of any legislation which creates a sustainable, viable finance industry.
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rjs:
Janet Tavakoli :
"Someone like [Robert] Rubin is able to wreak destruction, collect an ungodly profit, then go along his merry way, pontificating about how 'markets have an inherent and inevitable tendency -- probably rooted in human nature -- to go to excess, both on the upside and the downside.'
This from the man who, as Bill Clinton's Treasury secretary, was vociferous in opposing the regulation of derivatives -- a key factor in the current economic crisis -- and who lobbied the Treasury during the Bush years to prevent the downgrading of the credit rating of Enron -- a debtor of Citigroup."
Voters must demand that Congress uncovers and publicizes facts and prosecutes the financial system's massive multi-year frauds. This will mean thousands of felony prosecutions, enforcement actions, and civil actions.
http://www.huffingtonpost.com/janet-tavakoli/how-to-thwart-the-assassi_b_682538.html
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"August 11, 2010 | http://www.thenation.com/
The corruptions of journalism were on full display when CNN's Fareed Zakaria turned to Robert Rubin this past Sunday for advice on how to fix the financial crisis that he, as much as anyone, caused. I was trapped on a treadmill in front of an overhead television and unable to turn the thing off in time to avoid this assault on my mental and physical health.
As a result I was forced to hear Rubin, Bill Clinton's treasury secretary, insist that he always favored regulating toxic derivatives and is therefore not at all responsible for the ensuing economic meltdown. He was responding to the sole critical question from the CNN host, who quoted a question by New York Times columnist Paul Krugman: "Did all the senior members of the [Obama] economics team have to be protégés of Robert Rubin, the apostle of financial deregulation?" Unfortunately, Zakaria just rolled over when his guest simply lied in response:
"First of all, I am not the apostle of financial deregulation. Quite the contrary. On derivatives…I developed a deep concern about the systemic problem that was created. When I was back at Goldman Sachs, it was a concern I had…a concern I had when I was in government. And in fact, when I wrote my book in 2003, I was so concerned about it that I actually included that discussion in there."
Zakaria ended the show recommending it as his book of the week: "He wrote a great memoir that covered his two distinguished careers, both…on Wall Street and in Washington.… It was written with Jacob Weisberg, a great writer, the editor of Slate, and the two men weave a compelling tale that has many lessons for today."
To be charitable, I will assume that Zakaria has not actually read that book, which omits any discussion of the radical deregulation legislation that Rubin ushered through Congress and got the president to sign. Bill Clinton is on record stating that he got bad advice from Rubin and his handpicked successor, Lawrence Summers, on derivatives regulation: "On derivatives, yeah, I think they were wrong and I think I was wrong to take it," Clinton told ABC News last April 10.
Rubin and Summers were responsible for forcing Brooksley Born out of the Clinton administration because as chair of the Commodity Futures Trading Commission she had the temerity to suggest regulating the mortgage-backed securities that eventually proved to be so toxic. Instead, Rubin and Summers pushed the Commodity Futures Modernization Act, which Clinton signed into law in his last month in office, categorically exempting those suspect derivatives from any government regulation.
By then, Rubin had moved on to a $15-million-a-year job at Citigroup, which became a prime exploiter of the subprime housing market. As a result of its massive involvement with toxic securities, Citigroup, with Rubin in a leading role until early 2009, had to be bailed out by the federal government with a $45 billion direct investment and a guaranteed Fed protection for $306 billion in potentially toxic assets.
Citigroup, a merger of the old Citibank and Travelers insurance company, was made legal only by the Financial Services Modernization Act, which Rubin backed while treasury secretary. Then, in one of the most egregious conflicts of interest in US history, he went to work for the new bank, which took advantage of the changes in the law to buy up the infamous subprime lenders, beginning with Associates First Capital. The Economist magazine wrote of that purchase that "it extends Citi's already huge credit card operation to a lucrative new niche (price insensitive, if default prone, borrowers)" and questioned whether investors would see Citi's bold new venture "as something smart, such as 'evolved credit extension,' or something seamy such as loan-sharking."
Rubin was a major proponent of the firm's seamy expansion into the mortgages that proved to be toxic, and by 2007 Citigroup was the second-largest subprime servicer, after the only slightly more infamous Countrywide. As the New York Times pointed out on November 22, 2008, after a decade of flattering portraits of the man, finally acknowledging Rubin's role in Citi's disgrace: "The bank's downfall was years in the making and involved many in its hierarchy, particularly [CEO Charles O.] Prince and Robert E. Rubin, an influential director and senior adviser."
There is much more, and I haven't even touched on Rubin's shameful role in Enron's shenanigans. Enough said, though, to question not only Zakaria's journalism but, far more important, Barack Obama's leadership in first turning to Rubin as a key campaign adviser and then putting his disciples in charge of the U.S. economy.
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February 9, 2010 | Desperado's Outpost
Senator Maria Cantwell (D-WA) is one the lone voices in Washington D.C. calling for meaningful financial reform, and calling out the White House for its lack of leadership on that issue:
"To hear Sen. Maria Cantwell talk, another economic bubble is building as Wall Street banks - backed by taxpayer bailouts - continue to play the high-risk derivatives markets rather than extend credit to struggling businesses on Main Street.
Cantwell says that Congress and the Obama administration are just watching it happen. The Washington state Democrat is among the most outspoken members of the Senate when it comes to calling for tough new regulations to rein in Wall Street."
Not just "watching it happen," Sen. Cantwell. There are no innocent bystanders among the president and his team of economic advisers–enablers and co-conspirators are more accurate terms. More on that later. Back to Sen. Cantwell:
"She's not looking to pick a fight with the White House, the Federal Reserve or powerful congressional committee chairmen. She was, however, one of 30 senators to vote against the confirmation of Ben Bernanke to a second term as Fed chairman; she temporarily blocked the appointment of the White House nominee to head the Commodity Futures Trading Commission; and she's been highly critical of Treasury Secretary Timothy Geithner and Larry Summers, the top White House economic adviser."
Geithner and Summers–see enablers and co-conspirators. But to see the whole picture in focus, it takes a few steps backwards get the proper perspective.
In 1985, following Ronald Reagan's landslide defeat of Walter Mondale in '84, the Democratic Leadership Council (DLC) was formed with the aim of moving the Democratic party away from its "liberal" leanings toward a more "centrist" (read corporate-friendly) position. Bill Clinton chaired the DLC from 1990-1991 before running for, and being elected, president in 1992 as a so-called "New Democrat."
President Clinton's director of the newly-created National Economic Council from 1993 to 1995, and his Treasury Secretary from 1995-1999, was Robert Rubin, who spent 26 years at Goldman Sachs prior to joining the Clinton administration.
Matt Taibbi in Obama's Big Sellout:
"As Treasury secretary under Clinton, Rubin was the driving force behind two monstrous deregulatory actions that would be primary causes of last year's financial crisis: the repeal of the Glass-Steagall Act.. and the deregulation of the derivatives market."
Fast forward to April 2006 and the founding of a DLC offshoot, The Alexander Hamilton Project, whose first director was….Robert Rubin. Back to Taibbi:
"There are four main ways to be connected to Bob Rubin: through Goldman Sachs, the Clinton administration, Citigroup and, finally, the Hamilton Project, a think tank Rubin spearheaded under the auspices of the Brookings Institute to promote his philosophy of balanced budgets, free trade and financial deregulation."
At the founding meeting of the Hamilton Project, one of the featured speakers, and the only United States senator in attendance, was the junior senator from the state of Illinois, Barack Obama."
Now take a look at President Obama's economic team:
"At Treasury, there is Geithner, who worked under Rubin in the Clinton years. Serving as Geithner's "counselor" - a made-up post not subject to Senate confirmation - is Lewis Alexander, the former chief economist of Citigroup, who advised Citi back in 2007 that the upcoming housing crash was nothing to worry about. Two other top Geithner "counselors" - Gene Sperling and Lael Brainard - worked under Rubin at the National Economic Council, the key group that coordinates all economic policymaking for the White House.
As director of the NEC, meanwhile, Obama installed economic czar Larry Summers, who had served as Rubin's protégé at Treasury. Just below Summers is Jason Furman, who worked for Rubin in the Clinton White House and was one of the first directors of Rubin's Hamilton Project.
And as head of the powerful Office of Management and Budget, Obama named Peter Orszag, who served as the first director of Rubin's Hamilton Project."
…to serve alongside Furman at the NEC [Obama hired] management consultant Diana Farrell, who worked under Rubin at Goldman Sachs. In 2003, Farrell was the author of an infamous paper in which she argued that sending American jobs overseas might be "as beneficial to the U.S. as to the destination country, probably more so."
…Over at the Commodity Futures Trading Commission, which is supposed to regulate derivatives trading, Obama appointed Gary Gensler, a former Goldman banker who worked under Rubin in the Clinton White House. Gensler had been instrumental in helping to pass the infamous Commodity Futures Modernization Act of 2000, which prevented regulation of derivative instruments like CDOs and credit-default swaps that played such a big role in cratering the economy last year.
Now, considering that tangled web, do you think we're going to get lip service or meaningful, substantive reform of Wall Street? My money says lots of talk, very little, if any, action.
Possibly related posts: (automatically generated)
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AlterNet /
Wall Street's captains of industry and top policymakers in Washingt by playing for both teams.
The financial crisis has unveiled a new set of public villains-corrupt corporate capitalists who leveraged their connections in government for their own personal profit. During the Clinton and Bush administrations, many of these schemers were worshiped as geniuses, heroes or icons of American progress. But today we know these opportunists for what they are: Deregulatory hacks hellbent on making a profit at any cost. Without further ado, here are the 10 most corrupt capitalists in the U.S. economy.
1. Robert Rubin
Where to start with a man like Robert Rubin? A Goldman Sachs chairman who wormed his way into the Treasury Secretary post under President Bill Clinton, Rubin presided over one of the most radical deregulatory eras in the history of finance. Rubin's influence within the Democratic Party marked the final stage in the Democrats' transformation from the concerned citizens who fought Wall Street and won during the 1930s to a coalition of Republican-lite financial elites.
Rubin's most stunning deregulatory accomplishment in office was also his greatest act of corruption. Rubin helped repeal Glass-Steagall, the Depression-era law that banned economically essential banks from gambling with taxpayer money in the securities markets. In 1998, Citibank inked a merger with the Travelers Insurance group. The deal was illegal under Glass-Steagall, but with Rubin's help, the law was repealed in 1999, and the Citi-Travelers merger approved, creating too-big-to-fail behemoth Citigroup.
That same year, Rubin left the government to work for Citi, where he made $120 million as the company piled up risk after crazy risk. In 2008, the company collapsed spectacularly, necessitating a $45 billion direct government bailout, and hundreds of billions more in other government guarantees. Rubin is now attempting to rebuild his disgraced public image by warning about the dangers of government spending and Social Security. Bob, if you're worried about the deficit, the problem isn't old people trying to get by, it's corrupt bankers running amok.
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March 8, 2010 | The Huffington Post
As Treasury Secretary, Robert Rubin put in place all the pieces that set up the economy for the disaster that we are now living through. He pushed legislation that weakened regulation of the financial sector; he cheered on a stock bubble that eventually grew to $10 trillion and he established an over-valued dollar as a matter of official policy.
He then left to take a top job at Citigroup where he was able to enjoy the fruits of his labor. He earned well over $100 million in the decade after he left the Clinton administration. In the fall of 2008, when Citigroup was saved from bankruptcy with a taxpayer bailout, Rubin quietly slipped out the back door (with his money), resigning from his position at Citigroup.
It may not seem just that someone like Rubin would be allowed to live out his life in luxury after the policies that he promoted and personally profited from led to so much suffering for so many people. But that is the way things work in the United States these days. However, what is even more infuriating is that he doesn't seem to have any intention of going away. He is still pontificating on the economy and desperately trying to rewrite history to exonerate himself.In a recent public talk, Rubin told his audience that "virtually nobody" saw the financial meltdown. Therefore, he excused himself for missing it along with everyone else. While it may be true that the top people in policy circles and among the Wall Street crew with whom Rubin associates really are clueless about the economy, it was in fact very easy for a competent economist to see the crisis coming.
House prices diverged from a 100-year long trend in the mid-90s, just as the stock bubble began to pick up steam. By 2002, nationwide house prices had risen by more than 30 percent after adjusting for inflation. This followed a 100-year period in which they had just kept even with the overall rate of inflation.
There was no plausible explanation for this run-up in house prices based on the fundamentals of either the demand or supply side of the housing market. Income and population growth were relatively slow by historical standards. In addition, we were building homes at a near record pace, so there clearly were no major obstacles on the supply side. Furthermore, there was no remotely comparable increase in rents, so there was no evidence of an undersupply of housing; a fact that was also borne out by the record vacancy rate of this era.
So, it should have been clear to Robert Rubin and every other economic analyst that the housing market was in a bubble. When I first began writing about the bubble in 2002, it had already created more than $2 trillion in housing-bubble wealth. By its peak in 2006, the bubble had grown to more than $8 trillion. Could anyone believe that $8 trillion in housing wealth could disappear without serious consequences for the economy? This was the most predictable disaster imaginable. There was no excuse for the people in policy positions having missed it.
This is why it is infuriating to see Rubin still running around with his stories about "virtually nobody." The response is that anyone who had a clue could not miss the housing bubble and they should have done everything in their power to try to deflate it before it reached ever more dangerous proportions. Rubin did the opposite -- he put in place bubble friendly policies as Treasury secretary, then profited enormously from these policies after his return to Wall Street.
Reading Rubin's comments, it is hard not to think of George Wallace. The former governor of Alabama made his name on the national stage as an ardent supporter of segregation, famously blocking the schoolhouse in front of young black children trying to attend a previously segregated school.
Later in his life, Wallace had a change of heart and regretted his earlier actions. He went around to commemorations of major events in the civil rights era and begged for forgiveness. Wallace's presence at these events was no doubt painful for many of those who had to confront the brutality of the racist system in which Wallace had played such a key role. He could have served the world much better with more private expressions of contrition.
Having inflicted enormous damage on tens of millions of families who have lost their jobs, their homes and/or their life's savings, it would be nice if Rubin could have the decency to fade from the public scene. At least Wallace had the integrity to acknowledge that he had been wrong.
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February 27, 2010 | naked capitalism
Bloomberg reports that former Treasury Secretary and Citigroup board member Robert Rubin will be summoned before the Financial Crisis Inquiry Commission in April, with Alan Greenspan and Chuck Prince likely to be tapped as well.
On the one hand, it's a welcome sign that the FCIC will be interviewing many of the major figures responsible for the crisis. On the other, the Q&A format is almost certain to prove mighty unsatisfying. Although Angelides has been more effective a questioner than expected, none of the committee members is a litigator (as in practiced in dealing with witnesses in public forums) and it shows. Imagine what these hearings would be like if David Boies, who was devastatingly effective in the Microsoft antitrust trial, had a go at the likes of Bob Rubin, who bears far more responsibility for the crisis than most realize.
Greenspan, while a key actor, is unlikely to provide new information. He has been grilled repeatedly over his record; he has defended it verbally and in print; he therefore has already been subjected to every major line of attack and has practiced responses. Prince never seemed up to the task of managing Citi; a year into his tenure, he was having difficulty asserting control over the sprawling bank.
But Rubin was either the architect or the moving force behind so many of the flawed policies and practices that fed the crisis that it is difficult to come up with a complete list. For starters, he was an advocate of a finance-centric view of the economy and ultimately of US interests (notice how often trade negotiations have made opening financial markets a priority item. It's due to the near certainty that American firms would easily secure a significant share. Just look at the inroads they made in the UK and Europe). He was a persistent advocate of a strong dollar policy (and he meant it; his stance represented a 180 degree change from earlier Clinton Administration efforts to weaken the dollar to put pressure on Japan). One of the reasons is that prolonged currency weakness was believed to be unfavorable to the standing of financial centers.
Rubin also pioneered covert banking bailouts. US financial firms were heavily exposed to the 1994 peso crisis. Congress rejected a rescue package for Mexico. Rubin then raided the Exchange Stablilzation Fund, a large kitty created in the Depression and under Treasury's control, to do exactly what Congress had nixed, which was help the banks (a motive not openly discussed) by assisting Mexico.
Surprising as it amy seem, Rubin also bears considerable responsibility for global imbalances. In the 1997 Asian crisis, Japan wanted to lead a rescue effort within Asia, relying primarily on Asean. Rubin and his protege Larry Summers beat that back aggressively and insisted the IMF lead the rescue efforts (which by the way, all called for greater opening of capital markets, when hot money inflows had been the proximate cause of the Thai and Indonesian booms and busts). And the overly aggressive, inappropriate measures imposed on Thailand, Indonesia, and South Korea left a strong impression on all countries in the region: never never get in the position where you might need help from the IMF. That led them all to peg their currencies low in order to build up large foreign exchange reserves. If you look at charts showing the level of private debt to GDP in the US, the increase goes parabolic starting roughly in 1999.
Rubin was also famously the leader of the successful fight against Brooksley Born's efforts to regulate credit default swaps.
Yet Rubin somehow has the aura of being untouchable. From Bloomberg:
Rubin, 71, has been perceived as "bullet-proof" because his Citigroup job was "framed as if he was only there to give advice," said Charles Geisst, author of "Wall Street: A History" and a finance professor at Manhattan College in Riverdale, New York. "Unless they've actually got some stuff where he advised on some surreptitious deal that went bad or his advice was purposely misleading, they're going to have a very difficult time with him."
Yves here. Ahem, the problem isn't that there probably isn't dirty laundry, it's that Rubin normally limits his interventions to those at a similarly lofty level who will therefore never rat him out. And no one will go in and demand a data/e-mail dump. Rubin did call Treasury to try to get it to intercede to avoid a downgrade of Enron, and the press for the most part politely ignored this hot potato. Similarly, Rubin repeatedly pushed Citi management to take MORE risk in the credit markets. So even the little we can see of Rubin's record at Citi is far from clean.
Mind you, I am not suggesting he did anything criminal, and that it the problem with the standard that the FCIC and SIGTARP seem to be using. Reader Andrew Dittmer describes why "Were crimes committed?" is the wrong question to be asking:
A substantial fraction of financial services industry activity over the last couple of decades has been directed toward "financial innovation" in the sense of Martin Mayer: "finding legal
ways to do things that used to be illegal under the old rules." The periodic blowups have been dealt with by producing a scapegoat whose misbehavior was so blatant that it could be punished under the criminal code. The result is actually to support a framework in which enormous rewards are granted to people
who devote their lives toward freeing corporate organizations from the pain of democratic supervision. I don't think any compromise is possible on this point – if Congress resolves the tension through symbolically punishing a couple of egregious offenders, that would signify a step backwards on the road towards a non-predatory financial system.The only way to get out of this trap is to focus attention on what it means to maintain a sector that is addicted to finding ways to turn the rules that bind it into dead letter, and to supplying this skill to others as a paid service.
Yves here. In other words, we need to come up with standards of what should be unacceptable behavior. Rather than focusing on what was legal, which gives an industry that devised overly lax rules an easy out, we need to identify what products and practices were destructive. If they happened to be legal, that is prima facie evidence that we need new rules.
jake chase:
As to Rubin only being at Citi to provide "advice", we don't know what if anything Bob did as Chairman of Citigroup, but we know what he got paid for doing whatever it was he did assuming he did something, or at least we pretty much know.
According to the Company's year 2000 proxy statement, Bob owned as of February 28, 2000 a maximum of 38,310 Citigroup shares; whether he bought them or received them as a corporate signing bonus is not stated, but as we shall see it hardly matters. Those shares had a closing value on the New York Stock Exchange of $49.00 per share on that date. On February 28, 2007, seven years later by my calendar, he owned beneficially a total of 5,290,334 Citigroup shares, which had a closing value on that date of $50.37, representing a total of $266,474,123.
During the first eight of the nine calendar years he spent as Citigroup Chairman, Bob received $7,183,333 in salary, $68,081,994 in bonus, $1,739,193 in other annual compensation, $41,217,863 in restricted stock awards (that is money, not stock, although the amount of money is calculated somehow on the basis of stock values, just how is interesting but not important), 5,404,170 shares underlying stock options (that isn't money, now, don't start adding all these numbers up), and $338,403 in all other compensation (although what he could have needed that for I have no idea). No doubt Bob also accrued some retirement money too, but I haven't bothered about that or his social security benefits either. I don't know what if anything Bob got paid in 2007. Citigroup doesn't tell us in its 2008 Proxy Statement and I expect the rules say it doesn't have to because he didn't get enough to qualify as one of the highest paid celebrities whose compensation had to be disclosed.
I have no idea how many Citigroup shares Bob may have sold during his internship as Citigroup Chairman. A person could find this out of course by digging through the Form 4s all of which are available electronically on the SEC Edgar platform which is where I found the data being retailed here. I am hardly one to suggest that during the years 2000 to 2007 Bob sold any of his Citigroup shares, but of course he could have which would change the picture in any number of ways about which I would not care to speculate.
Incidentally, during the Rubin reign at Citigroup, the company's shares fell to roughly $3.00, which gives him a nearly unmatched record for corporate futility. I don't remember reading about his giving any of that Citigroup money back, but I suppose he could have donated a few million shares to charity or relieved himself of them through an equity swap.
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I should not be surprised to see that Robert Rubin, having been one of the single most destructive forces over the last two decades (Greenspan gets more heat because he was more visible, but Rubin has long had enormous sway) continues to have influence, not simply through his large network of well placed proteges (Larry Summers and Timothy Geithner as the most visible examples), but his ability to command attention (an article by him in Newsweek as the latest example).
Marshall Auerback, an investment manager and strategist and longstanding Rubin watcher/critic, below takes on the latest bit of Rubin self congratulation masquerading as wisdom (cross posted from Ed Harrison's blog). Marshall has tastefully omitted some of his spurious arguments to focus on the central flaw of the piece, but let me give you one example:
The question of which economic model works best was recently subjected to rigorous analysis by a task force called the Commission on Growth and Development, established by the World Bank and other sponsors in April 2006….While the specifics differed from country to country, the commission concluded that these highly successful economies shared a set of common characteristics: sustained movement toward market-based economics; governments that effectively provided sound fiscal and monetary policy, substantial public investment, and increasing integration with the global economy; high savings and investment rates; political stability and the rule of law; and considerable focus on widening the distribution of income. The commission also found that no economy anywhere in the world had been successful with largely state-directed activities and high walls against global integration.
Yves here. First, China is on the list. So is Japan. China liberalized its markets, but retained substantial state direction. Anyone attempt to indicate otherwise is a gross distortion. Ditto Japan. I'd need to read the report, but this smacks of a hugely biased reading of the data. Both countries pursued openly mercantialist policies, with substantial barriers against imports, which raises serious questions about the practical meaning of "global integration." When the Plaza Accord nearly doubled the price of the yen in dollar terms, Japanese imports of US goods barely budget. Japan was found to have "structural" barriers, a combination of consumer attitudes but also very cleverly designed trade impediments (trust me, the Japanese are masters of this, I can bore you with details). And China has has a substantially undervalued currency for the last, what, at least six years? An undervalued currency is tantamount to a massive export subsidy. To suggest these countries are operating with a neoliberal, largely open market model is utter bunk.
Now to Auerback:
As we all know, during his tenure as Treasury Secretary, Robert Rubin laid the groundwork for today's crisis through his aggressive championing of financial deregulation. Had he at least acknowledged some remorse or recognition of error, he would be more appropriately suited for an advisory role on how to fix the global economy, much as a reformed criminal often has useful insights on penal. No such luck here. This neo-liberal zealot reiterates the usual self-serving nonsense how 'NOBODY' could have possibly foreseen the magnitude of the problem. Being one of the worst Treasury Secretary's of the 20th century was clearly not enough.
Post the Clinton Administration, Rubin was a senior advisor of Citigroup after he quit the Treasury. He left just before its near collapse amidst criticism of his performance. In 2001, he got hold of Peter Fisher in the US Treasury Department to try to put pressure on the bond-rating agencies to avoid downgrading Enron's debt which was a debtor of Citigroup.
In January 2009, he was named by MarketWatch as one of the "10 most unethical people in business".
Letting him publicly expound on getting the global economy back on track is akin to providing Kim Il Jong-il a public platform on human rights. Unlike Greenspan, who at least has had the decency to admit mistakes, Rubin still expects to be taken seriously as a policy maker. This is truly disgusting considering the millions of Americans who are without work now and heading south into poverty, not to mention the millions of workers around the world that have lost their jobs and savings and more largely thanks to the policies championed by this misguided deficit warrior.
And the article clearly establishes that the man is a deficit terrorist who understands nothing about reserve accounting and bonds. This is a classic illustration of the idiocy:
The United States faces projected 10-year federal budget deficits that seriously threaten its bond market, exchange rate, economy, and the economic future of every American worker and family. Those risks are exacerbated by the context of those deficits: a low household-savings rate, even after recent increases; large funding requirements for federal debt maturities every year; heavy overweighting of dollar-denominated assets in foreign portfolios; worsened fiscal prospects in the decades after the current 10-year budget period; and competing claims for capital to fund deficits in other countries.
Bonds don't "fund" anything and certainly don't create competition for "funding requirements" on the basis of a silly "crowding out" theory.
Here Rubin assumes that government deficits increase the claim on saving and reduce the "loanable funds" available for investors. Does the competition for saving push up the interest rates?
Yves here. The "loanable funds" theory was discredited back in the thirties, which is why Auerback slips in the reference. Back to him:
No, for two reasons: First, budget deficits build productive infrastructure which exerts a positive influence on economic growth.
Second, budget deficits typically help stimulate investment because they keep aggregate demand from plummeting.
Bond sales do play an important role in managing aggregate bank reserves and in the administration of overnight interbank interest rates, but Rubin clearly does not understand this, despite years on Wall Street. When government spends, recipients of Treasury checks deposit them into banks, which adds reserves to the banking system. In effect, government spending actually lowers interest rates.
By contrast, budget surpluses are not even remotely like private saving. They actually destroy liquidity in the non-government sector (by destroying net financial assets held by that sector). They squeeze the capacity of the non-government sector to spend and save. If there are no other behavioural changes in the economy to accompany the pursuit of budget surpluses, then the private sector is forced to increase its private debt levels to sustain demand and then when this option is exhausted, aggregate demand falls and consequently wipes out non-government saving.
Pro-active fiscal policy will allow the private sector to have healthier finances by providing spending stimulus over time to generate income growth (and private saving) when it is targeted toward creating full employment, not bank bailouts. Bad fiscal policy, by contrast, simply reflects a collapse in private spending and correspondingly lower tax revenues, and the concomitant failure of governments to act so as to prevent increased social welfare payments (such as unemployment insurance or food stamps) from coming into play as a result of this declining economic activity.
It is clear that if resources are fully utilised then choices have to be made on appropriate use. These choices will be political in nature. That is the only constraint which exists. Rubin clearly doesn't understand this, so he is in no way suited to offer any kind of advice (other than how to blow up an economy via reckless banking practices).
These people are never shamed by their actions. Fortunately, society was spared their advice for several months – but now they are back, akin to the bad aftertaste of greasy pizza that one belches out after a particularly gruesome serving. I'm just waiting for the day when Bernie Madoff will be writing an article for Newsweek, expounding on how we can improve financial regulation.
Also see my related post at New Deal 2.0 "Deficit Hawking: A New Year Opens with the Same Bad Old Ideas."
Ivan:
Mr Rubin titled his book on the Clinton years "In an uncertain world." In such a world, all he did was to introduce even more uncertainty.
K Ackermann:
The Commission on Growth and Development's conclusions were stuffed down its collective throat. It's the same conclusions that caused the IMF and the other cabals to ransack and loot whatever they can in the name of the free market.
Don't let the state provide malaria medicine… make them get it through the free market. If they can't afford it, then the problem solves itself, doesn't it? That's been the attitude of maestros like Rubin for a long time. I call them phone whisperers. They speak softly into a phone, and people die, and they smile.
Of course they are never shamed by their actions. They have a whole different concept of what it means to be a human being.
Francois T:
The so-called deficit hawks never have a problem spending for military, national security and business tax cuts.
Yet, when it comes to spending on any social priorities, they become apoplectic.
This is the only clue needed to dismiss these people as shills, brown-nosers for the powerful and wealthy and enemies of the people.
They love America, yet, hate Americans.
Who needs these intellectual criminals anyway?
Hugh:
Newsweek is, of course, owned by the Washington Post parent company. It revamped its format not too long ago to get out of the news digest/summary business. It essentially conceded that market to the web. Similarly, the WaPo is outsourcing its own news operations and has closed its non-Washington bureaus. The feature sharing deal with Pete Peterson is just part of this. This is all just a way of saying that the Post company really doesn't do or want to do news anymore (of course it still does commit the random act of journalism but these are increasingly rare and aberrational). The Post is a Village rag where Beltway gossip replaces news. Newsweek is just a platform for lengthier pieces for the Conventional Wisdom (CW).
That's why a destructive quack like Rubin will show up in it. Rubin still visits and advises the White House. Unlike Marshall, I think it is beside the point whether Rubin actually believes the tripe he is peddling (I really don't think he does). That really isn't the purpose of the exercise. Rubin validates a view that allows for the ongoing corporate looting of government. In the eyes of Jon Meacham, Newsweek, and the Village that confers legitimacy on him. In other words, the Newsweek interview is an example of economic hack meets media hack for the masturbatory delight of other Beltway hacks.
What the rest of us should take away from this is that Obama's economic policy is not naïve or mistaken but (as Rubin's ongoing participation in its formation, and the recognition of this by Newsweek) clear-eyed and deeply criminal in nature. Obama, Rubin, Summers, and Geithner are not trying to improve the situation of the country. They are trying to improve the situation of its corporations, and at our expense. This is not a subtle point. Team Obama is not trying its best but just wrong or out of its depth. They are pushing an agenda of state corporatism that is antithetical to the foundational values of our republic. There is no mistake, no misunderstanding. They mean it. They would not let a disgrace like Rubin within a hundred miles of the place if it were otherwise.
Glen:
Greenspan at least had the balls to admit he was wrong, but Rubin, Greenspan, Summers, et al have done more damage to their country than every terrorist attack combined. Listening to these guys for more advice is like inviting Osama Bin Laden to America to blow shit up.
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'Just look at the timeline of the Citigroup deal," says one leading Democratic consultant. "Just look at it. It's fucking amazing. Amazing! And nobody said a thing about it."
Barack Obama was still just the president-elect when it happened, but the revolting and inexcusable $306 billion bailout that Citigroup received was the first major act of his presidency. In order to grasp the full horror of what took place, however, one needs to go back a few weeks before the actual bailout - to November 5th, 2008, the day after Obama's election.
That was the day the jubilant Obama campaign announced its transition team. Though many of the names were familiar - former Bill Clinton chief of staff John Podesta, long-time Obama confidante Valerie Jarrett - the list was most notable for who was not on it, especially on the economic side. Austan Goolsbee, a University of Chicago economist who had served as one of Obama's chief advisers during the campaign, didn't make the cut. Neither did Karen Kornbluh, who had served as Obama's policy director and was instrumental in crafting the Democratic Party's platform. Both had emphasized populist themes during the campaign: Kornbluh was known for pushing Democrats to focus on the plight of the poor and middle class, while Goolsbee was an aggressive critic of Wall Street, declaring that AIG executives should receive "a Nobel Prize - for evil."
But come November 5th, both were banished from Obama's inner circle - and replaced with a group of Wall Street bankers. Leading the search for the president's new economic team was his close friend and Harvard Law classmate Michael Froman, a high-ranking executive at Citigroup. During the campaign, Froman had emerged as one of Obama's biggest fundraisers, bundling $200,000 in contributions and introducing the candidate to a host of heavy hitters - chief among them his mentor Bob Rubin, the former co-chairman of Goldman Sachs who served as Treasury secretary under Bill Clinton. Froman had served as chief of staff to Rubin at Treasury, and had followed his boss when Rubin left the Clinton administration to serve as a senior counselor to Citigroup (a massive new financial conglomerate created by deregulatory moves pushed through by Rubin himself).
... ... ...
The irony of Bob Rubin: He's an unapologetic arch-capitalist demagogue whose very career is proof that a free-market meritocracy is a myth. Much like Alan Greenspan, a staggeringly incompetent economic forecaster who was worshipped by four decades of politicians because he once dated Barbara Walters, Rubin has been held in awe by the American political elite for nearly 20 years despite having fucked up virtually every project he ever got his hands on. He went from running Goldman Sachs (1990-1992) to the Clinton White House (1993-1999) to Citigroup (1999-2009), leaving behind a trail of historic gaffes that somehow boosted his stature every step of the way.As Treasury secretary under Clinton, Rubin was the driving force behind two monstrous deregulatory actions that would be primary causes of last year's financial crisis: the repeal of the Glass-Steagall Act (passed specifically to legalize the Citigroup megamerger) and the deregulation of the derivatives market. Having set that time bomb, Rubin left government to join Citi, which promptly expressed its gratitude by giving him $126 million in compensation over the next eight years (they don't call it bribery in this country when they give you the money post factum). After urging management to amp up its risky investments in toxic vehicles, a strategy that very nearly destroyed the company, Rubin blamed Citi's board for his screw-ups and complained that he had been underpaid to boot. "I bet there's not a single year where I couldn't have gone somewhere else and made more," he said.
Despite being perhaps more responsible for last year's crash than any other single living person - his colossally stupid decisions at both the highest levels of government and the management of a private financial superpower make him unique - Rubin was the man Barack Obama chose to build his White House around.
There are four main ways to be connected to Bob Rubin: through Goldman Sachs, the Clinton administration, Citigroup and, finally, the Hamilton Project, a think tank Rubin spearheaded under the auspices of the Brookings Institute to promote his philosophy of balanced budgets, free trade and financial deregulation. The team Obama put in place to run his economic policy after his inauguration was dominated by people who boasted connections to at least one of these four institutions - so much so that the White House now looks like a backstage party for an episode of Bob Rubin, This Is Your Life!
At Treasury, there is Geithner, who worked under Rubin in the Clinton years. Serving as Geithner's "counselor" - a made-up post not subject to Senate confirmation - is Lewis Alexander, the former chief economist of Citigroup, who advised Citi back in 2007 that the upcoming housing crash was nothing to worry about. Two other top Geithner "counselors" - Gene Sperling and Lael Brainard - worked under Rubin at the National Economic Council, the key group that coordinates all economic policymaking for the White House.
As director of the NEC, meanwhile, Obama installed economic czar Larry Summers, who had served as Rubin's protégé at Treasury. Just below Summers is Jason Furman, who worked for Rubin in the Clinton White House and was one of the first directors of Rubin's Hamilton Project. The appointment of Furman - a persistent advocate of free-trade agreements like NAFTA and the author of droolingly pro-globalization reports with titles like "Walmart: A Progressive Success Story" - provided one of the first clues that Obama had only been posturing when he promised crowds of struggling Midwesterners during the campaign that he would renegotiate NAFTA, which facilitated the flight of blue-collar jobs to other countries. "NAFTA's shortcomings were evident when signed, and we must now amend the agreement to fix them," Obama declared. A few months after hiring Furman to help shape its economic policy, however, the White House quietly quashed any talk of renegotiating the trade deal. "The president has said we will look at all of our options, but I think they can be addressed without having to reopen the agreement," U.S. Trade Representative Ronald Kirk told reporters in a little-publicized conference call last April.
The announcement was not so surprising, given who Obama hired to serve alongside Furman at the NEC: management consultant Diana Farrell, who worked under Rubin at Goldman Sachs. In 2003, Farrell was the author of an infamous paper in which she argued that sending American jobs overseas might be "as beneficial to the U.S. as to the destination country, probably more so."
Joining Summers, Furman and Farrell at the NEC is Froman, who by then had been formally appointed to a unique position: He is not only Obama's international finance adviser at the National Economic Council, he simultaneously serves as deputy national security adviser at the National Security Council. The twin posts give Froman a direct line to the president, putting him in a position to coordinate Obama's international economic policy during a crisis. He'll have help from David Lipton, another joint appointee to the economics and security councils who worked with Rubin at Treasury and Citigroup, and from Jacob Lew, a former Citi colleague of Rubin's whom Obama named as deputy director at the State Department to focus on international finance.
Over at the Commodity Futures Trading Commission, which is supposed to regulate derivatives trading, Obama appointed Gary Gensler, a former Goldman banker who worked under Rubin in the Clinton White House. Gensler had been instrumental in helping to pass the infamous Commodity Futures Modernization Act of 2000, which prevented deregulation of derivative instruments like CDOs and credit-default swaps that played such a big role in cratering the economy last year. And as head of the powerful Office of Management and Budget, Obama named Peter Orszag, who served as the first director of Rubin's Hamilton Project. Orszag once succinctly summed up the project's ideology as a sort of liberal spin on trickle-down Reaganomics: "Market competition and globalization generate significant economic benefits."
Taken together, the rash of appointments with ties to Bob Rubin may well represent the most sweeping influence by a single Wall Street insider in the history of government. "Rather than having a team of rivals, they've got a team of Rubins," says Steven Clemons, director of the American Strategy Program at the New America Foundation. "You see that in policy choices that have resuscitated - but not reformed - Wall Street."
While Rubin's allies and acolytes got all the important jobs in the Obama administration, the academics and progressives got banished to semi-meaningless, even comical roles. Kornbluh was rewarded for being the chief policy architect of Obama's meteoric rise by being outfitted with a pith helmet and booted across the ocean to Paris, where she now serves as America's never-again-to-be-seen-on-TV ambassador to the Organization for Economic Cooperation and Development. Goolsbee, meanwhile, was appointed as staff director of the President's Economic Recovery Advisory Board, a kind of dumping ground for Wall Street critics who had assisted Obama during the campaign; one top Democrat calls the panel "Siberia."Joining Goolsbee as chairman of the PERAB gulag is former Fed chief Paul Volcker, who back in March 2008 helped candidate Obama write a speech declaring that the deregulatory efforts of the Eighties and Nineties had "excused and even embraced an ethic of greed, corner-cutting, insider dealing, things that have always threatened the long-term stability of our economic system." That speech met with rapturous applause, but the commission Obama gave Volcker to manage is so toothless that it didn't even meet for the first time until last May. The lone progressive in the White House, economist Jared Bernstein, holds the impressive-sounding title of chief economist and national policy adviser - except that the man he is advising is Joe Biden, who seems more interested in foreign policy than financial reform.
The significance of all of these appointments isn't that the Wall Street types are now in a position to provide direct favors to their former employers. It's that, with one or two exceptions, they collectively offer a microcosm of what the Democratic Party has come to stand for in the 21st century. Virtually all of the Rubinites brought in to manage the economy under Obama share the same fundamental political philosophy carefully articulated for years by the Hamilton Project: Expand the safety net to protect the poor, but let Wall Street do whatever it wants. "Bob Rubin, these guys, they're classic limousine liberals," says David Sirota, a former Democratic strategist. "These are basically people who have made shitloads of money in the speculative economy, but they want to call themselves good Democrats because they're willing to give a little more to the poor. That's the model for this Democratic Party: Let the rich do their thing, but give a fraction more to everyone else."
Even the members of Obama's economic team who have spent most of their lives in public office have managed to make small fortunes on Wall Street. The president's economic czar, Larry Summers, was paid more than $5.2 million in 2008 alone as a managing director of the hedge fund D.E. Shaw, and pocketed an additional $2.7 million in speaking fees from a smorgasbord of future bailout recipients, including Goldman Sachs and Citigroup. At Treasury, Geithner's aide Gene Sperling earned a staggering $887,727 from Goldman Sachs last year for performing the punch-line-worthy service of "advice on charitable giving." Sperling's fellow Treasury appointee, Mark Patterson, received $637,492 as a full-time lobbyist for Goldman Sachs, and another top Geithner aide, Lee Sachs, made more than $3 million working for a New York hedge fund called Mariner Investment Group. The list goes on and on. Even Obama's chief of staff, Rahm Emanuel, who has been out of government for only 30 months of his adult life, managed to collect $18 million during his private-sector stint with a Wall Street firm called Wasserstein-Perella.
The point is that an economic team made up exclusively of callous millionaire-assholes has absolutely zero interest in reforming the gamed system that made them rich in the first place. "You can't expect these people to do anything other than protect Wall Street," says Rep. Cliff Stearns, a Republican from Florida. That thinking was clear from Obama's first address to Congress, when he stressed the importance of getting Americans to borrow like crazy again. "Credit is the lifeblood of the economy," he declared, pledging "the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money." A president elected on a platform of change was announcing, in so many words, that he planned to change nothing fundamental when it came to the economy. Rather than doing what FDR had done during the Great Depression and institute stringent new rules to curb financial abuses, Obama planned to institutionalize the policy, firmly established during the Bush years, of keeping a few megafirms rich at the expense of everyone else.
Obama hasn't always toed the Rubin line when it comes to economic policy. Despite being surrounded by a team that is powerfully opposed to deficit spending - balanced budgets and deficit reduction have always been central to the Rubin way of thinking - Obama came out of the gate with a huge stimulus plan designed to kick-start the economy and address the job losses brought on by the 2008 crisis. "You have to give him credit there," says Sen. Bernie Sanders, an advocate of using government resources to address unemployment. "It's a very significant piece of legislation, and $787 billion is a lot of money."
But whatever jobs the stimulus has created or preserved so far - 640,329, according to an absurdly precise and already debunked calculation by the White House - the aid that Obama has provided to real people has been dwarfed in size and scope by the taxpayer money that has been handed over to America's financial giants. "They spent $75 billion on mortgage relief, but come on - look at how much they gave Wall Street," says a leading Democratic strategist. Neil Barofsky, the inspector general charged with overseeing TARP, estimates that the total cost of the Wall Street bailouts could eventually reach $23.7 trillion. And while the government continues to dole out big money to big banks, Obama and his team of Rubinites have done almost nothing to reform the warped financial system responsible for imploding the global economy in the first place.
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Friday, October 16, 2009The new FRONTLINE documentary The Warning, scheduled to debut next Tuesday, is not likely to provide any assistance in the "reputation rebuilding" effort by former Fed Chairman Alan Greenspan whose comments yesterday regarding "too big to fail" might be seen in a whole new light given new revelations from the late-1990s about regulation of derivatives.
Pictured above with former Treasury Secretary and Goldman Sachs alum Robert Rubin, this duo constituted two-thirds of the "Committee to Save the World" (along with top Obama administration economic adviser Larry Summers), a call that, in retrospect, may have been a bit premature.
Brooksley Born:
"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission (CFTC) -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"This should be good, particularly in light of the fact that there has been virtually no progress on any financial market reforms, despite continuing calls from the likes of Paul Volcker.
In The Warning, airing Tuesday, Oct. 20, 2009, at 9 P.M. ET on PBS (check local listings), veteran FRONTLINE producer Michael Kirk (Inside the Meltdown, Breaking the Bank) unearths the hidden history of the nation's worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.
"I didn't know Brooksley Born," says former SEC Chairman Arthur Levitt, a member of President Clinton's powerful Working Group on Financial Markets. "I was told that she was irascible, difficult, stubborn, unreasonable." Levitt explains how the other principals of the Working Group -- former Fed Chairman AlanGreenspan and former Treasury Secretary Robert Rubin -- convinced him that Born's attempt to regulate the risky derivatives market could lead to financial turmoil, a conclusion he now believes was "clearly a mistake."
Born's battle behind closed doors was epic, Kirk finds. The members of the President's Working Group vehemently opposed regulation -- especially when proposed by a Washington outsider like Born.
"I walk into Brooksley's office one day; the blood has drained from her face," says Michael Greenberger, a former top official at the CFTC who worked closely with Born. "She's hanging up the telephone; she says to me: 'That was [former Assistant Treasury Secretary] Larry Summers. He says, "You're going to cause the worst financial crisis since the end of World War II."... [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.'"
Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. "Born faced a formidable struggle pushing for regulation at a time when the stock market was booming," Kirk says. "Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves."
Now, with many of the same men who shut down Born in key positions in the Obama administration, The Warning reveals the complicated politics that led to this crisis and what it may say about current attempts to prevent the next one.
"It'll happen again if we don't take the appropriate steps," Born warns. "There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience."
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Zero Hedge is starting to run a series of profiles of one of the most influential living people in the world. The man in question is former Secretary of the Treasury, and the man who made Goldman Sachs into the hedge fund quasar and uber-prop trading desk (rhymes with Hedge Fund Tsar, a position Barack Obama may or may not be contemplating) that it is now, Robert Rubin. Rubin redefined the term risk arbitrage (or as some would say, riskless arbitrage, thanks to the helpful nudge here and there of whoever may have been in a position of "puppet" power at any given moment) by being among the first to discover (and definitely the first to repeatedly bet the farm, making boatloads when successful, and somehow not losing when not) the amazing synergies provided by Goldman Sachs' numerous relationships as they may pertain to the firm acting in proprietary trading capacity.
If one were to claim that Goldman Sachs is a cephalopod of some nature, than Robert Rubin is the beating heart (and soul) of such an animal. A mere listing of the people the were Rubin's proteges while at Goldman should be enough to send shivers up the spine of any University of Chicago efficient market hypothesis fan. The names of Rubin's most well-known underlings include (and this is not a comprehensive list):
- Larry Summers: needs no introduction
- Thomas Steyer: founder of multi-billion hedge fund Farrallon Capital
- Sylvia Matthews Burwell: President of the Global Development Program at the Bill & Melinda Gates Foundation
- Eric Mindich: Youngest Goldman partner in history (27) and founder of multi-billion hedge fund Eton Park
- Richard Perry: Founder of multi-billion hedge fund Perry Capital
- Frank Brosens: Co-founder of multi-billion hedge fund Taconic Capital
- Edward Lampert: Founder of multi-billion hedge fund ESL Investment
Another way to visualize Rubin's relationships is courtesy of Muckety:
Yet taking a more detailed look at Rubin's accomplishments reveals a less than flattering picture. Some relevant episodes taken from Rubin's career:
1979 Arb desk losses on oil: Head Rubin "Remaining detached was often no mean feat. For one thing, Rubin, as part of his job, was sometimes gambling with a third of his partners' retirement money. In 1979, for example, he took a number of arbitrage positions that depended on the expectation that inflation and oil prices would continue high. When oil prices and inflation dropped, many of his investments plunged. "We had one month in which we lost more money than the firm made in any prior year," he remembers. "But most people had internalized this sort of thing and the senior management, particularly, was very good about saying, Look we understand once in a while things like this will happen. It doesn't mean people weren't nervous because they were -- hell, I was nervous." From the NY Times, see also Big Deal: Mergers and Acquisitions in the Digital Age, by Bruce Wasserstein, page 574.
1986 fixed income division losses on interest rates: Co-head Rubin "had learned his lessons in risk from the financial markets. In 1986, as losses at the fixed income division of Goldman Sachs mounted to $100 million, Rubin discovered that there are implicit interest rate options embedded in many fixed income products. If the rates drop then homeowners would refinance their mortgage at lower rates and corporations would exercise their call provisions to refinance their bond debt." Risklatte see also Fischer Black and the revolutionary idea of finance, by Perry Mehrling
1992 losses on Mexican bonds before Rubin joined the Clinton Administration in 1993: "From 1992 to 1994, [Goldman] had purchased $5.2 billion of Mexican bonds on behalf of its clients or its own portfolio, one-fifth of the total. These were the very bonds that Rubin's bailout was to salvage." From Blood Bankers, by James Henry, page 296.
2002 Citi bad loans to Brazil and Enron: "American banks have about $25.6 billion in outstanding loans to Brazilian borrowers. Citigroup, the biggest lender to Brazil, has $9.7 billion in Brazilian loans." That's right. Forty percent of the U.S. bank exposure in Brazil is the fault of America's biggest and dumbest bank. And who is the resident financial wizard at Citigroup? "Robert H. Rubin, who was treasury secretary under President Clinton and engineered international rescue packages for Mexico, Russia and many Asian countries, is now a Citigroup director." From The American Cause
A common unifying thread is the repetitive, spaced out by 5-10 years on average, spectacular blow up, the result of the bursting of yet another bubble of his own creation, for which not only would Bob not get punished, but would either frame, or be the beneficiary of, policies that would provide a generous backstop, and would subsequently progress to ever loftier positions of responsibility, both private and public.
Is this the same theme now seen with now only the five core TBTF firms, but mostly with Goldman Sachs? Is it surprising that moral hazard has now enveloped the very fabric of finance, after one of its core progenitors has been pacing the halls of both Goldman (and now nationalized Citi) and numerous administrations over the past 40 years?
More on Robert Rubin and his multi-billionaire hencheman as we delve deeper next time.
by Anonymous
on Tue, 10/13/2009 - 17:36
#98129
Tyler,
For many years now I have known about Rubin and his involvement in just about everything. I guess those close to him felt that if there was a potential big score for themselves personally, why not go for it??
In the end, it is all about the almighty buck for some.
Now I know that the central figure in this painting has a name....
http://www.mcnaughtonart.com/page/view_collection/Most%20Popular?artpiece=353%22--%3E%3Cimg%20src=http://imgur.com/r4e2C.jpg%3E%3C
by TraderMark
on Tue, 10/13/2009 - 17:36
#98130
sweet muckety
p.s. I did some back research on Rubin and he literaly resigned the next day from Treasury Secretary once Congress passed repeal of Glass Steagal
http://www.fundmymutualfund.com/2009/06/bloomberg-volcker-marginalized-m...
You can't make it up - its as if he had one goal, get that repealed and he was out of there.
"If you want the dirty details the "repeal" bill passed in the House May 6, 1999. In the Senate July 1, 1999.
Robert Rubin's work was done. He resigned. July 2, 1999. (1 day after the Senate passed the bill) He went off to work for Citigroup, collecting well over $100M in compensation in the coming decade. Yes the same Robert Rubin lauded as one of our best Secretary Treasuries and a great steward for Citigroup. He's got Goldman blood in him! Must be brilliant!"
Really this is the type of stuff the main stream media should be pre-empting dancing with the stars with to tell the american people what is going on. That said, MSM is owned by corporate interests so why would they bother.
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Kenneth Rogoff warns us not to believe those who argue that the crisis was largely due to government failure, and hence that regulating the financial sector is counterproductive and unnecessary:
Why we need to regulate the banks sooner, not later, by Kenneth Rogoff, Commentary, Financial Times: When in doubt, bail it out," is the policy mantra ... after the ... collapse of Lehman Brothers. With the global economy tentatively emerging from recession, and investors salivating over the remaining banks' apparent return to significant profitability, some are beginning to ask: "Did we really need to suffer so much?"Too many policymakers, investors and economists have concluded that US authorities could have engineered a smooth exit from the bubble economy if only Lehman had been bailed out. Too many now believe that any move towards greater financial regulation should be sharply circumscribed since it was the government that dropped the ball. Stifling financial innovation will only slow growth, with little benefit in terms of stemming future crises...
Certainly the US and global economy were already severely stressed at the time of Lehman's fall, but better tactical operations by the Federal Reserve and Treasury, especially in backstopping Lehman's derivative book, might have stemmed the panic. Indeed, with hindsight it is easy to say the authorities should have acted months earlier to force banks to raise more equity capital. The March 2008 collapse of the fifth largest investment bank, Bear Stearns, should have been an indication that urgent action was needed. Fed and Treasury officials argue that before Lehman, stronger measures were politically impossible. There had to be blood on the street to convince Congress. ...
[C]ommon sense dictates the need for stricter controls on short-term borrowing by systemically important institutions, as well as regularly monitored limits on oversized risk positions, taking into account that markets can be highly correlated in a downturn. ... There should also be more international co-ordination of financial supervision, to prevent countries using soft regulation to bid for business and to insulate regulators from political pressures.
...The view that everything would be fine if Hank Paulson, then US Treasury secretary, had simply underwritten a $50bn bail-out of Lehman is dangerously misguided. The financial system still needs fundamental reform...
I think that even if Lehman had been bailed out the economy would still have been bad, just not as bad, so either way there are substantial economic costs and a case for regulation.
NDD :
Agree of course with the thrust of Rogoff's article. It is disheartening but predictable that, having been handed hundreds of billions of working class Americans' taxes no strings attached, banksters would have no incentive to agree to any regulatory restrictions. And Congresscritters' votes are just a cost of business.Specific to the Lehman/September meme, however, we STILL do not know the substance of Bernanke and Paulson's Armageddon speech to Congressional leaders three days later -- although it seems likely that the trigger was a run on Money Market funds triggered by Putnam's "breaking the buck."
Additionally, there was no meltdown of stock (and therby 401k) values until 3 weeks later, after consumers -- virtually instructed by the aforesaid Bush/Paulson/Bernanke/Congresscritters to panic -- obediently did so and stopped spending money en masse, and took 10% of consumption out of the economy overnight.
Take away the government-inspired consumer panic, and of what importance was Lehman?
Posted by: NDD | Link to comment | Aug 19, 2009 at 03:46
Beezer :
"Better macroprudential action is needed, particularly in reining in sustained, large current account deficits. While such deficits can sometimes be justified, prolonged imbalances fuel leverage and can give the illusion that high growth and asset prices are sustainable."The role that a chronic trade deficit played in all this is not much discussed, it seems to me. One writer described it as a "big hole in the tire" that effectively neuters domestic economic growth, or any attempts by central banks to re-balance economies.
It seems the general concept of "balance" was abused throughout our economy, and still is. From labor, to trade balances, to balance in the economy between various industries, to income distribution and medical care distribution--just about everywhere one bothers to look. Imbalances.
Posted by: Beezer | Link to comment | Aug 19, 2009 at 03:46bakho :
I agree with his assessment. I agree with his assessment that the Bush administration SHOULD HAVE increased capitalization requirements much sooner.However, you go into a financial crisis with the administration you have, not the one you want.
There is another side to the crisis and that is the "high fuel prices/ auto collapse" portion. Even without the financial crisis, we would have had an oil price driven recession. We got both at the same time which is one of the reasons why it is so bad.
Bush could have prevented the high oil prices had he not pursued a reckless quest to use the military to bring Iraqi oil to market and had instead pursued a fuel efficiency and oil conservation.
Bush put most of his chips on unsustainable, short-term special-interest-driven policies that collapsed around his ears.
Posted by: bakho | Link to comment | Aug 19, 2009 at 05:22
save_the_rustbelt :
Unregulated banks is akin to giving a bottle of whiskey and car keys to a 10 year old boy. Banker are an odd lot anyway, they take risks with someone else's money and think they are brave for doing so. Posted by: save_the_rustbelt | Link to comment | Aug 19, 2009 at 05:39Alex Tolley :
MT: "I think that even if Lehman had been bailed out the economy would still have been bad, just not as bad, so either way there are substantial economic costs and a case for regulation."Does it really make much difference either way? As Krugman was saying for years, the US economy was being propped up by consumers raiding the rising equity values of their homes. That ended in 2006-2007. Since then credit expansion has been very low as the banks are no longer lending to anyone except those with deep pockets and themselves. The excess liquidity in the system is just flowing into the securities markets. House prices are being propped up by banks not selling their foreclosures in any volume to maintain the illusion their capital ratios are good. The real economy is poor, employment declining as layoffs continue.
It isn't just that we need to regulate retail banks (they should have been kept separated from investment banks and these should have been kept small enough to fail after the LTCM warning), but the bailouts should have come with some strings that banks maintain lending rather than "the fed pushing on a string" as has happened.
Posted by: Alex Tolley | Link to comment | Aug 19, 2009 at 07:53
Don the libertarian Democrat :
I believe that allowing Lehman to fail was a big mistake. It almost started a Debt-Deflationary Spiral. But I agree with the idea that some people have concluded that, since we did avoid a DDS, our financial system has been proven robust. All that we need to do is a little fiddling around the edges. The fact that we almost had a DDS with a Fed Chairman who gave a good talk on the subject in 2002 is scary beyond belief. That we came so close to an event that Fisher taught we needed to avoid at all costs 70 years ago should signal that we need to take major actions.So, in essence, I agree with Rogoff. What has worked for us has been a version of the Chicago Plan of 1933. Brad De Long has been the best expositor of this. All that I'm asking is that the ideas about Narrow/Limited Banking also put forward in the plan be looked into. The best overall view that I've read is this one by Buiter:
http://blogs.ft.com/maverecon/2009/06/too-big-to-fail-is-too-big/
I realize that some of these ideas, like Narrow Banking and taking away Limited Liabilities can seem very quaint. But, if we are using the ideas of 1933 to get out of this mess, isn't it at least possible that the ideas put forward in that plan for avoiding such a crisis might work?
Posted by: Don the libertarian Democrat | Link to comment | Aug 19, 2009 at 08:00
bakho :
"the bailouts should have come with some strings that banks maintain lending rather than "the fed pushing on a string" as has happened.Posted by: Alex Tolley | Link to comment | Aug 19, 2009 at 07:53 AM"
Lack of collateral is a huge problem. We need a downward transfer of wealth so those at the bottom with the highest spending velocity can repair their balance sheets and start spending. It is a bad idea to continue to loan to people that lack the ability to repay. We also need to find other spenders (like the government).
Posted by: bakho | Link to comment | Aug 19, 2009 at 08:37
sgt_doom :
Sure, I agree with Rogoff, a member of the Group of Thirty which encouraged the wholesale use of securitization to the max and credit derivatives, thus bringing us (earth's population) to this economic meltdown. And surely, Rogoff (is he the Chess Grandmaster? I get all these Group of Thirty and Bretton Woods Committe crooks mixed up) should know that Glass-Steagall should never have been repealled - although I don't recall his opposition?Surely Rogoff should know that the Commodity Futures Modernization Act would lead to this, although I don't recall his opposition? (Evidently only Brooksley Born - and Senator Dorgan and then-Rep. Saunders were intelligent enough to realize this!)
Yup, somehow Rogoff writing about this situation is somewhat misleading, don't ya think
Posted by: sgt_doom | Link to comment | Aug 19, 2009 at 09:43
Alex Tolley :
bakho: "Lack of collateral is a huge problem. We need a downward transfer of wealth so those at the bottom with the highest spending velocity can repair their balance sheets and start spending. It is a bad idea to continue to loan to people that lack the ability to repay."How will they get this wealth? They cannot borrow to buy houses which used to be the road to financial security. The net effect is that wealth will likely continue to trickle up making the disparity even worse.
I'm not saying that we should go back to stupid lending practices again, but the banks have tightened up so much that credit creation is being badly squeezed, which is countering the need for expansion. Do we need a WPA again?Posted by: Alex Tolley | Link to comment | Aug 19, 2009 at 11:33
lonesome moderate :
What is really depressing is that there is even a debate on this. If a nuclear power plant were to explode, nobody would question that this meant we needed to increase and/or update regulation of nuclear power, even if we were able to clean up the mess and hardly anyone died. But the banking industry still have a lot of money to give to politicians, so somehow this doesn't happen in the banking sector. How bad a crisis do we need to override the system's entrenched corruption?Posted by: lonesome moderate | Link to comment | Aug 19, 2009 at 12:40
Lafayette :
MT: "I think that even if Lehman had been bailed out the economy would still have been bad, just not as bad, so either way there are substantial economic costs and a case for regulation."The impact of closing Lehman, I suggest, was twofold:
*First, it served as a lesson to the others that Uncle Sam would indeed let them fail; which filled them with a Blue Fear, so necessary to keeping the bank lobbyists from manipulating Congress other than in the manner Treasury wanted.
*Secondly, the economic consequence of its closure was only to assure that the other would vacuum up its profit wins and share them out to the gluttons.
Economically, Lehman's closure is a footnote in the Great Subprime Mess story. Was it also a matter of Paulson giving Fuld the shaft? Methinks yes.
Posted by: Lafayette | Link to comment | Aug 19, 2009 at 12:45
Glenjo :
Reading the article, this got my attention:"The March 2008 collapse of the fifth-largest investment bank, Bear Stearns, should have been an indication that urgent action was needed. Fed and Treasury officials argue that before Lehman, stronger measures were politically impossible. There had to be blood on the streets to convince Congress. In any event, given the system's manifest vulnerabilities, and the impending tsunami of the housing price collapse, it is hard to know if deferring the crisis would have made things better or worse, particularly given the obvious paralysis of the political system."
Why did Congress have to be convinced? The more I study the financial crisis, the more I conclude that it was a complete failure of the regulatory agencies to actually regulate. Admittedly, Grahamm pushed through laws which removed some of the barriers, but the Fed, SEC, FDIC and other regulators have largely watched this problem despite warnings from people within the regulatory agencies, the IMF, and even the FBI.
The bottom line is that the has been no significant increase in serious penalties to prevent further financial market shenanigans - no one's gone to jail, no serious Congressional investigations, no rigorous action from the regulators. Instead, Congress knuckles under to the most blatant threats to further wreck havoc and gives money to those which caused the mess. Is regulation required is not even a serious question to be debated, the real question is why haven't we started? My guess is that both the regulatory agencies and Congress are largely co-opted by the wealthy and the banksters. Indeed, hindsight may show us that the resulting disruption and fake recovery was not disruptive enough to force real reform, and that the next disruption will be significantly worse, and find our government already so heavily in debt that it will have no ability to defuse the crisis.
Posted by: Glenjo | Link to comment | Aug 19, 2009 at 12:59
Worker :
Lehman, and to a lesser extent the other banks, was a hostage taker. The economy is hostage.We state a policy of not negotiating with hostage takers, but soon as a couple hostages die, we negotiate with them.
The hostage takers learn that they need to take a whole lot of hostages.
At least a couple of these hostage takers took headshots before we capitulated.
If only we could put the others under house arrest.
Posted by: Worker | Link to comment | Aug 19, 2009 at 01:03
Lafayette :
THE PRESENT MESS{Rogoff: We Need to Regulate Banks}
That ain't gonna happin.
We threw out the (second of two acts) Glass-Steagal and that fact will not change -- even though we should indeed separate Commercial (risk-averse) from Investment (risk-prone) Banking. Mixing the two is the idiocy that brought about this Present Mess.
Lafayette: "We should regulate behaviour". Like upping the marginal income tax to confiscatory levels above, say, 10 megabucks a year.
Posted by: Lafayette | Link to comment | Aug 19, 2009 at 01:04
don :
Regulating banks (or rather, the bank holding companies) is a longer term worry. Right now, I think the biggest worry is that too many of them are operating with large and growing undisclosed losses and that a larger-than-average wave will threaten to sink them anew, bringing larger bailouts than heretofor. This could severely impact the Treasury and the U.S. dollar. Instead of simply waiting and relying on the bailout and deny tactics of the past, we should be preparing a system (like the RTC) to prevent new loans from collapsing without having taxpayers assume the bad legacy loans.The banks will never voluntarily agree to get the capitalization needed to prevent this scenario. They are still controlled by people bent on hiding the extent of losses (their past mistakes), hoping that they can grow out of their problems. There is no excuse for allowing them to avoid marking assets to market now.
Posted by: don | Link to comment | Aug 19, 2009 at 03:59
mrrunangun :
Does anyone suppose that if Lehman and BS had remained IB partnerships that the partners would have levered 30 or 40 to one in CDOs with their own money? In the partnership days they might have levered 5:1 for an especially enticing opportunity. Why did the regulators let them do it?Posted by: mrrunangun | Link to comment | Aug 19, 2009 at 06:10
Anne from Chicago :
Not an economist here. But I thought we had a regulated banking sector. Unfortunately, it was so "boring" that bankers went out and created the "shadow banking sector" (the existence of which caught many in the middle class by surprise this year, when they saw huge losses in jobs and portfolios as a result of the flaws inherent in having an unregulated banking sector.)It is absolute insanity to follow the crash of 2008 with the notion that regulation of the financial sector would be worse for the economy than continuing business as usual in the shadows.
Posted by: Anne from Chicago | Link to comment | Aug 19, 2009 at 06:55
Zephyr :
The easing of regulation during the last two decades went too far.Better regulation would have helped. But the crisis was not caused by a lack of regulation. The crisis was caused by the greedy excesses that preceded it. And that irrational exuberance was fueled by Greenspan's foolishly low interest rate policies. That was like gas on the fire fueling the bubble. When the Fed finally took the punch bowl away the bubble collapsed.
More regulation would help. But what we really need is better (more stable) Fed policies.
Posted by: Zephyr | Link to comment | Aug 19, 2009 at 09:05
Drewfuss :
How do you know it will work?The view that more 'regulation' will prevent another GFC presumes a cause, one that seems asymmetric with the supposed cure - loose fiscal and monetary policy. At the very least, a strong theory will be needed to join these two dots, and this doesn't seem to have materialized.
There is little more going on here other than people asserting that deregulation was that which caused the problem, and more/re-regulation is that which fixes the problem.
Not good enough.Posted by: Drewfuss | Link to comment | Aug 19, 2009 at 11:10
Min :
bakho: "Lack of collateral is a huge problem. We need a downward transfer of wealth so those at the bottom with the highest spending velocity can repair their balance sheets and start spending. It is a bad idea to continue to loan to people that lack the ability to repay."Alex Tolley: "How will they get this wealth? They cannot borrow to buy houses which used to be the road to financial security. The net effect is that wealth will likely continue to trickle up making the disparity even worse.
I'm not saying that we should go back to stupid lending practices again, but the banks have tightened up so much that credit creation is being badly squeezed, which is countering the need for expansion. Do we need a WPA again?"I think that we do. On an ongoing basis. One persistent problem in this country is the short term view, both in government and in business. One result is that things that do not have short term visible payback do not get done. Like maintaining infrastructure. Republican Harold Stassen, who tried to get his party's presidential nomination for many years, thought that we should have ongoing Federal public works projects.
Such projects would not only address problems of unemployment and welfare, as well as producing long term public good, they would infuse money into the economy in a bubble up, not a trickle down fashion. The increasing stratification of U. S. society is not a simple thing, but surely an ongoing public works program would at least mitigate the problem.
A capitalist society faces a basic conundrum. For capitalism to function well requires competition. However, as competition produces winners and losers, the winners gain political and economic power to increase the difference between the two and stifle competition. To restore or maintain competition requires some mechanism to support the losers (or their children), so that they are able to compete fairly against the winners (or their children).
As things are now, the economy is financially supported mainly by lending, which is mainly to the middle and upper classes. Since lending requires future payback, with interest, the middle class is put on a treadmill. What we are seeing now is that their future earnings have not kept up with their obligations. If things do not improve soon for them, we may see a large number of bankruptcies in the coming years.
One advantage of a public works program is that those receiving the money have no future obligation attached, no interest to pay. (OC, the government may have obligations and interest to pay, but that burden would be spread out across society. As it is, the burden of supporting our economy falls disproportionally on the middle class.)
Posted by: Min | Link to comment | Aug 19, 2009 at 11:19
oops :
Bloomberg has an article on the Fed addressing bank failure @ Jackson Hole this year. KC Fed Pres. Hoenig says shareholder equity should be wiped out. I'm guessing that means shareholders would have to keep a tight leash on management.We'll see if CNBC will cover this aspect of Jackson Hole at all since their daddy, GE, exists today because of a bailout.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aFsKPn0jLwSU
Posted by: oops | Link to comment | Aug 20, 2009 at 09:41
don :
oops - I caught the same article. T. Hhenig is right on. Let's hope we can move to his method for treating TBTF's in future. It would be a nice backstop to better regulation.Posted by: don | Link to comment | Aug 20, 2009 at 10:42
Lafayette :
BLAME IT ON THE FEEL GOOD FACTOR{AT: I'm not saying that we should go back to stupid lending practices again, but the banks have tightened up so much that credit creation is being badly squeezed, which is countering the need for expansion.}
This is a misrepresentation of what is happening. If credit seekers have good credentials, they can get a loan. But why should anyone want to take that risk if foreclosures have risen, even if at a lower rate?
Too few consumers are asking for credit loans -- they've been burnt and are paying down past credit excesses. So the economy remains stagnant. And this condition will continue to maintain for as long as people do not succumb to the Feel Good Factor.
Which will not happen until they are sufficiently reassured of their future employment to assume what is the most seriously engaging financial commitment of their lives -- a mortgage.
It all depends upon the consumer, and that person is "not yet ripe" for picking. That WILL happen, however. It has never failed, but we must have patience.
It took us a good ten years to get into this Mess. We ain't gettin out of it in just a year.
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thedailybeast.com
What keeps the former Clinton economic star up at night? Friends blame him for the Citigroup fiasco. And Rubin can't figure out how he didn't see it coming.
People who know Robert Rubin say he never thought that it would end this way. In a span of about 10 years, the former Treasury secretary under President Bill Clinton pulled off an amazing feat-going from the man who saved the economy to one of those responsible for its demise as a senior executive and board member of the hopelessly troubled banking giant Citigroup.
It is an amazing about-face for someone who has wielded so much influence and achieved so much success in the power centers of New York and Washington over the past four decades. Before becoming Treasury secretary during the economic boom of the Clinton presidency, Rubin served as CEO of Goldman Sachs. Since leaving Washington, he spent the last 10 years as a board member and senior executive at Citigroup, which for a time was the prototype of the modern Wall Street firm, with its financial "supermarket" business model that offered every banking and brokerage service imaginable. In time, however, Citi became the poster child for the financial crisis that has plunged the country into one of history's steepest recessions after its massive and costly bet on toxic real-estate debt.
"Bob feels pretty strongly that what happened at Citi wasn't his fault," says one associate. "He also knows that he faces an uphill battle changing people's opinion about the matter."
It is his role at Citigroup during this time that has damaged Rubin's legacy, possibly beyond repair. He has been ridiculed in the press. He found his picture prominently displayed with other board members on the front page of the New York Post under the headline "Bounce These Bozo Bankers," which pointed out that Rubin made close to $110 million during his time at Citigroup, while shares fell from above $50 to below $5, wiping out billions of dollars of shareholder wealth in the process, as he became richer.
Even among his peers on Wall Street, who revered him for so long, there is a general belief that Rubin is fairly culpable for the Citigroup implosion that led to a massive government bailout. This general belief, even among people who consider themselves friends, is what keeps Rubin up at night, according to people who know him. "Bob feels pretty strongly that what happened at Citi wasn't his fault," says one associate. "He also knows that he faces an uphill battle changing people's opinion about the matter."
One reason Rubin is so concerned about his reputation is that even now, eight months "retired" from Citigroup, he commands respect and influence. He keeps an office on Park Avenue at the Council on Foreign Relations and has a regular business schedule. He often travels to Washington to speak with his good friend and protégé, former Treasury Secretary Larry Summers, now the president's chief economic adviser, to discuss what he likes to talk about most: economic policy. Recently, Rubin even had a sit-down with President Obama on the subject.
People who know Rubin say what keeps him going at age 70 is that he is still very much part of the public-policy debate, albeit in a behind-the-scenes way, and he would like to keep it that way. (It is one reason he won't talk publicly with me about these issues.) Unfortunately, Rubin is also still very much part of the debate surrounding the disaster known as Citigroup, including the questions over whether the troubled company should be broken up, whether its CEO, Vikram Pandit (a man Rubin helped hire), has the chops to remain in that position, and most importantly, who's to blame for the bank's tragic downfall-one of the key events in the great financial crisis of 2008.
It's that blame that Rubin can't seem to shake; in fact it's becoming more intense as the one year anniversary of the financial crisis's most turbulent period approaches. And as the debate about Rubin's culpability grows among the chattering classes, people who know Rubin say this debate is also growing inside his head. Rubin has been privately wrestling with his role as senior adviser to former Citi CEOs Sandy Weill and Chuck Prince when the risk taking began (and reached immense proportions), and falling back on the fact that he didn't have "operating responsibilities," meaning he had authority but no direct responsibility to manage those risk takers.
He concedes that he advocated more risk taking, but he says he wanted Citi to do it smartly, "like we did it at Goldman," he has said. (What makes him feel bad is that he knows that even his old friends on Wall Street say he needs to own up to the damage caused by that wild risk taking.).
... ... ...
But if there's one certainty of the past decade of Wall Street greed and government mismanagement of the economy, it's that Citigroup was a grossly mismanaged institution. Eventually, the federal government was forced to prevent what would have been the largest bank failure in U.S. history by pumping some $50 billion in capital into the bank, and guaranteeing hundreds of millions in toxic assets.The U.S. government is now Citigroup's largest single shareholder. The firm is currently on its third CEO (and some regulators are pressing for yet another change at the top); it has gone through almost a half dozen CFOs, numerous management changes during its sordid history, and endless regulatory turmoil.
Throughout the good times and bad, there's been one constant-Bob Rubin. And consider the following: Citigroup was technically illegal when it was founded by Sandy Weill and John Reed back in 1998 because it combined both commercial and investment banking, but with the help of Rubin as Treasury secretary, the law that would have prevented the supermarket model from working-The Glass-Steagall Act- was dismantled. Citigroup survived, and Rubin was rewarded with his dream job: Lots of money and little if any management responsibility.
Now you know why Bob Rubin's reputation won't be repaired anytime soon.
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Mar 22, 2009[This is a long diary. It's worth reading, I promise. If you disagree, I'll give you your money back.]
Much of the news these days--the AIG fiasco, Geithner's flawed bailout plan, the financial crisis itself--points to a single essential truth: Wall Street rules. The GOP's subservience to Wall Street is longstanding and unmatched. But Wall Street also holds power over the purported party of the people, most notably in form of Robert Rubin and his acolytes. It's fair to call Wall Street, as Robert Kuttner does, the Democratic Party's most powerful interest group. Which would be horrrendous even if Obama weren't trying to solve a financial crisis that Rubin and his acolytes helped to create.
How the hell did we get here? Let's review.
Along with former Federal Reserve Board chairman Alan Greenspan, Rubin and Summers compose the high priesthood of the bubble economy. Their policy of one-sided financial deregulation is responsible for the current economic catastrophe.
-- Dean Baker
I led with a quote from Dean Baker because he has credibility -- he saw the housing bubble for what it was in 2002 -- but it's hardly a controversial pronouncement. Any fair reading of recent history supports Baker's claim: Greenspan, Rubin, and Rubin's protege Summers deregulated banks and opposed efforts to regulate them--actions that led directly to the financial crisis. In addition to deregulation, the other tenets of the Church of Rubinism, like the Washington Consensus, have been discredited.
But the story of Rubinsism isn't just about a discredited ideology; it's also about conflict of interest, corruption, and corporate incest. And the story is ongoing.
Obama chose as his top economic advisors Summers and Tim Geithner, a protege of both Summers and Rubin whose fingerprints are also all over the crisis. That Obama did so -- and did so with little opposition -- shows the power that Wall Street sholds within the Democratic Party. We may finally be waking up to Wall Street's corrosive impact on our party, but what Robert Kuttner wrote two years ago still holds true:
A mark of Wall Street's ubiquitous power in defining the limits of the politically thinkable is that its power is hardly noticed. The personification of this power is Robert Rubin.
Given Bill Clinton's desire to move the party to the center, it was perhaps inevitable that he would align himself with Rubin. But he didn't officially team up with him during his first run for president. Indeed, during his campaign he struck populist notes and took positions that couldn't have thrilled Rubin. It was only after his winning campaign that he and Rubin joined forces.
It was in the two and a half months between winning the 1992 election and being sworn into office that Bill Clinton did a U-turn on the economy. He had campaigned promising to revise NAFTA, adding labor and environmental provisions and to invest in social programs. But two weeks before his inauguration, he met with then-Goldman Sachs chief Robert Rubin, who convinced him of the urgency of embracing austerity and more liberalization. Rubin told PBS, "President Clinton actually made the decision before he stepped into the Oval Office, during the transition, on what was a dramatic change in economic policy."
One of Clinton's goals was to end the GOP's longtime fund-raising dominance on Wall Street. The mere presence of Rubin in his administration was enough to impress Wall Street, and his policies were a surefire way to get corporate cash flowing into Democratic campaign coffers. Rubin became assistant to the president for economic policy, then Treasury Secretary. From those perches he pursued his patented form of neoliberalism, a shaky stool whose legs were deregulation of markets, budget austerity, and especially trade. He convinced Clinton to move on NAFTA before he moved on health care, but the notorious NAFTA was only part of Rubin's effort to "liberalize" trade:
Mr. Rubin pushed developing countries to open their markets to foreign competition while privatizing state-dominated economies. This approach eventually became known as the Washington consensus and gained deep traction in Latin America, East Asia and Eastern Europe, regions where Citigroup later aggressively pursued new business.
Rubin was unabashed in pushing policies that enriched his once and future employers:
Rubin tends to get a free pass on actions that, in lesser men, would be seen as plain conflicts of interest. For example, Goldman Sachs, which Rubin left to join Clinton, was a prime underwriter of Mexican bonds both before and immediately after the passage of NAFTA, as Faux points out in his book, The Global Class War. Goldman was also the investment bank that underwrote the privatization of the Mexican national phone company, Telmex, in the late 80s. After NAFTA created a gold rush of foreign money into Mexico, enriching Goldman Sachs and its clients and triggering an unsustainable speculative boom followed by a crash, Rubin promoted the bailout of Mexico that made foreign bondholders whole. A little-noticed provision of NAFTA permitted foreign banks to acquire Mexican ones. In 2001, Rubin, back in the private sector, negotiated Citigroup's $12.5 billion acquisition of Mexico's leading bank, Banamex.
Rubin's actions that most directly led to our current crisis were those involving regulation, or lack thereof. It was during Rubin's tenure that people were sounding the alarms about the dangers posed by derivatives. Rubin--along with his deputy Summers and Greenspan--opposed the effort to regulate them.
The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation-a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant-and successful-in their opposition. Nothing was done.
Rubin is known for his charm, self-deprecation, and mellow temperament--traits often credited for his success. But the effort to regulate derivatives aroused his anger.
At an April 21, 1998, meeting with Brooksley Born, the chairwoman of the commodities commission, Mr. Rubin made no secret of his feelings about her proposal. "It was controlled anger. He was very tough," Mr. Greenberger recalls. "I was at several meetings with him, and I've never seen him like that before or after."
Rubin had many critics at the time and has even more now. It's hard to find a progressive economist or even a left-leaning one who praises Rubin's trade policies, which hurt workers in the US and in developing countries. And his fetish for balanced budgets came at the expense of social programs. Joe Stiglitz, who chaired Clinton's Council of Economic Advisors, says Rubin pushed deficit reduction "too far."
Stiglitz went on to wish, with hindsight, that instead of devoting tax revenues to deficit reduction, "Clinton had used the additional funds to finance more investments in R&D, technology, infrastructure and education. & GDP in the year 2000 would have been higher, and the economy's growth potential would have been stronger."
The economic growth under Clinton, said Stiglitz, was due primarily to "the technological innovations -- the computer revolution -- and the process of globalization, changes in the economy that were proceeding before Clinton took office." Dean Baker concurs, pointing out that it was massive consumption driven by the dot-com boom-bubble that led to economic growth:
Rather than investment driving growth during the Clinton boom, the main source of demand growth was consumption. Consumption soared during the Clinton years because the stock market bubble created $10tn of wealth. Stockholders consumed based on their bubble wealth, pushing the saving rate to record lows, and the consumption share of GDP to a record high.
The growth under Clinton-Rubin was unsustainable because it rested on not just the dot-com bubble but also on Rubin's high-dollar policy, which in the short term led to cheap imports and low inflation. But, in addition to killing manufacturing jobs by putting downward pressure on wages, it contributed to a massive trade deficit, which in turn led to a decline in the value of the dollar. Baker:
Rather than handing George Bush a booming economy, Clinton handed over an economy that was propelled by an unsustainable stock bubble and distorted by a hugely over-valued dollar.
But whatever the causes, the nineties economy grew, and a guru was born. When he retired midway through Clinton's second term, the president called Rubin the greatest Treasury Secretary since Alexander Hamilton. He handed off the position to his protege Larry Summers, who picked up where Rubin left off.
A long-time target of Rubin's was the Glass-Steagall Act of 1933, which limited the kind of conflict-of-interest-tainted speculation that had contributed to the Great Depression. The law prevented speculative investment banks from joining with government-supervised and-insured commercial banks. Over the years regulatory exceptions had weakened Glass-Steagall, but the Financial Services Modernization Act killed it. The bill was concocted by Summers and Greenpsan. In his book, "The Age of Turbulence," Greenspan describes this "unsung moment of policymaking."
As it happened, October 14th was the day slated for Larry and me to have our weekly breakfast. We looked at each other and said, "We have to settle this thing."...After an hour or two we divided the pie. Treasury and the Fed came together on a single bill, and up it went to Capitol Hill, where it passed. Historians view the Financial Services Modernization Act as a milestone of business legislation, and I'll always remember it as an unsung moment of policymaking for which there ought to be a little song.
Summers's and Greenspan's bill was known in known in some circles as the "Citigroup Authorization Act" because it served so beautifully the interests of Sandy Weill's emerging behemoth. When Congress passed the bill in November 1999, Citigroup had recently announced a new hire.
Rubin had stepped down as treasury secretary that July. His new job, announced in late October, was chairman of Citi's executive committee. Rubin's initial annual compensation was around $40 million.
Fast forward some nine years to 2008. Plagued by scandal, Larry Summers was no longer president of Harvard, a job he'd gotten with the help of Rubin, one of only seven members of the Harvard Corporation. Summer had spent much of his post-Harvard life working for an elite hedge fund. Citigroup, meanwhile, was on the brink of collapse.
Citigroup's stock has plummeted to its lowest price in more than a decade, closing Friday at $3.77. At that price the company is worth just $20.5 billion, down from $244 billion two years ago. Waves of layoffs have accompanied that slide, with about 75,000 jobs already gone or set to disappear from a work force that numbered about 375,000 a year ago.
Rubin, a wise old man of the party, hadn't been much in the news in the intervening years, although he'd made news in 2001 when he tried to get an official at Treasury to convince bond-rating agencies not to downgrade the corporate debt of the infamous Enron, a debtor of Citigroup. The controversy would've harmed a lesser figure, but Rubin made it through unscathed.Also he made period pronouncements. Early in 2008, for example, as the housing bubble burst and threatened the financial system, he claimed that there was, in fact, no crisis but rather a cyclical "periodic disruption" that followed "periodic excess." He did find a scapegoat, however, the uneducated electorate:
And the economic problems that he did acknowledge were blamed on just about everyone but the major U.S. financial players.
Rubin said part of the problem is that we need a "more educated electorate" to hold politicians accountable.
Now attention focused on Rubin's role in wrecking Citigroup. During his tenure shareholders had endured losses of more than seventy percent. A devastating piece in the Times revealed what it called Rubin's "pivotal role" alongside CE Charles Prince in causing "the bank's current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits."
The story quotes a former Citigroup exec who says it was Rubin, not Prince, primarily responsible for Citibank's intense focus on the now-notorious collateralized debt obligations, or C.D.O.'s, bundles of mortgages and other forms of debt that were resold to investors. (AIG's use of C.D.O.'s helped to bring it down.)
"Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process," a former Citigroup executive said of the bank's big C.D.O. push. "Chuck was totally new to the job. He didn't know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, 'You have to take more risk if you want to earn more.' "
Federal regulators decided in the fall to give Citi $306 billion in loans and securities and a direct investment of about $20 billion. Rubin--who recently resigned from Citigroup after "earning" well over $100 million there--has denied he contributed in any way to Citi's downfall. He's clearly fighting to preserve his reputation, which should've been soiled long ago.
You might be familiar with another person who played a role in Citibank's downfall and subsequent gobbling up of taxpayer money: Rubin's protege Tim Geithner.
Geithner's tenure at the New York Fed – which bore the major responsibility for supervising Citigroup – covers a tumultuous span in which the sprawling conglomerate spiraled from the country's biggest banking company to one of its largest welfare cases.
Now under much closer government supervision – after a $52 billion rescue – Citigroup appears headed for dismantling amid a leadership shuffle that included last week's announced departure of former Treasury Secretary Robert Rubin as senior counselor and director.
So to review: Rubin protege Summers wrote a law that benefited Rubin's company and Rubin protege Geithner supervised Rubin's company (looked the other way) as it expanded and made risky moves that eventually brought about the government bailout of the company.
In his job at the New York Fed, Geithner made what the New York Times called "cataclysmic" decisionsthat exacerbated the financial crisis--experience that in the anti-meritocracy known as the United States qualified him for the most important position in Obama's cabinet.
As president of the Federal Reserve Bank of New York, Mr. Geithner was a key decision maker last September when the government let Lehman Brothers fail and then, two days later, bailed out the insurer American International Group for $85 billion.
Those decisions proved cataclysmic. The markets and the economy have yet to recover from Lehman's failure. The bailout of A.I.G. dealt a further blow to the Fed's credibility - and, by extension, Mr. Geithner's - because it was an abrupt reversal from the no-new-bailouts stance that had applied to Lehman and, initially, to A.I.G. Together, the decisions showed that several months into the financial crisis, officials lacked the information and the insight to correctly call the shots.
Of the three leading contenders for the Democratic nomination, Hillary Clinton was closest to Rubin and other Rubinites; John Edwards was farthest from them. Barack Obama was in the middle, although closer to close-to than far-from. They played important roles onObama's campaign:
[Rubin's] son, Jamie Rubin, is a major Wall Street fund-raiser for Barack Obama. His former deputy chief of staff, Karen Kornbluh, is Obama's chief domestic policy adviser, and Rubin is also close to Obama's chief of staff, Steve Hildebrand, who used to hold the same position for former Senate Democratic Leader Tom Daschle, another Rubin ally.
Still, there was ambiguity in his relationship to the Wall Street wing of the party. Yes, he headlined the launch of Rubin's Hamilton Project, but he used the opportunity to distance himself from the group on trade. Yes, he got a boatload of money from Wall Street, but he got boatloads of money from small donors as well. And he struck populist fair-trade notes that surely didn't jibe with Rubinities.
After he'd won the nomination, however, things became clearer. He expressed regret for his rhetoric in opposition to NAFTA and hired a Rubinite Wal-Mart defender to head up his economic policy shop.
Senator Obama, Democrat of Illinois, hired Jason Furman, a Harvard-trained economist closely associated with Mr. Rubin, a Wall Street insider who served as President Clinton's Treasury secretary. Labor union leaders criticized the move, and said that "Rubinomics" focused too much on corporate America and not enough on workers.
Things became even clearer after he won the general election.
It is testament to former Treasury Secretary Robert E. Rubin's star power among many Democrats that as President-elect Barack Obama fills out his economic team, a virtual Rubin constellation is taking shape.
The president-elect's choices for his top economic advisers - Timothy F. Geithner as Treasury secretary, Lawrence H. Summers as senior White House economics adviser and Peter R. Orszag as budget director - are past protégés of Mr. Rubin, who held two of those jobs under President Bill Clinton. Even the headhunters for Mr. Obama have Rubin ties: Michael Froman, Mr. Rubin's chief of staff in the Treasury Department who followed him to Citigroup, and James S. Rubin, Mr. Rubin's son.
Steve Clemonsput it succinctly:
Obama has essentially brought in the same crowd of people or ideological fellow travelers who helped hatch the Clinton era manic finance fest that the Bush administration made worse.
I can only guess why Obama cast his lot with the Rubinites. The simplest answer, that he's one of them, doesn't comport with his record or with his concerted effort to defy classification. If anything, he's presented himself as a Fourth Way Democrat, splitting the difference between Rubinism and progressivism. Even if he shares their views, you'd think could've found neoliberals who hadn't helped to create the crisis.
What's clear, though, is Obama's decision to align himself with Rubinties was fateful. They've made their presence felt, and nothing they've done is a surprise. They're only acting like themselves.
It's no surprise they've rejected nationalization on purely ideological grounds.
We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system.
It's no surprise that Geithner will try to solve the crisis by using taxpayer money to protect from risk hedge funds and other investors.
It's no surprise that Geithner believes that insolvent banks are, in fact, sound.
It's no surprise that his plan is a thinkly disguised version of the plan presented in the fall by Bush Treasury Secretary and former Goldman Sachs exec, Hank Paulson.
It's no surprise that Geithner hired a former Goldman-Sachs lobbyist to be his chief of staff, a person who in his former position fought effort to rein in executive compensation:
a Washington influence-peddler who worked against Obama's effort to limit excessive corporate pay is now a key member of the Obama administration team that is supposed to contain excessive compensation in the AIG case and in general.
It's no surprise that Geithner hired Citigroup's chief economist.
And it's no surprise that Summmers and Geithner didn't see the moral and political problems inherent in allowing the AIG bonuses to go forward.
You might be thinking that Republicans are conspicuously absent from this mini-history. That's because their complicity is well-understood. We know Wall Street tells them what to do. We know they have bailout on their hands. We know they service the rich. But Dems are supposed to be different.
And Obama is different. For example, he supports regulatory reforms that a leading Republicans would never support. But in light of Obama's toxic investment in Rubinites, the question is whether he's sufficiently different. The good news is that Obama, while clearly simpatico with Rubin and his proteges, isn't an ideologue. It's hard to believe he would allow them to sink his presidency. But he needs to throw them-- or at least their ideas --overboard. Soon.
This isn't just Obama's problem, of course. The Democratic Party won't be what it should be until it rejects Rubinism, without condition and without apology.
UPDATE: Commenterdrache takes exception:
meh (4+ / 0-)
I look at it differently and would ask you what would you have Obama do?
Nationalize the banks? HA! Good luck first getting the support for it and then even more good luck getting it done.
I think you miss the central point to understanding Obama, which is first and foremost he's a pragmatist. Which means in effect he'll do what he thinks needs to be done regardless of whether or not it's his personal ideology.
Frankly I'd rather have a pragmatist then an idealgoue (as you seem to be suggesting) becuase for now I don't think there's anything Obama can do that is different.
However I think all criticism of Obama in this matter is short circuited by the fact that Obama supports strong overhaul of the system.
Something no too rubinite would do.
Thus your diary's conculsion is in error
Okay, one at a time: "what would I have Obama do?"
I'd have Obama stop listening to people who caused the crisis and start listening to people who predicted the crisis--they, almost to a person, advocate some form of nationalization.
"Good luck first getting the support for it"
Why do you think continually bailing out banks will billions of dollars is politically doable but taking control of banks that taxpayer already own isn't? Joe Stiglitz says we should not only take control of banks but also make banks pay the government back--that sounds a helluva lot more politically doable than sending no-string trillions to banks. But it would require political leadership that takes the case to the people, bypassing a Congress that is beholden to Wall Street.
"I'd rather have a pragmatist then an idealgoue"
I would, too, which is why it's so disheartening that Obama is listening to free-market fundamentalists. Nationalization is the practical approach in that it has a chance of working.
"However I think all criticism of Obama in this matter is short circuited by the fact that Obama supports strong overhaul of the system."
As I said in the diary:
And Obama is different. For example, he supports regulatory reforms that a leading Republicans would never support.
One final point: this issue--the Democratic Party's relationship to Wall Street is much bigger than Obama and the financial crisis. It's about what kind of party and country we are.
Not giving money to Wall Street does not preclude many things.It would not exclude doing due diligence on Citigroup's books. Nor would it exclude Galbraith's demand that they examine the loan tapes to get a better overview of the big four's solvency. This type of examination to determine their true state and determining a course of action in regard to them that is not just throwing them cash would be something a diligent and non ideological Treasury Secretary might want to undertake - no?
Reestablishing Glass/Steagall and the repeal of Rubin and Summers' masterwork Financial Services Modernization Act is not precluded by not giving Wall Street money. And the fact that such actions are not on the agenda is troubling.
Plus there is the recognition that Wall Street is not real small business and doesn't necessary help those closest to the ground, so to speak.
It would not exclude the government forming partnerships with smaller local and regional banks to extend credit to local businesses, small and midsize, and to help ease local personal credit. That would help the liquidity problem in America faster then the current system.
Nor does it stop the development of new governmental grants and loans for technological R&D for educational institutions and small business. That is not giving money to Wall Street.
It does not mean doing nothing. It means stop throwing money at the people who caused the problem and now refuse to change and live by their own standards (if you can't afford to lose don't invest your money in Wall Street for instance). For me it is like watering the lawn with the broken sprinkler that sputters and doesn't move, so that most of the lawn withers and dies. Which is something we have been doing for long before the sprinkler started losing its parts. Instead you remove that sprinkler and use your hand to make the water spray while moving your arm back and forth. Then you keep doing that until you can get the sprinkler cleaned, repaired and refurbished. IOW, you make sure the lawn actually gets watered.
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Rubin was also central - Democrats more than Republicans in a lot of ways with the Clinton Administration - in getting rid of Glass Stiegel, was the old restriction that the banks couldn't tie up with brokerage firms and insurance companies. Well, basically after they made their reform led by Clinton and by Bob Rubin, you had like four-color linguini here in a bowl. It's all mixed up together.
anscript2 - Bill Moyers Journal . Transcripts | PBS
BILL MOYERS: That's sort of a historical-
KEVIN PHILLIPS: That's right. We've had-
BILL MOYERS: I don't understand why it is. But-
KEVIN PHILLIPS: Well, because you have to compete with sleaze. Get a little more sleaze in your own operations. And you look at all these lies, these deceptions, these frauds that have been going on. But, I mean, there aren't too many people that would say back two or three years ago that the way to prosper more was to do less of the cheating. You had to do what the others were doing. And that's the way these things - it was true in the Twenties. It's been true in plenty of other bubbles. You have to do it. So just the question of what's been bubbling here and the hugeness of the problem hasn't been revealed to people.
BILL MOYERS: You say it's the greatest story never told.
KEVIN PHILLIPS: Well, the greatest story never told in several senses. The first sense and when I do bad money, it's bad capitalism and bad money in the sense of the dollar and bad money in the sense of bad dog, bad Wall Street. But what's here that doesn't get the attention is the United States in the last 20 years undertook an enormous transformation of itself with no attention paid. And what it means is and what makes all this so frightening is the country is at risk because of the size of the financial sector that has never been graded on its competence and behavior in any serious way. They are the economy at this point. And we are now seeing what happens when a 20 to 21 percent of GDP financial sector starts to come unglued.
BILL MOYERS: But there are people, Kevin, who disagree with us, who say that this financial industry has created great wealth for America in the last 25 years.
KEVIN PHILLIPS: Oh, it's created great wealth for a small slice of America. But if you go back and we remember the manufacturing heyday, the auto workers in Michigan had fishing cabins up on the lake. And the middle class had been fattened by the rise of the blue-collar middle class. Well, there's no rising blue-collar middle class now. The middle class is shrinking.
The pie in a financial economy goes to the one or two percent - or even less- that have capital skills and education. We have never had so much polarization and wealth disparity and just groaning wealth right at the top of ladder as we have now under finance.
BILL MOYERS: So how is it that, as you write in the book, the financial sector has hijacked the American economy? You used that term.
KEVIN PHILLIPS: I use the term. And without using a whole bunch of numbers, let me try to put it this way. You had-
BILL MOYERS: The numbers are there in chapter two.
KEVIN PHILLIPS: The numbers are there in chapter two. You had essentially a financial sector that, let's say, was sort of neck and neck with manufacturing back in the late 1980s. But they got control in a lot of ways in the agenda. Finance has been bailed out. I mean, everybody thinks this is horrible now what we're seeing in terms of bailouts. Even a lot of the people who do it think it's bad.
This has been going on since the beginning of the 1980s. Finance has been preferred as the sector that got government support. Manufacturing slides, nobody helps. Finance has a problem, Federal Reserve to the rescue. Treasury to the rescue. Subsidies this, that, and other.
So bit by bit, they got bigger. And the other reason they got bigger was because this became a country that was further and further in debt. Consumerism was just pushed to the nth degree. People were given the sense that they had to buy everything and they had to borrow to do it increasingly.
But we've seen the central component of the rise of the financial sector is the rise of the debt industry. Mortgage, credit cards, all these gimmicks that Wall Street sells-- just all kinds of products. And, of course, the products are laying an egg all over the world right now.
BILL MOYERS: You're very hard in here on Alan Greenspan's tenure at the Fed.
KEVIN PHILLIPS: Well, I know Alan from the Republican campaign back in 1968. He was always a very scholarly, data-driven guy. But I think, for some reason or other, his chairmanship will be remembered as turn on the spigots.
BILL MOYERS: Turn on the spigots?
KEVIN PHILLIPS: Turn on the spigots. He started in 1987 with a crash that was a wicked one in one day in 1987. And he turned on the spigots. And they had the huge growth of the tech bubble in the 1990s. And then right after the tech and the stock market bubble blew up in 2000, you had 9/11. So there was a need for more stimulus. And they ginned up the stimulus again hugely.
And the upshot is that during Greenspan's tenure from 1987 to 2006, what they call total credit market debt in the United States quadrupled, quadrupled from about $11 trillion up to $44, $45, $46 trillion. And finance got the great bulk of it. And Greenspan would do nothing to disturb finance.
He wouldn't puncture a bubble. He wouldn't crack down on the exotic mortgages. He really wouldn't do much of anything except give obscure speeches in which, you know, he mumbled the different directions so nobody would know what he meant. But basically he gave finance what they wanted.
BILL MOYERS: And you write also that during this period the Clinton Administration aided and abetted this kind of speculation. Bill Clinton's economic advisor, Bob Rubin, who later became Secretary of Treasury - wanting to fuel this, right?
KEVIN PHILLIPS: It's been a bipartisan phenomenon. You can go back to the 1980s and say Reagan and George Bush, Sr., got a bubble started. Clinton got in and got an even bigger bubble going. And then George W. Bush with the biggest bubble of all. But it's not that the Clintonites didn't play. They did. Bob Rubin as Secretary of the Treasury - I mean, if he was a Hindu and he was being reincarnated, he'd come back as a pail because this guy bailed out everything you can imagine. They had the Mexican loan bailout. They had the long-term capital management bailout, the Russian Southeast Asian currency bailouts.
BILL MOYERS: All of which, however, kept them from coming into this economy, into our economy, coming to our continent.
KEVIN PHILLIPS: Well, except that a lot of the liquidity they created and the momentum and the borrowed money produced the implosion of the bubble in 2000. And a lot of what was imploding was the $2.5 trillion in new debt that was tied to energy and telecommunications, that's Enron, WorldCom, and Global Crossing. So there was a lot more of a bubble blown up there.
Rubin was also central - Democrats more than Republicans in a lot of ways with the Clinton Administration - in getting rid of Glass Stiegel, was the old restriction that the banks couldn't tie up with brokerage firms and insurance companies. Well, basically after they made their reform led by Clinton and by Bob Rubin, you had like four-color linguini here in a bowl. It's all mixed up together.
BILL MOYERS: So you have it - for this disaster has bipartisan parentage.
KEVIN PHILLIPS: Absolutely.
BILL MOYERS: But yet you say it's come to an end. You say there'll be no pretense any longer that the financial system is supreme.
KEVIN PHILLIPS: Oh, there may be a pretense in some quarters. I mean, obviously people who were doing the bailouts are saying how important it is that we don't rock or endanger the financial system. Some would say to the contrary that the best thing we could do would be to put its failings out there and let the making cure it.
I don't expect that to be the prevailing view. We've had 25 years of what I call financial mercantilism, which is the government aiding and pushing and bailing out the financial sector. It's not going to change. But I do think finance is going to lose its control over the economy in the sense that the public is going to be so angry they're going to insist on more regulation.
And you can see that both presidential contenders are now talking somewhat more regulation and anger at finance. So I think that'll crimp
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Last modified: January 06, 2020
