Summers, Phil Gramm and the law NOT to regulate derivatives

[slipslidingaway]

http://www.motherjones.com/mojo/2008/11/obama-taps-larry-summers-recalling-summers-days-regulation-foe

Summers 1998 Senate appearance...

"We understood the seriousness of making this proposal. To question an independent agency's concept of its jurisdiction and then to propose legislation that would temporarily curtail that agency's ability to act is not something we do lightly. We concluded, however, that such legislation was necessary to avoid disruption and dislocation in the market while the underlying issues were being considered by Congress.


Congress in late 2000 did end up implementing the Summers approach, when Senator Phil Gramm, then the head of the Senate banking committee, used a back-room maneuver to slip into a must-pass spending bill a measure that prevented the CFTC or the SEC from regulating derivatives..."


http://www.pbs.org/moyers/journal/04032009/watch.html

"WILLIAM K. BLACK: There were two really big things, under the Clinton administration. One, they got rid of the law that came out of the real-world disasters of the Great Depression. We learned a lot of things in the Great Depression. And one is we had to separate what's called commercial banking from investment banking. That's the Glass-Steagall law. But we thought we were much smarter, supposedly. So we got rid of that law, and that was bipartisan. And the other thing is we passed a law, because there was a very good regulator, Brooksley Born, that everybody should know about and probably doesn't. She tried to do the right thing to regulate one of these exotic derivatives that you're talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. We will pass a law that says you can't regulate. And it's this type of derivative that is most involved in the AIG scandal. AIG all by itself, cost the same as the entire Savings and Loan debacle..."

[mod mom]

1. 6 recs but no comments. k+r

[slipslidingaway]

3. Thanks for the knr, we've all heard how Phil Gramm slipped

this into a spending bill, what we do not hear is the involvement of anyone from the Clinton Treasury.

[chimpymustgo]

2. And when are they planning to put those regulations back in? Hmmmm....

[slipslidingaway]

4. They're working on getting it under control...

:(

[Enthusiast]

5. This is the part that troubles me.

The Glass Steagal Act should have already been reenacted in the face of these abuses. I'm very disappointed in The Obama Administration. I thought we were the good guys. I want to believe.

[KittyWampus]

20. It isn't just a matter of putting regulations back in now. Sadly, the Obama Adminstration has said

they intend to "regulate" these financial entities that are "too big to fail".

In other words, they are happy to allow these behemoths to exist and seem, at this point, to have no intent of breaking them up into smaller, localized pieces.

Regulation WILL NOT WORK.

Entities that are too large simply hire enough lobbyists, politicians, lawyers to find the loopholes.

At least by forcing them to remain compartmentalized into distinct and separate pieces, their influence will be more amenable to government oversight and control.

[sabrina 1]

6. 'Rubin, Summers and Gramm'

What WAS Obama thinking? Does he know their history and how much their policies contributed to this mess? I know, I've heard 'he's playing chess while everyone else is playing checkers'. But I see no sign that he has any problem with saving the very system these people, who he chose as part of his administration, are such an intrinsic part of.

I wish he would address this issue. Why he thinks the people who caused the problem because they so fully believed in deregulation, can fix it, unless they've completely changed their minds. Have they ever admitted, Summers especially, how wrong they were, or apologized to those, like Dorgan and Brooksley Born who got it right and who they dismissed as 'out of touch with the economics of the 21st Century' or actively worked against?

Interesting too that Summers resigned as president of Harvard after the controversy he ignited as a result of his remarks about why there are not more women in finance and a second controversy later which would have resulted in a second 'no confidence' vote against him in less than a year:

http://www.browndailyherald.com/home/index.cfm?event=displayArticle&ustory_id=76fb5a22-ce9f-4825-8176-0ff94efa92f7

Harvard President Summers resigns amid latest controversy

Harvard University President Lawrence Summers, whose five-year tenure has been beset by controversy, announced yesterday that he will step down at the end of the academic year.

>snip

The president's decision came a week before he was to face a no-confidence vote at a Feb. 28 meeting of the Faculty of Arts and Sciences, the university's largest school. In past weeks, professors have openly criticized the president's leadership skills in wake of the Jan. 27 resignation of FAS Dean William Kirby, whom many faculty members believe was forced out by Summers.

>snip

The no-confidence vote was to be Summers' second in a year; Summers faced his first last March after he said at an academic conference that women may have less innate scientific ability than men. The motion passed by a 218-185 vote.

Maybe 'more' is not 'better'. It looks like a few women, Brooksley Born and Barbara Boxer eg, were a little bit more knowledgeable about all this than he was.

And speaking of women Summers didn't listen to, this story surfaced in the Boston Globe recently:

http://www.boston.com/business/articles/2009/04/03/ex_employee_says_she_warned_harvard_of_risky_moves/

Ex-employee says she warned Harvard of risky moves
Endowment staffer fired after letter to president Larry Summers was the president then

Back in 2002, a new employee of Harvard University's endowment manager named Iris Mack wrote a letter to the school's president, Lawrence Summers, that would ultimately get her fired.
Discuss
COMMENTS (8)

In the letter, dated May 12 of that year, Mack told Summers that she was "deeply troubled and surprised" by things she had seen in her new job as a quantitative analyst at Harvard Management Co.

She would go on to say, in later e-mails and conversations, that she felt the endowment was taking on too much risk in derivatives investments, and that she suspected some of her colleagues were engaging in insider trading, according to a separate letter written by her lawyer that summarized the correspondence.

On July 2 Mack was fired. But six years later, the kinds of investments she allegedly warned about did blow up on Harvard. The endowment plunged 22 percent last summer, in part due to the collapse of the credit markets. As a result, the school is cutting costs and under criticism that it took on too much risk in its investment portfolio......

He doesn't have a great record as either an economist or an academic, it seems to me. So, why is he Treasury Sec? I really would like to know what it was Obama saw in this guy.

[slipslidingaway]

9. He must have known their backgrounds....

and I have a hard believing that the people who could not see the problem to begin with are the right people to put in charge of fixing the system now.

Thanks for the links, I read about the problem Harvard had with derivatives in their endowment program and the warnings that were ignored.

:(

[scarletwoman]

12. GREAT post! One small correction -- Summers is Chief Economic Advisor, not Sec. of Treasury.

Tim Geithner -- a Summers protege -- is Secretary of Treasury.

Anyway, wonderful post, great links. Thank you very much! :thumbsup:

sw

[sabrina 1]

16. Thanks for the correction

Too late to edit now ~

[KharmaTrain]

15. Summers Isn't Treasury Secretary

He's an advisor. That said, I've never had much good to think about him...going back to when he was the Treasury Sec. under Clinton.

The alternative is to let the banking situation crash and hope that Mad Max Beyond Thnderdome doesn't happen.

[sabrina 1]

17. Thanks, can't correct it

but I appreciate the correction.

As for alternatives, maybe choosing people who have a better record on being right and who are not so connected to Wall St. would have been one alternative. People who believe that the Financial industry needs to be regulated and that investigations to find out whether or not there was fraud involved, is a good idea, people who do not have any conflict of interest.

I am at a loss as to the choice of people like Summers and Geithner and if there is a good reason, which is possible, it would be helpful to know what it is.

Obama seems to have been very aware of the need for regulation as he addressed the issue in March of last year and even went so far as to criticize McCain's association with Gramm during the election season.

This is his speech on the economy delivered exactly one year ago. It's long, but it's clear that he DID understand the problems that would result from a system without proper oversight. This speech makes his association with Summers and Geithner even more puzzling, unless, as I said, he has reasons which, so far, are not clear to the rest of us:

http://my.barackobama.com/page/community/post/samgrahamfelsen/gGBNsq

In Major Speech, Obama Calls for Modernizing Our Regulation of Financial Markets

Unfortunately, instead of establishing a 21st century regulatory framework, we simply dismantled the old one – aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered down oversight. In doing so, we encouraged a winner take all, anything goes environment that helped foster devastating dislocations in our economy.

Deregulation of the telecommunications sector, for example, fostered competition but also contributed to massive over-investment. Partial deregulation of the electricity sector enabled market manipulation. Companies like Enron and WorldCom took advantage of the new regulatory environment to push the envelope, pump up earnings, disguise losses and otherwise engage in accounting fraud to make their profits look better – a practice that led investors to question the balance sheet of all companies, and severely damaged public trust in capital markets. This was not the invisible hand at work. Instead, it was the hand of industry lobbyists tilting the playing field in Washington, an accounting industry that had developed powerful conflicts of interest, and a financial sector that fueled over-investment.

A decade later, we have deregulated the financial services sector, and we face another crisis. A regulatory structure set up for banks in the 1930s needed to change because the nature of business has changed. But by the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework.

That sounds like someone who was very aware of what was going on and I would think, would want to bring in people who were not tainted by any association with the very practices he himself slammed in that speech.

[KharmaTrain]

18. Beating The System From Within Vs. From Without

I have great respect for Dr. Krugman and other economists, but just like the old saying goes..."those who know do, those who can't, teach". I'm as critical as anyone about the excesses and corruption of Wall Street and corporate America, but to expect 30 years of "deregulation" and outright greed to be reversed in 3 months is quite a tall order.

Personally, I would have prefered Robert Reich at Treasury as he's had the government experience as well as knowledge of the markets that few others have, includng Dr. Krugman. But he's just one person...this mess is far bigger and can't be tamed destroying the beast. Reregulation is crucial, but that will be for the future...not to figure out both what happened and whose responsible...the only ways we'll find our ways out of this mess.

Just like President Obama appears to want to reform Washington from the inside...also another long and arduous task, I see the same approach at Wall Street...and one that is the biggest contention with many here. I see the GM move last week as a harbinger on what will happen to Wall Street next. As we bail, we (meaning the government) buys interest and control of these operations. Gutting them or letting them completely disintegrate would set this recession/depression into hyperdrive. The good side is the economy will recover sooner since it will have hit bottom so fast. The bad side is millions of more people will be out of jobs, homeless and our financial system will be worthless...barter will be the business standard. Just like to stop a train out of control...if you stand in front of it, you'll get run over...the only way to put on the breaks is to climb into the cab and grab the controls. And the people you want at those controls should be those who know how the train operates.

If we condemn each person with a Wall Street connection, the pantry will be bare. It was one thing to profit from a system everyone else involved was benefitting from...it's another to have jobbed the system to your advantage. Those who jobbed the system must be exposed, prosecuted and never let near money again. But to condemn all takes a lot of people who can help end this mess out of the game and prolongs the downslide. I'd prefer a soft landing rather than a crash landing.

Cheers...

[Reterr]

7. How much longer before Moyers gets called a Freeper

;)?

[smokey nj]

8. Well, they're already calling William Black a liar so I guess it won't be long.

[slipslidingaway]

10. Soon we'll all be freepers :)) n/t

[slipslidingaway]

11. Anyone know more about this issue, TIA n/t

[scarletwoman]

13. k&r -- Thanks for posting this. It's absolutely unbelievable to me that anyone thought

that not regulating derivitives was a good idea.

In fact, I think they KNEW it was a bad idea, but they also knew they'd have a really great run of making tons of money hand over fist before the whole corrupt mess came crashing down.

sw

[slipslidingaway]

14. Believe that is the issue as well...

there was simply to much money to be made, and surely their money for retirement is tucked safely away.

:(

Gramm gets all the blame, but it appears there were others behind the scenes as well.

[slipslidingaway]

19. Kicking for more of the background story....if anyone knows n/t

[chill_wind]

23. ssa.....deregulating financial markets,

encouraging asset bubbles, and *bailing out Wall Street Cronies* are some of the notable highlights of his past "stewardship" touched on here:

The Summers Bubble (November 2008)
http://www.prospect.org/cs/articles?article=the_summers_bubble

(...)

As stewards of the Clinton economy, Summers and his mentor Rubin embraced the delusion that an unregulated financial marketplace is an ideal economic configuration. They pursued this vision with gusto, consistently bowing to Wall Street interests in championing voluntary, "market based" solutions over enforceable government regulations.

With respect to today's crisis, the most consequential example of Summers' penchant for deregulation was his support for the Commodity Futures Modernization Act, which ensured that over-the-counter derivatives (those not traded on exchanges) would go unregulated. It was a major giveaway to Wall Street banks. These financial instruments have played a starring role in the recent financial crisis.

Watch and see how he will now go after someone like Elizabeth Warren:

Brooksley Born, chair of the Commodity Futures Trading Commission during the late 1990s, had the foresight at the time to understand that Summers' position on derivatives was deeply problematic. She argued that an unregulated derivatives market posed serious systemic risk and began taking steps to establish a framework for oversight.

Summers and Rubin, together with Alan Greenspan, went to great lengths to marginalize Born and eventually succeeded in derailing her efforts. Recent events have underscored the soundness of her position, but Summers has failed to concede his error, maintaining that Born's positions were "deeply problematic." This raises an important point -- without any distance from the worst policy mistakes of the Clinton administration, Summers has no incentive to offer an honest critique of these errors and guide the country in a different economic direction.

which is all stuff probably a lot of people will say they knew, but the full article is a useful read.

[slipslidingaway]

24. Thanks for that article, what is mostly posted here is that Gramm

was the sole culprit behind that bill. I knew Summers was against regulating derivatives and the push by Brooksley Born, but I did not know that he was also was in favor of the bill to not regulate derivatives until recently.

Nice to see the asset bubble of the 90's mentioned as well, those 15-30% returns in the equity market happen all the time.

:eyes:

Hope he does not go after Elizabeth Warren...or maybe 3 strikes and you're out.

OT - Going to put this in the Congress forum.

Thanks again.

[leftofthedial]

21. Obama's economic team is a disaster.

[slipslidingaway]

22. Agree, but it seems that Gramm had help in slipping that law

into another bill, although we do not hear about that aspect.