Mammon Larry Summers — temple money changer
mammon Robert Rubin — pharisee
The indefatigable Brad DeLong has devoted his energies to singlehandedly protecting Larry Summers from the Internet (although, he makes pains to say, he likes Janet Yellen almost as much). Although I’m letting most of the Fed chair sideline debate pass me by, DeLong and others have raised one issue that played an important symbolic role in 13 Bankers and, more generally, the historical background to the financial crisis: Brooksley Born’s proposal to think about regulating OTC derivatives in 1998.
For those who don’t know the story, it basically goes like this. Born, as chair of the CFTC, was worried about the risk posed by OTC derivatives, which were effectively unregulated at the time. On May 7, 1998, the CFTC issued a “concept release” asking for comments about the regulation of OTC derivatives. Summers, then deputy treasury secretary, along with Treasury Secretary Robert Rubin, Fed Chair Alan Greenspan, and SEC Chair Arthur Levitt, opposed Born, and they issued their own press release on the same day opposing the CFTC. Over the next several months they successfully blocked the CFTC from regulating OTC derivatives, convincing Congress to stop the CFTC from moving forward, a position that was enshrined in statute in the Commodity Futures Modernization Act of 2000.
Now that it is widely recognized that OTC derivatives needed to be regulated, this has been an uncomfortable bit of history for Summers et al. The current defense was put forward by an unnamed person and by DeLong:
One person close to the process described it this way: “The concern with Born’s concept release back then was that CFTC jurisdiction rested on the contracts being futures contracts, and if they were futures contracts, they had to be exchange traded, and existing hedging contracts were not exchange traded (at the time they basically couldn’t be), so there was a concern that the existing contracts would be void (illegal).” . . . Cal Berkeley professor J. Bradford DeLong, who has authored papers with Summers, Tweeted last night: “‘Brooksley Born approach’ made all existing derivatives contracts unenforceable. Very bad idea.”
There are several problems with this defense.
First, this argument targets one possible outcome of Born’s process, not the process itself—which is what Summers et al. shut down. The purpose of the concept release was ”to solicit comments on whether the regulatory structure applicable to OTC derivatives under the Commission’s regulations should be modified in any way . . . and to generate information and data to assist the Commission in assessing this issue.” Born wanted to discuss the issue. Yet her opponents then—and now—jumped to the “worst” possible outcome (for them, or rather for certain market participants) and equated that with what Born was doing.
Second, that isn’t how the law works. It was recognized at the time that OTC derivatives were in a legal gray area—hence the desire for “certainty” that was finally satisfied by the CFMA. If some activity is in a legal gray area, and you do it anyway, you can’t simply assert that now the activity must be allowed by law because you are doing it. If the contracts you wrote, knowing they might not be enforceable, now become definitively unenforceable—well, tough luck. You can’t dictate what the law is simply through your own actions.
Third, the argument proves too much. Again, Born was proposing to think about about whether and how OTC derivatives should be regulated. If that is a “very bad idea,” then, by implication, OTC derivatives can never be regulated—because you have to think about regulating something before you can regulate it. Is that really a position that Summers and DeLong want to defend?
Fourth, if the problem is existing contracts, then there’s an obvious solution: grandfather them. In fact, the concept release included this language:
“This release does not in any way alter the current status of any instrument or transaction under the CEA. All currently applicable exemptions, interpretations, and policy statements issued by the Commission regarding OTC derivatives products remain in effect, and market participants may continue to rely upon them.”
It is true that that language applied to the release itself, not necessarily to any regulations that might have been issued later. But those regulations would have to go through the usual notice-and-comment process, and the other regulatory agencies would obviously be at the table. If Summers’s real concern was past contracts, then that’s something he could have negotiated with Born.* (And if she refused, then he could have gone to Congress, or to the courts.) That concern doesn’t justify what happened.
Summers would be better off—at least as far as this Fed chair thing is concerned—simply admitting he was wrong, rather than trying to win a fifteen-year-old argument. At the end of the day, however, the whole Brooksley Born affair is a bit beside the point—if the question is trying to understand Larry Summers. The Summers camp thinks they can justify his anti-regulatory stance during the Clinton years by making Born look like an extremist; by implication, he was just a moderate.
But the Born affair (and, or course, the great “thirteen bankers” quote) is just one piece of evidence. We know that Summers opposed derivatives regulation. The report of the President’s Working Group on Financial Markets with his name on it unanimously recommended providing “legal certainty” by definitively exempting derivatives from the Commodity Exchange Act. He was secretary of the treasury when the CFMA was passed. Robert Rubin said in his 2003 memoir (before he had anything to be embarrassed about), “Larry characterized my concerns about derivatives as a preference for playing tennis with wooden racquets–as opposed to the more powerful graphite and titanium ones used today.” (Rubin now claims that he was in favor of derivatives regulation, although he didn’t do anything about it.)
And it isn’t as if Summers had some other, better proposal to regulate OTC derivatives. He was against it. That’s the issue—not whether the legal status of derivatives contracts under the CEA somehow changed because of a concept release issued by the CFTC.
* This is what Levitt now says he wishes he had done.
This idea is being pushed by the boys’ club around President Obama, and also by the bullying cool kids, some of the Wall Street types like former Treasury Secretary Robert Rubin who paved the way for the country’s ruin. Larry’s loyal former protégée Sheryl Sandberg aside, it evokes a sexism of complacency — just a bunch of alpha males who prefer each others’ company and who all flatter themselves that they’re smart enough to know how smart Summers is.
These days, it’s impolite to mention that all those cool bankers that President Cool didn’t punish enough brought the country to the brink of disaster.
Even Bill Clinton has offered an “oops,” saying he got bad advice from Summers and Rubin.
In the late 1990s, when the prescient Brooksley Born, then chief of the Commodity Futures Trading Commission, wanted to publicly examine derivatives, Summers, who was deputy Treasury secretary, worked with Rubin and Alan Greenspan to block her.
Michael Greenberger, a University of Maryland law school professor and former Born lieutenant, told The Post that Summers called and said: “I have 13 bankers in my office, and they say if you go forward with this you will cause the worst financial crisis since World War II.” Instead, these bankers were behind the policies that caused the worst financial crisis since before World War II.
As The Times reported this week, when the 58-year-old Summers came to the Obama White House, he was worth $7 million; when he left at the end of 2010, he “jumped into a moneymaking spree” at a hedge fund and at Citigroup — a bank rescued by a government bailout — so he could be a gazillionaire by the time Ben Bernanke retires and the job is open.
His stuffing of his pockets within hours of leaving the White House job now makes it unseemly for him to lead the Federal Reserve in enforcing the important new regulations from the Dodd-Frank financial reform bill.
He is an exemplar of, rather than a solution to, the obscenely lucrative revolving-door problem mocked by Mark Leibovich in his new book, “This Town.”
The Fed is entering a new era when it is supposed to be getting tough on the banks, even if it means that the banks are smaller and less profitable and that shareholders make less.
Sure, Summers, the son of two economists and nephew of two Nobel laureates in economics, has a high I.Q. and inspired a great cameo bit in “The Social Network.” But there has to be somebody out there to run the economy who wasn’t a part of the culture that ran the economy into the ground.
Janet Yellen, the Fed’s vice chair, has generally been more publicly aligned with Bernanke than Summers has been in using monetary policy to revive the economy. If the president passes over the trailblazing and more temperamentally stable Yellen to appoint Summers, he’ll be giving Larry some vindication on his infamous critique of women that helped get him ousted as president of Harvard — a job he got thanks to Rubin.
Does the fact that we’ve had no female Fed chairs and no female Treasury secretaries mean that Summers was right when he said women are less likely to have the kind of brains that would allow them to get top jobs requiring math skills?