Amidst all the illusions and false promises in the incipient rescue of the American economy, at least one smart woman from Oklahoma is working for taxpayers and homeowners.
If Barack Obama is a closet socialist, he sure has a peculiar way of pursuing his grand scheme. Notwithstanding the vivid hallucinations emanating from the unmedicated wing of the Republican Party these days, the 44th President is smart, charismatic, and very much a pragmatic centrist on the issues that are defining his Presidency.
One clear signal that Obama’s political DNA is much closer to Bill Clinton’s than, say, Bernie Sanders’s, is how he’s been handling the economy generally, and the continuing crisis in the banking system in particular.
Here I should repeat my caution on this subject. Those who need to believe, with a song in their hearts, that the underlying nature of the American system is tilted toward democracy and justice, are not going to find solace in this column. Even for the brave, the harsh facts about this debacle present a hazard zone for the psyche. The more one delves into this astounding problem, the more frightening and disorienting it becomes. The only silver lining here is that, at some point, you’re likely to experience your anger beginning to shove back against your fear, like a fourth person trying to squeeze into the back seat of a small car.
Seriously, there’s lots to be enraged about. Some of you will recall the scene of a devastated
Alan Greenspan admitting before Congress last fall that his basic, philosophical assumptions about the financial markets being able to regulate themselves were tragically misguided. Yet, it isn’t just that the formerly god-like chairman of the Federal Reserve was dramatically copping to a profound mistake. Nope. There’s a lot more to the story, including how Greenspan & Co. set out, a decade ago, to destroy a fine public servant, Brooksley Born.
Born was the head of the Commodities Futures Trading Commission (CFTC) when she decided during the economic boom years of the Clinton Administration that it was time to get a handle on the darkly unregulated trading of derivatives. As Michael Moore comically demonstrated in “Capitalism, a Love Story,” not even people who earn their money selling derivatives or studying derivatives can express, in English, what a derivative is. Suffice to say a derivative is not a stock, nor a bond, nor a commodity, but a contract whose value is derived from the value of an underlying asset. They are often highly leveraged such that relatively small changes in the value of the underlying assets can have a dramatic effect, positive or negative, on the value of the derivative.
By 1998, Born had decided that the CFTC had to move to regulate derivative transactions. At the time, the estimated value of these instruments held by U.S. commercial banks approached $40 trillion. By the time the financial crisis hit last year, the value of these wagers had reached an estimated $175 trillion. Right, trillion with a “t.” (By comparison, federal budget outlays for 2009 are projected at just under a mere $4 trillion.)
But Born’s decision to regulate derivatives was stiffly resisted by Greenspan, an Ayn Rand disciple who, according to the reporting in a recent PBS Frontlines episode, not only discouraged Born from regulating derivatives but also opined that financial fraud, in general, was not worth the trouble to even investigate. Born was not persuaded. When she pushed the issue, the wall she hit included not just Greenspan but Robert Rubin, Larry Summers, and other members of President Clinton’s Working Group on Financial Markets.
By coincidence, in the midst of Born’s lonely standoff with Greenspan, Rubin, and Summers, a stunning financial debacle occurred that should have sealed the argument in her favor. An elite hedge fund named Long Term Capital Management (LTCM) informed the Federal Reserve that it could not cover $4 billion in losses. The news set off a high-stakes, white-knuckle rush to absorb the losses that the over-leveraged geniuses at LTCM had incurred in the “dark” market of derivatives transactions.
“This episode should serve as a wake-up call about the unknown risks that the over-the-counter derivatives market may pose to the U.S. economy and to financial stability around the world,” Born told the House Banking Committee just a few days later.
It didn’t matter. Greenspan, Rubin, Summers and then Securities & Exchange Commission chairman Arthur Levitt Jr., still opposed her and worked, successfully, (along with such stellar, de-regulating legislators as Sen. Phil Gramm) to actually reduce the CFTC’s regulatory authority. Born found herself with no recourse but to resign in protest in 1999. Among this crowd, only Levitt has had the decency to directly acknowledge that what happened to Born was wrong, and to express personal regret for his role in her ousting. Greenspan, Rubin and Summers have refused to talk to reporters about it, although Summers aridly conceded to the New Yorker’s Ryan Lizza that: “With hindsight, all of us with involvement in financial policy wish we had done more to forestall problems.”
(Memo to Larry Summers: ‘Hey, don’t be so hard on yourself. It’s only the wreckage of the western banking system we’re talking about, and you, for one, still have a nice paying job.’)
As Lizza notes in his article, this isn’t the first time Summers’s arrogance and lack of good sense has gotten him into trouble, beginning with a memo he signed onto while at the World Bank in 1991 that posited: “the economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable.”
Today it’s impossible not to see the connection between the LTCM debacle and the AIG disaster that, in the wake of the 2008 banking collapse, cost the U.S. taxpayer so dearly (approximately $70 billion in direct payments alone). The green eye-shade prose of the financial press doesn’t quite capture the human juice of this mind-bending disaster that, in the words of Rolling Stone’s Matt Taibbi, rendered the United States a “permanent laughingstock.”
The involvement of Rubin and Summers in what happened to Brooksley Born is important because of what it says about values, and about what it says about who gets to hold power in Washington D.C. A decade later, Barack Obama would turn to these supposedly brilliant men, in large part because they were comfortable characters to the shell-shocked markets that he was trying to stabilize. Into this rather exclusive men’s group came Treasury Secretary Tim Geithner who, like Summers, is a Rubin protegé. Geithner began serving as a special assistant to Summers in 1993 and, a decade later, had worked himself up to become the President of the Federal Reserve Bank of New York. In that position, he was instrumental in helping current Federal Reserve chairman Ben Bernanke and Bush Administration Treasury Secretary Henry Paulson assemble and pound through Congress the massive bailouts of AIG and the teetering investment banks in September of 2008.
In retrospect, maybe it makes a certain kind of disturbing but common sense for Obama to turn to people like Summers and Geithner to try to staunch the hemorrhaging on Wall Street. If so, it still comes at a great and mounting cost of public trust that has yet to reckoned with. The economy hangs in the balance to be sure, but so do fundamental issues of democratic rights and justice that school children pledge, on a daily basis, to honor as part of the fabric of America.
This is where Elizabeth Warren comes in.
Warren is a 60 year-old Harvard Law School professor from Oklahoma who, a year ago, was appointed by Senate Majority Leader Harry Reid to head up the five-member Congressional Oversight Panel (COP). COP monitors the $700 billion federal “Troubled Assets Relief Program,” known as TARP, that Congress hastily approved last year.
It may be too simplistic to cast Warren as the new Brooksley Born. For one thing, the COP chairwoman is publicly outspoken, whereas Born waged her battles largely behind the scenes. But one similarity is that both have had to square off against the bankers and their allies in government to try to protect and advance the public interest. What sets Warren apart from all the other contemporary players in this saga (including Obama) is the extent to which she has publicly and viscerally embraced her duties to the American taxpayer to be honest about what she can account for, and forthright about what she can’t.
To begin with, Warren has been unsparing in her criticism of Geithner’s predecessor, Hank Paulson, for the way Paulson misled Congress and the American people about how the first $350 billion in TARP funds would be spent. In asking for what amounted to zero accountability (and a formal bar on legal challenges) for how banks would use the billions of federal dollars being pumped into them in the fall of 2008, Paulson said it was necessary to unfreeze small business lending.
“That’s not what happened to that money,” Warren says. She refers to this initial infusion by Treasury as the “don’t ask, don’t tell money,” and has strongly registered her objection that the ruse facilitated by the Treasury undermines public confidence not just in the government, but in the nation’s financial system. Likewise, she’s essentially accused Paulson of lying to her committee in assuring COP that Treasury had secured assets of equivalent value in exchange for the billions dispensed to the banks.
In an interview that she gave earlier this month (on the same day the financial press was reporting that Wall Street firms, many of whom received shovels of taxpayer dollars, were dispensing a record $140 billion in bonuses), Warren pronounced herself “speechless,” at the shamelessness of it. She never actually uses the word “theft” but her indignation is clear when she talks about how, rather than the banks using the tax dollars to make loans to businesses (as we were told they would) the funds were invested elsewhere and/or spent on bonuses.
Warren bristles not just at the ethical squalor in the U.S. banking system but at the still prevailing attitude that regulation of trading and lending practices is a threat to the whole system. Appearing on HBO with Bill Maher last spring, she shared her tart analysis that the U.S. lending industry has devolved into using a “trick and traps model” that exploits consumers. She then drew laughs in bemoaning the lack of regulation by noting that even the children’s board game, “Candyland,” and canasta have rules.
Part of what makes Warren so effective–some are already seriously proposing her as a future Presidential candidate–is how well she communicates. She’s an award winning academic but she talks clearly about what financial machinations involve and speaks with passion and urgency about how taxpayers and consumers are entitled to feel about them. In one of her most recent videos (September 9th) for COP, she makes a compelling case that those dispensing the remaining TARP money (read, Tim Geithner and the Treasury Department) need to do more to address the dramatically deepening home foreclosure crisis. The problem has worsened considerably since COP started studying it last winter, she says, such that now 1 in 8 U.S. homeowners are either in foreclosure or facing default. Without downplaying the effects on defaulting homeowners, Warren argues that the secondary effects are so devastating on surrounding property owners and communities such that every American now has a direct stake in foreclosure mitigation.
It’s Warren’s clear resolve to be an independent voice for citizens and taxpayers that makes it vital that she be listened to. The most troubling part of her message is her regularly candid “yes, but” rebuttals to the bubbles of supposed good news, primarily from Treasury, that the economy and the markets are recovering.
Well, that’s interesting, Warren says, but look at the key problems that TARP was supposed to help buy solutions to. There’s not much evidence, she says, that the so-called “toxic assets”–i.e. the bundled sub-prime mortgages that banks gobbled up like so much Halloween candy–are off the books, something that TARP was supposed to accomplish. As far as the “too big to fail” syndrome that was a prime justification for the taxpayer bailout, she says, the indications are that, if anything, it has gotten worse as smaller and mid-sized banks are taken over by large ones. (Here, a good example is Washington Mutual being absorbed by JP Morgan Chase & Co.)
“All the things that were serious problems then,” she says, “are serious problems now.”
“Arrogance is exactly the right word,” she told MSNBC last week in talking about the record Wall Street bonuses. “We’re talking about people who think they deserve it after they effectively bankrupted their companies and nearly bankrupted the country. Had it not been for taxpayers bailing them out, these people would be on the street.”
Moreover, she has no confidence, and is providing no assurances, that Congress or the White House are committed partners to the reforms and transparency that the 2008 crisis so clearly begs.
“The same rules that brought us to this crisis are still in place,” Warren said last week. “We have not changed any of the basic rules. And the conversation on regulatory reform has really, in large part, been drowned out. So my view on this is let’s demand we get real changes.”
In a piece he filed earlier this month for Mother Jones, veteran Washington-based journalist David Corn understandably posed the question of whether Warren’s plain-spoken calls for “real changes” has (echoes of Brooksley Born) put her on a collision course with Larry Summers. Warren told Corn that she and Summers were friends. The White House, Corn reported, “did not respond to a request for comment from Summers.”
To be fair to Obama, he has responded favorably to Warren’s calls to create a Consumer Financial Protection Agency. Legislation that would create the agency cleared the House Financial Services Committee on Friday but not, according to the Los Angeles Times, without being watered down under fierce industry and Republican opposition.
Warren would be the first to tell anybody and everybody that the stakes at this moment in history are enormous and that the outcome could well determine whether the U.S. economic system returns to health and sanity, if not in our lifetimes or in the lifetimes of our children. She, more than anybody right now, embodies both the urgency for the necessary major reforms and the moral imperative that they be secured on behalf of taxpayers and ordinary citizens and investors. She speaks for the rest of us, and we have to somehow summon the social and political awareness and fortitude to make sure that she not be silenced, or sent packing from Washington the way Brooksley Born was beaten and sent packing a decade ago.
–Tim Connor
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