Is Lew Compromised?

Jonathan Weil at Bloomberg has a good piece up today on whether Jacob Lew's generous compensation package at Citigroup compromises him as Treasury secretary. Read, and ponder: http://www.bloomberg.com/news/2013-02-21/citigroup-s-man-goes-to-the-treasury-department.html

Also check out my take on Lew and his Citigroup ties--part of the time-dishonored  Rubinomics tradition -- back in January:

Is Jack Lew A Friend to Wall Street?

Like Tim Geithner, the new Treasury nominee may owe his views to Robert Rubin. So don't expect him to pursue much in the way of bank reform.

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By Michael Hirsh

Updated: January 10, 2013 | 11:27 a.m. 

Reprinted from National Journal

It was a little noted event when last fall, during the height of the presidential election campaign, the Treasury Department released Timothy Geithner’s phone records. To the extent anyone paid attention at all—and let’s face it, almost no one did—financial reporters were struck that the Treasury secretary’s most frequent contact was Larry Fink of BlackRock, the world’s largest money manager and Geithner’s principal conduit to his many friends on Wall Street. But the even more telling name of Geithner’s regular confidants, as the Financial Times noted, was the second one on the frequent-contact list: Robert Rubin.

That might seem odd; after all, it’s been nearly a decade and a half since Geithner worked for Rubin, who is long retired from public life. But Bob Rubin was no ordinary employer. The former Treasury secretary under Bill Clinton all but created Timothy Geithner as we know him today, raising him from a junior Tokyo Embassy staffer to undersecretary of the Treasury in the mid-to-late-’90s, and later sponsoring the still-boyish bureaucrat as president of the New York Fed in 2003 (against resistance from the head of the search committee, Paul Volcker, who according to The Wall Street Journal barked: “Who’s Geithner?”). As he almost always has, Rubin prevailed, and for nearly four years his former protégé has lorded over America’s financial system.

Rubinomics: It’s the cult that never quits. Now the nation is faced with a potential new acolyte. Is Jacob Lew, who is expected to be named Thursday as the replacement for Geithner, yet another Rubinite who will largely follow the policies of his predecessor? Calm, brilliant, competent at everything he’s tried—from the Office of Management and Budget to deputy secretary of State to chief of staff—Lew has smoothly run the White House in the year since William Daley left. He has a reputation for unimpeachable integrity and total honesty, as well as a mastery of the budget that will be critical over the next four years of fiscal fights. But many critics fear that the picture is different when it comes to Wall Street. On financial reform, Lew is a virtual cipher who, in his few public pronouncements, has appeared to toe the Rubin-Geithner line of minimal interference with America’s giant banks.

And Lew is taking over as Treasury secretary at a critical time. Two and a half years after enactment, the Dodd-Frank financial law is still not fully implemented. Even as the winds of financial turbulence threaten from Europe, financial-industry officials admit the Federal Deposit Insurance Corp. has not developed the capacity to liquidate banks in the event of a crisis. Although it never became a 2012 campaign issue, financial regulation has lagged well behind schedule (no one even seemed to care, for example, when Mitt Romney failed to propose an alternative to Dodd-Frank, even though he had promised to do so). Wall Street’s lobbyists have managed to delay the “Volcker Rule” —the closest thing we have today to a Glass-Steagall law separating federally insured commercial banking from risky investment banking—by six months. The banks are also engaged in a behind-the-scenes effort to escape U.S. oversight of their derivatives activities overseas.

Into this den of super-sophisticated—and savage—lions of finance will walk the gentle-mannered figure of Jack Lew, who is expected to be easily confirmed. Hopes for change—any real progress in containing the power and systemic size of the banks—are not high. “By going with Jack Lew, Obama is making the decision: ‘I don’t want a fight over Treasury secretary. I want someone who’s going to maintain the status quo.’ That’s what Jack Lew represents,” says Jeff Connaughton, who as a senior Senate staffer fought for financial reform and later, in despair, wrote a book titled Wall Street Always Wins.

A Brief History of Rubinomics

From the very beginning of Obama’s presidency, when Rubin made a cameo appearance at Obama’s first financial crisis meeting—held in September 2008 next to a college gym in Florida—and thenkvelled from the sidelines as his two proudest protégés, Geithner and former Treasury Secretary Larry Summers, took over the new administration, Rubin’s influence has continued to be strong. At the same time, however, the ex-Treasury secretary’s reputation has never recovered from the lingering aftermath of a disaster he and his hands-off approach to Wall Street did so much to create. In her stunningly frank new memoir about her major battles with Geithner over the past four years, Sheila Bair, the widely admired former FDIC director, calls Geithner’s surprise appointment in 2008 “a punch in the gut” that made sense to her for only one reason: Rubin’s shadowy power. “I did not understand how someone who had campaigned on a ‘change’ agenda could appoint a person who had been so involved in contributing to the financial mess that had gotten Obama elected,” Bair writes. “The only explanation I could think of was that Robert Rubin had pushed him.”

Over the next several years, Bair continues, Geithner and Summers gradually cut Obama off from other voices, other regulators who wanted to do more to clean up the subprime-mortgage mess or crack down more harshly on the banks that did so much to generate it. To date, not a single financial executive has been indicted in what is widely seen as probably the biggest financial fraud in history, and the biggest banks responsible for the disaster are now even bigger, their trading practices every bit as mysterious. As a result, a number of experts say that, as incredible as it sounds, they may pose an even greater systemic risk to the American economy than they did before.

It is trend that troubles and upsets many progressives. Obama has shown a penchant for making bold Cabinet choices in areas he is personally comfortable with or has a passion for—such as foreign policy—while taking the line of least interference (read: Rubinite) approach on the financial sector and delegating most decisions to Geithner. Exhibit A: In recent weeks, a huge debate erupted in Washington over whether Obama should pick a maverick Republican, Chuck Hagel, as his Defense secretary. Obama did. But if the president wanted a Republican in his Cabinet for the second term, then why not Bair, the tough and prescient head of the FDIC under Bush who irritated Geithner to no end by pushing for harsher reforms? Or Thomas Hoenig, who as a GOP-appointed Federal Reserve governor earned plaudits from the Right and Left for calling for a breakup of the biggest banks?

And where are the bold-minded Democrats like Brooksley Born, the farsighted head of the Commodity Futures Trading Commission who took on Rubin and Alan Greenspan in the ’90s? Or Gary Gensler, Obama’s CFTC chief and a rare renegade Rubinite who has led a brave and lonely battle to rein in the murkiest market of all, over-the-counter (or privately traded) derivatives, but who leaves office at the end of 2013. (“No one has mentioned his name for Treasury or any other post,” laments a close ally of Gensler’s at CFTC.)

Instead, Obama wants to appoint a man who appears to be something of a naïf on financial reform and who, while he may not be as much a part of the Rubin cabal as Geithner was, worked with Rubin in the Clinton administration and later became one of a throng of former Clintonites recruited by Rubin at Citigroup. Liberal analyst Bob Kuttner’s pronouncement back in 2010 still rings true today: When it came to finance, Kuttner wrote, “instead of the team-of-rivals model that Obama had often invoked, Obama hired a team of Rubins.”

The Results Are In

Over the past four years Geithner has come through for the team big time, and the results of his hands-off approach to the chief perpetrators of the worst financial hangover since the 1930s are now in: The basic structure of Wall Street has not changed and arguably has gotten more dangerous. Geithner will likely go down in history as the Treasury secretary who helped avert a second Great Depression—it’s how he sees his own legacy, and he deserves a lot of credit for that—but also as the man who allowed Bob Rubin’s baby, Wall Street, to resurrect itself as a place dominated by the giant, too-big-to-fail banks that still loom over our collective future.

“Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash,” writes Frank Partnoy, a former Wall Street trader-turned-Cassandra who has been warning since the late ’90s that the U.S. public is getting shafted by banks dealing in OTC derivatives. “It’s what you can’t figure out that’s terrifying,” Bill Ackman, one of the most sophisticated hedge-fund managers in the world, tells Partnoy and coauthor Jesse Eisinger in their article in the current Atlantic magazine, “What’s Inside America’s Banks?” In the gargantuan derivatives-trading positions, Ackman says, “you can’t figure out whether the bank has got it right or not.” Much of the new worry comes in the wake of revelations that even Jamie Dimon, the head of JPMorgan Chase and one of the most respected CEOs on Wall Street, didn’t comprehend the huge loss his London unit took last year. “If JPMorgan can have a $5.8 billion derivative problem, then any of these guys could—and $5.8 billion is not the upper bound,” Ackman says.

This is sometimes known as the Too-Big-to-Fail problem, but a little-noted corollary is the Too-Complex-to-Understand problem. And that poses a big systemic risk for the global economy, if no one knows which are the stronger or weaker banks in the next crisis—which, sooner or later, will come. “What is really dangerous is that investors cannot discriminate between banks anymore,” says Robert Johnson, a former Soros fund manager who now runs the progressive Institute for New Economic Thinking. “It’s like the Greek crisis, but many times larger. Everybody has to back away from all the banks because they know they’re interconnected. They know there are derivatives exposures, and they know the derivatives are not confined by the scale of outstanding debt. None of us as investors in financial institutions can ever say we’re confident they don’t have this stuff.”

The Obama administration consciously let this happen, its many critics say. Geithner and Co. is “enthralled with Wall Street,” says Dennis Kelleher, the head of Better Markets, an advocacy group. “None of [the Rubinites] have been able to come grips to with fact that they laid the seeds” for the 2008 financial crisis, and “that has prevented accountability anywhere down the line.” It has also blinded the administration from addressing the deeper systemic nature of Wall Street’s pathology, Kelleher says. Or as Johnson puts it: “The whole culture of the White House and Treasury is still a Wall Street trading culture.”

What Will Lew Do?

As Rubin was in his day, Jacob Lew may well be the most liked and admired man in Washington. Even so, he should not be dismissed as a patsy. Lew, a former aide to Speaker Tip O’Neill, clawed his way to senior positions through sheer intellect (Harvard, Georgetown Law) and hard work. Republicans are still smarting from his often uncompromising bargaining during two bruising budget battles. “He’s a prince, but his good manners belie how tough he is. I’ve seen him get mad, very stern. It’s not like he’s sort of this happy mensch,” says a former senior Obama administration official.

The real issue is whether Lew is just too far behind to catch up, whether he’ll be a babe in the woods of financial arcana. According to one senior financial-industry lobbyist in Washington, Lew’s appointment is a huge relief precisely because Wall Street executives believe they’ll get something close to another Geithner, or someone even more pliable. Lew “is not a markets guy,” this executive, who would speak only on condition of anonymity, told National Journal. “We could do a lot worse. He’s not openly hostile to the financial sector.”

Until now, Lew has given only the barest hints of his views on finance. At his 2010 Senate confirmation hearing to become head of OMB, Lew was asked by Sen. Bernie Sanders, I-Vt., whether he believed that the "deregulation of Wall Street, pushed by people like Alan Greenspan [and] Robert Rubin, contributed significantly to the disaster we saw on Wall Street." Lew responded that he didn't "personally know the extent to which deregulation drove it, but I don't believe that deregulation was the proximate cause." (For the record, a plethora of experts and Obama himself have said that, as the then-presidential candidate put it in 2008, “it's because of deregulation that Wall Street was able to engage in the kind of irresponsible actions that have caused this financial crisis.")

Like others from the Clinton era, Lew checked his box at Citigroup, working during the two years directly before the 2008 collapse as chief operating officer of the bank’s Alternative Investments unit, which engaged in proprietary trading and invested in hedge funds and private equity groups. Although Lew merely oversaw the books, The Huffington Post reported in 2010 that Lew's unit invested in John Paulson’s hedge fund, which made billions correctly predicting that U.S. homeowners would not be able to make their mortgage payments.

Lew’s defenders say it’s wrong to see him as just another Rubinite. “I don’t think he’s a member of any club,” says Bowman Cutter, the former head of the National Economic Council under Clinton, and a close associate of Lew’s. “Tim was much more a part of that club. He knew all of those people, was close to them. I worked for Rubin.... Tim, Larry were all sort of in the inner circle of that group. But there is absolute no way you could ever say that about Jack Lew. He spent the formative part of his career as a senior staffer on the Hill. That doesn’t mean on substantive issues he’ll have different views, of course. Most of it he’s not going to disagree with it for sake of doing so.”

More tellingly, Obama, by all evidence, is not unhappy with the financial status quo. The president clearly has other issues he wants to spend his political capital on: a deficit-reduction deal, gun control, immigration reform. And Obama seems fairly satisfied with what Geithner has wrought. In a revealing interview with Rolling Stone last fall, Obama sounded the straight Geithner-Rubinite line on Wall Street: “I've looked at some of Rolling Stone’s articles [by acerbic critic Matt Taibbi] that say, 'This didn't go far enough; we didn't institute Glass-Steagall' and so forth, and I pushed my economic team very hard on some of those questions. But there is no evidence that having Glass-Steagall in place would somehow change the dynamic. Lehman Brothers wasn't a commercial bank; it was an investment bank. AIG wasn't an FDIC-insured bank, it was an insurance institution. So the problem in today's financial sector can't be solved simply by reimposing models that were created in the 1930s.”

Connaughton calls Obama’s view “financially illiterate,” and he’s right. The point was not that the repeal of Glass-Steagall caused the crisis. Instead it laid the groundwork—planted the “seeds,” to use Kelleher’s term, along with other key moves by the Rubinites in the 1990s. A crisis of size of what happened 2008 doesn’t occur because of just a Lehman or an AIG is out of control. It happens because the entire financial system is infected by risk, and there are no more islands of safety, such as commercial banking, or any firewalls. This what Rubin’s signature policy, the repeal of Glass-Steagall, began to accomplish in 1999; it ensured there would no longer be any strong firewalls and capital buffers between Wall Street institutions and their affiliates, and between banks and nonbanks and insurance companies. A year later, in 2000, Summers and Geithner pushed for the Commodity Futures Modernization Act, which created a global laissez faire market worth trillions in unmonitored trades. So with the repeal of Glass-Steagall, systemic failure was entirely forgotten while at the same time, with the passage of the CFMA, huge new systemic risks were being created. As Eric Dinallo, the former superintendent of the New York State Insurance Department who dealt with the collapse of AIG, once put it: Deregulation "created a perfect storm of financial disaster."

This was largely the doing of the Rubinites. Yet Geithner and Summers have remained in defiant denial of their responsibility, thus permitting Wall Street to recreate itself in its old image. While Lew was not directly involved, as Clinton’s OMB chief from 1998 until January 2001 it was his office that was responsible for overseeing new legislation and policy, which would have included Glass-Steagall repeal (the Financial Services Modernization Act of 1999) and the Commodity Futures Modernization Act.

In his defense today, Geithner argues that he couldn’t do the first thing he is justly credited with—saving the nation from Depression—without keeping the banks intact. He and his Treasury Department also like to point proudly to the payback for the American taxpayer, since almost all the TARP money has been repaid. But neither of these arguments stands up well to scrutiny. First, the crisis cost the economy trillions of dollars, which has never been regained. And while Geithner’s bailout measures were undoubtedly necessary in the heat of the crisis, by the time the Congress began debating serious reform in late 2009, the banks were somewhat healthy, and yet even then Geithner refused to tamper with their balance sheets. As Bair writes, “I couldn’t think of one Dodd-Frank reform that Tim strongly supported. Resolution authority, derivatives reform, the Volcker and Collins amendments—he had worked to weaken or oppose them all.” (A Treasury spokeswoman refused to comment directly on the Bair book.)

Despite the Obama administration’s inertia, however, simmering resistance to the too-big-to-fail problem appears to be growing stronger. Recently, in a remarkable instance of Right-Left unity, Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., asked the Government Accountability Office to study the subsidies given to the biggest banks. (Brown is also proposing to limit non-deposit liabilities to 2 percent of GDP, a level that would force the nation’s top five banks to shrink significantly). Obama’s own appointee, Federal Reserve Board Governor Dan Tarullo, called in a recent speech for “a set of complementary policy measures” to go with Dodd-Frank, including a cap on banks’ size, a view endorsed more stridently by several Fed governors (but not by the Obama administration). Perhaps the most startling moment in this rising tide came last summer when Sanford I. Weill, the founder of Citigroup who once proudly hung a sign in his office that read “the Shatterer of Glass-Steagall,” called for a breakup of the big banks, including his own creation.

For Lew, the challenge will be whether he decides that the growing number of dissidents in high places—from Brown and Vitter to Dan Tarullo—are really onto something. The options are there: Lew could decide to endorse the Tarullo proposal, which involves, in part, limiting the expansion of big banks by restricting the funding they get from sources other than traditional deposits. He could personally take up the cause of the Volcker Rule, ensuring that it is implemented as intended, barring federally insured banks from the riskiest trading behavior. Or Lew could simply do what financial officials did the last time around: wait for the next crisis to hit, and then respond.

Remembrance of Rubinomics Past

The man mainly responsible for all this kid-gloves treatment of Wall Street, Robert Rubin, was once the most admired secretary since Alexander Hamilton. That’s what Bill Clinton called him upon Rubin’s departure in 1999. Rubin quickly went to work at Citi for Weill, who wrote frankly in his memoirs that he had hired Rubin to secure a “highly visible public endorsement” for the repeal of Glass-Steagall later that year. Back then this approach to Wall Street was considered enlightened. It was the “globalization” era of the ’90s, when the bond market became known as the benign taskmaster of Washington (recall James Carville’s endlessly quoted line about wanting to “come back as the bond market” in his next life).

There was a style about Rubin that everyone loved—judicious, calm, untouched by the rancor.

And his advice always sounded sage: Don’t tamper too much with finance or the flow of capital; don’t threaten banks’ balance sheets; keep changes minimal. As Barney Frank, the brilliantly caustic former chairman of the House Financial Services Committee, once summed up the Clinton administration’s view to me: “The way to a good life was to leave capital alone. Do not tax it, do not regulate it. If you do that, it will take care of you.” This became known as the “Washington Consensus,” a set of reform policies that Rubin and Co. simplified into a three-pronged formula: rapid liberalization of markets, privatization, and a demand for fiscal austerity from governments.

Like Jack Lew, Rubin was admired by everyone for his low-key personal style. Rubin always had a big heart and a gentle manner: He was a liberal Democrat who, as a young trader at Goldman Sachs, used to show up at New York community meetings on the inner-city poor. Later on he opposed Clinton’s welfare “workfare” reform—a much-criticized compromise with the GOP—as too harsh. He also performed brilliantly as a crisis manager during the 1997-98 Asian contagion; yet somehow he could not see or appreciate its deeper causes, just as he would later miss the crisis developing under his nose as a senior counselor at Citigroup in the 2000s. And in the end he could not bring himself to lay a restraining hand on his former colleagues from Wall Street.

In the year 2010, in an interview with me a decade after his star turn as Treasury secretary, as the floodwaters of the subprime disaster lapped at his executive suite in the Citigroup building on Manhattan’s East Side, Rubin mulled over the consequences of what he had wrought. “We have a market-based financial system, and yet we have a whole bunch of institutions that are too big or too interconnected to fail,” Rubin said in puzzled tones. “Yet the market-based system is the way to go. How do you reconcile all that? The fundamental theory of the [market] case is premised on the notion that failure or success reaps their own rewards. But now that’s not happening.” Indeed, it remains the central pathology of our times: we have created a free-market system dominated by institutions so huge and systemically important that they no longer have to play by free-market rules.

Robert Rubin and his team, including Tim Geithner, did more than anyone to create that reality. It’s probably a fair bet that Jacob Lew will not tamper too much with it.

Why Hagel Is Smarter Than His Critics

Picture Credit: Salon.com

Reprinted from National Journal

It looks awfully likely that Chuck Hagel will squeak through confirmation as President Obama's Defense secretary. But it is also likely that he'll enter the Pentagon a damaged figure, a nominee tainted by the lingering impression that he is not ready to handle the vast complexities of a defense budget slated for slashing. Sen. Lindsey Graham, R-S.C., in telling Fox News Sunday that he would no longer block a Hagel vote, still indicated he was shifting his position reluctantly. He called Hagel "one of the most unqualified, radical choices for secretary of Defense in a long time."

Unqualified? Radical? Hagel did himself no favors, of course, with his unsteady performance at his confirmation hearing two and a half weeks ago. But what has gone largely unnoted by the punditocracy is that, over the past decade or so, the former Republican senator from Nebraska has distinguished himself with subtle, well-thought-out, and accurate analyses of some of America's greatest strategic challenges of the 21st century--especially the response to 9/11--while many of his harshest critics got these issues quite wrong.

Even Hagel's defenders, scarce though they still seem today, have not addressed this question well. Consider Thomas Friedman, perhaps the most widely read foreign-affairs columnist of our time. In a column in The New York Times on Dec. 25, Friedman supported the Hagel nomination even though he said Hagel's views on Israel and Iran were "out of the mainstream."

"The legitimate philosophical criticism of Hagel concerns his stated preferences for finding a negotiated solution to Iran's nuclear program, his willingness to engage Hamas to see if it can be moved from its extremism, his belief that the Pentagon budget must be cut, and his aversion to going to war again in places like Iraq and Afghanistan, because he has been to war and knows how much can go wrong," Friedman wrote. "Whether you agree with these views or not, it would be nothing but healthy to have them included in the president's national security debates."

This was faint praise indeed. Perhaps it might even be more "healthy" to have a Pentagon chief whose views on these issues have so often proved right in contrast to so many others, including Friedman himself. Much has been made of Hagel's opposition to the Bush administration's turn toward Iraq a decade ago, but what is more important are the reasons Hagel gave at the time for this lonely stand. In an interview he did with me in the summer of 2002, Hagel laid out a sophisticated vision of a foreign policy that needed to balance "realism and idealism," one that was governed, above all, by a careful assessment of what it might mean to divert precious resources--both human and monetary--to Iraq when Afghanistan was still so unfinished.

"We are involved in something here we've never had to face before," Hagel said as the Bush administration turned its war machine toward Iraq, expressing concern to me that the minuscule security forces left behind in Afghanistan would not be enough. "The coalition forces run the risk of having not an adequate force on the ground to be able to give the Afghans under the [Hamid] Karzai government a reasonable chance to succeed with the monumental task that government has," he said. "I have always believed that once we engaged in Afghanistan the way we did, we had to see it through not just for Afghanistan but also because our prestige was on the line. The greatest risk is allowing that to unwind and go backward."

As we now know, Afghanistan did unwind and go backward, thanks in large part to U.S. inattention. In the first years after the fall of the Taliban, aid amounted to just $67 a year per Afghan, a meager figure compared to nation-building exercises such as Bosnia ($249) and East Timor ($256), according to Beth DeGrasse of the U.S. Institute of Peace. Jim Dobbins, Bush's former special envoy to Kabul, told me in an interview in 2006 that Afghanistan was the "most under-resourced nation-building effort in history." Another senior Bush administration official, former reconstruction coordinator Carlos Pascual, also said at the time that the State Department had "maybe 20 to 30 percent" of the people it needed in Afghanistan.

Yet as much as Hagel raised concerns about backsliding in the actual theater of the war against al-Qaida, he also worried presciently about U.S. overreach, as well as alienating allies around the world that were critical to fighting a global struggle against transnational terrorists. Hagel foresaw that unless Washington was more careful about the exercise of hard power, we would find ourselves in the very crisis we are in today, with a $600 billion-plus defense budget that the president and Congress have now mandated be cut by $500 billion over the next decade. Hagel saw that, in Iraq, America was taking on an already weakened leader who the senator said probably didn't have weapons of mass destruction, and at the same time empowering another regime (Iran) that badly wanted WMDs--a dire development further documented on Monday by The Washington Post, which reported that the Iranian-backed Shiite group Asaib Ahl al-Haq, the "League of the Righteous," is exerting new political power in Iraq.

Hagel also delivered some of the earliest warnings about the potentially disastrous effects of George W. Bush's ill-grounded "Axis of Evil" speech, in which the president needlessly alienated Tehran only days after the Iranians had actually delivered up aid and support to stabilize post-Taliban Afghanistan. Ironically, Bush's own officials on the ground in Afghanistan, such as Dobbins, had testified to Iran's measured policies at the time. They noted that at a 2002 donor's conference in Tokyo that occurred only a week before the Axis of Evil speech, Iran pledged $500 million--at the time, more than double the Americans' contribution-- to help rebuild Afghanistan. "Iran actually has been quite helpful in Afghanistan," Hagel, then a member of the Senate Foreign Relations Committee, told Congressional Quarterly on Feb. 1, 2002. "And we're giving them the back of our hand." Hagel added: "We're not isolating [the Iranians]. We're isolating ourselves.... We ought to be a little more thoughtful. That [axis] comment only helps the mullahs."

Hagel was, in other words, displaying a deeply knowledgeable, well-grounded sense of the actual (monetary) and strategic costs of war, a critical faculty that will be badly needed in the months ahead as he grapples with the possibility of sequestration and budget cuts. His skepticism has since been vindicated by a large number of studies of the titanic costs of launching wars in both Iraq and Afghanistan, amounting to multiple trillions of dollars. A Rand Corp. study in 2010 even concluded that the chaos in Iraq following the U.S. invasion "stalled or reversed the momentum of Arab political reform; local regimes perceive that U.S. distraction in Iraq and the subsequent focus on Iran have given them a reprieve on domestic liberalization."

What were Hagel's critics of today, and even some of his lukewarm defenders, saying at the same time? On March 13, 2003, seven days before the Iraq invasion, the Times' Friedman wrote: "This war is so unprecedented that it has always been a gut call-and my gut has told me four things. First, this is a war of choice. Saddam Hussein poses no direct threat to us today. But confronting him is a legitimate choice-much more legitimate than knee-jerk liberals and pacifists think. Removing Mr. Hussein-with his obsession to obtain weapons of mass destruction-ending his tyranny and helping to nurture a more progressive Iraq that could spur reform across the Arab-Muslim world are the best long-term responses to bin Ladenism."

Chuck Hagel, of course, was no knee-jerk liberal. He was, demonstrably, smart and strategic about the risks of a terrible expense in blood and treasure that lay ahead-- far more than many others. And he deserves more credit for that than he is getting. Perhaps Hagel is, after all, just the man to tackle the Defense Department budget.

Why I Still Have This Website

Timothy Noah updates a sad trend: The 99 Percent are still getting screwed:

http://www.newrepublic.com/article/112397/one-percent-gobbles-economic-recovery#

This just continues a trend we have been posting about for quite some time. From last April:

http://informingthe99percent.blogspot.com/2012/04/gated-community-of-one-percent.html

Matt Stoller had an interesting post on Naked Capitalism the other day noting that, despite Obama's populist rhetoric about restoring the Middle class, imposing a gimmicky "Buffett Rule" against millionaires and such, the top one percent have actually made out better, in percentage terms, during Obama's "recovery" of 2009-2010 than they did from 2002-07 under Bush.

The comparison, based on a paper by one of the best young economists in the country, Emmanuel Saez (winner of the uber-prestigious Clark medal), is a little unfair, since it stacks the last two years up against a five-year period under Bush, and Obama was clearly inheriting a disaster from his predecessor. But the harsh fact is that there is very little that Obama has done--or more precisely, has been able to do given the ideological paralysis in Washington and his own misguided caution--to stop the growing class divide.

This bit from Saez's paper sums it up: "From 2009 to 2010, average real income per family grew by 2.3% but the gains were very uneven. Top 1% incomes grew by 11.6% while bottom 99% incomes grew only by 0.2%. Hence, the top 1% captured 93% of the income gains in the first year of recovery." It's an astonishing figure: NEARLY ALL the income in the first year of recovery went to the one percent. As Saez dryly concludes: "Such an uneven recovery can possibly explain the recent public demonstrations against inequality."

You think? I call this the "sleeping serpent issue" of this election. The Obama camp yesterday released a video of Romney's more callous and silly remarks from the primary season, including his call to let the mortgage market "hit bottom," but the president is pretty vulnerable on this too.

So I'll sound again my old tocsin: we need new, Saez-sized thinking in Washington that will acknowledge that this administration and this Congress have barely touched the surface of what went wrong in the Great Recession. Unless they do, the upper-income brackets will continue to become a giant gated community inside America, a place so apart from the rest of us that it is looking less and less distinguishable, each passing year, from the palace of King Louis the XVI. Maybe Trayvon Martin was only an early victim.

Our Unloved Drones

Reprinted from National Journal

With President Obama’s CIA nominee, John Brennan, in the spotlight this week, Washington is engaged in a big debate over the ethics of covert drone warfare. But like it or not, “targeted killing” will continue and perhaps even increase in years to come. The more realistic questions to ask about what some Obama administration officials call “the new normal” of warfare are these: Who’s really going to run the drone program — the White House, the Pentagon, or the CIA? And how long is it likely to last?

And you can depend on this: As intense as the public debate over drones has been, the internal bureaucratic battle will be even more tumultuous.

Brennan had indicated that he wanted to see big changes in control of the drone program even before his confirmation hearing on Thursday. Under his watch as White House counterterrorism coordinator, Brennan’s former employer, the CIA, has become much more of a “paramilitary” organization, and he wants to return the agency to its roots. “John thinks that the traditional role of the CIA is to be the biggest, baddest, most effective human-intelligence collection facility on the planet,” says a senior administration official, who would discuss Brennan’s views only on condition of anonymity. “That’s the tradition of the CIA he grew up in, and that’s what he thinks the CIA in its essence should be.”

“A lot of what’s driving Brennan, from what I’ve heard, is that he feels the [drone] program has run its course as a CIA operation,” says Philip Giraldi, a former CIA counterterrorism official. “He feels that basically the collateral damage is causing more problems than any success coming out of the program.” Meanwhile, the debate over the ethics — and, perhaps more significantly, the efficacy — of targeting rogue American citizens and others abroad is going to grow more intense, too.  “My sense is there is a growing recognition that these strikes can hurt organizations but they are rarely the main reason for the end of the organization,” says Seth Jones, a counterterrorism expert at the Rand Corp.

According to other people who know Brennan’s thinking well, he also believes that moving drones to the Defense Department will allow greater congressional and public scrutiny. He fears that if the United States does not lead in developing an ethical and legal policy framework on the use of drones, decades’ worth of international law will be undermined and other countries that are close to developing their own drones, particularly China and Russia, will abuse them. The nominee to head the Pentagon, former Sen. Chuck Hagel, R-Neb., is nominally in support of targeted strikes, but he is also keenly aware of the possibly perilous precedent that’s being set, and he is concerned about the backlash from “collateral damage” when innocents are killed, possibly creating even more jihadists than are being taken out.

Obama himself, while more than tripling the number of drone strikes from the previous administration, has given his bureaucrats’ considerable ammunition for the battle over who runs the show and how. The president wants to put a “legal architecture in place … to make sure that not only am I reined in, but any president is reined in,” as Obama said on Jon Stewart’s show (of all places) last year. At the same time he’s trying to avoid going down in history as the “drone president,” emphasizing to his team economic development and diplomacy over “kinetic action” as ways of transforming places like Mali from terrorist havens into viable polities. “The president is not turning to his team and saying where do we put next drone base to solve the North Africa problem,” the senior administration official says. “Drones aren’t a policy. They are a tool. The president’s directive to all of us is to think bigger, and with regard to Mali or Somalia think long term.”

Obama has also indicated he understands the potential moral quandary if covert drone strikes become a new permanent way of war, declaring in his Inaugural Address that “enduring security and lasting peace do not require perpetual war.”

The bureaucratic fight is already under way. In his written answers to the Senate Intelligence Committee, Brennan said that targets are picked “on a case-by-case basis through a coordinated interagency process” involving the Pentagon, CIA, State Department, and other agencies. But in fact, behind the scenes the CIA has not always cooperated in sharing the vetting process, especially in Pakistan, and Brennan is likely to change that. One major underlying issue is which agency—the CIA or Defense— operates under tighter rules for disclosure and congressional notification. On one hand, the military does conduct itself under rules of engagement that are more spelled out and governed by clear codes, such as the Uniform Code of Military Justice. On the other hand, covert war by the military has in some ways been conducted under even less scrutiny in recent years, particularly when it comes to special operations.

Some critics, such as former Deputy Defense Secretary John Hamre, have worried that special ops now has generic authority to deploy where it wants without case-by-case orders. Without proper civilian oversight, a bin Laden-style success can easily become a "Black Hawk Down." According to a senior CIA lawyer, the statutes reining in the CIA, which date from the famous Church Committee hearings of the 1970s, have set up effective procedures under Title 50 of the National Security Act. "Now, almost 40 years later, we're in a situation where the CIA has to go through this bureaucracy, and at the same time you have the [special-operations] military doing all sorts of things that present worse types of concerns with much less congressional notification," he said.

The only way to lay all the ethical and bureaucratic questions to rest is to declare, at some point, that the war against al-Qaida is over. But that too is the subject of debate. With new splinter groups rising in the aftermath of the Arab Spring, that’s unlikely to happen in the foreseeable future. And administration officials tend to contradict each other occasionally about how they see the end game. In a speech last November, Jeh Johnson, the Pentagon general counsel, said that the “tipping point” for the end will come when “so many of the leaders and operatives of al-Qaida and its affiliates have been killed or captured [that] the group is no longer able to attempt or launch a strategic attack against the United States.”

But the senior administration official told National Journal on Thursday that the new dangers emerging from groups such as al-Qaida in the Islamic Maghreb do not focus on the U.S. homeland. “What Americans need to understand over the long term is that there will likely be more attacks like we saw in Algeria and Benghazi. Al-Qaida has metastasized and now has affiliates in more places, but ones that unlike core al-Qaida don’t necessarily have an interest in striking the U.S. homeland.”

And so the drone debate will drone on, as long as the war does. And that too will be a long time.

The Too Big to Fail Problem, Cont.

It’s been four years since the financial crisis, and no Wall Streeter has gone to jail for it or even paid out a penalty severe enough to cost him his palace in the Hamptons. Still, in this as in most things, one can say better late than never. The Justice Department’s lawsuit against the Standard & Poor’s ratings agency, announced Tuesday, may be overdue, but at least it is happening. And if DOJ sticks to its principles and demands an admission of wrongdoing from S&P in the end—which is likely to be a big sticking point—that will be a real achievement.

But let’s not sidestep the real issue. As Justice's lawsuit indicates, ratings agencies such as S&P and Moody’s were central players in the historic fraud that was the subprime-mortgage securities catastrophe. According to the 2011 report of the Financial Crisis Inquiry Commission—and Tuesday’s lawsuit—S&P’s process for rating securities during the subprime-mortgage bubble was utterly corrupt. The firm knowingly gave inflated AAA ratings to bad securities in order to satisfy its investment banking clients. “Put simply, this alleged conduct is egregious—and it goes to the very heart of the recent financial crisis,” Attorney General Eric Holder said at a news conference. 

That’s impressively tough language, and it almost sounds like payback for S&P’s decision in August 2011 to downgrade the U.S. government for the first time to an AA+ rating from AAA. Holder denied there was any connection between the lawsuit and the downgrade, although Floyd Abrams, S&P’s attorney, told CNBC that the “intensity” of the DoJ investigation “significantly increased” afterwards. But the real question now is whether Holder will follow through and force S&P to admit its wrongdoing formally, or will he follow the recent pattern by which major financial firms have been permitted to settle civil charges without admitting anything?  (S&P, by the way, denied all wrongdoing in a statement, calling the lawsuit “meritless.”)

There is reason to be skeptical that the government will push too hard. Because what’s really going on in the relationship between Washington and Wall Street is this. The big ratings agencies, somewhat like the big banks, have been deemed too big or important to the financial system to fail. As a result, they continue to operate in largely the same way today. “One thing we’ve  learned is we haven’t learned a damn thing from the crisis,” says Sylvain Raynes, a former Moody's executive who has been a severe critic of the ratings agencies.

This is not how capitalism is supposed to work, and the Obama administration has not done a very effective job of fixing it to date. Consider, for the sake of comparison, Arthur Andersen. The giant accounting firm ceased operation in 2002 after authorities learned that its auditors had shredded documents related to Enron's fraudulent schemes and were probably complicit in those practices. Even though the firm's felony conviction was later vacated by the Supreme Court, Arthur Andersen's name was so tarnished, and it faced so many outstanding lawsuits, that no one wanted to do business with it any longer. End of story.

Why haven't the ratings agencies suffered the fate of Arthur Andersen? Despite some moves in Congress to change their behavior—especially by Sen. Al Franken, D-Minn.—U.S. authorities are still treating the three largest agencies, Moody’s, Standard & Poor’s, and Fitch, fairly gently. The firms are basically doing business the same way, taking fat fees from the investment banks whose securities they rate, a clear conflict of interest. That is because they are still, essentially, quasi-governmental organizations. They continue to be anointed by the Securities and Exchange Commission as the arbiters of what is considered “investment grade”—or safe—securities appropriate for conservative investors like pension funds and insurance companies.

The prominence of these firms in the financial landscape was an ironic result of the government’s efforts to fix the system during the Great Depression. “Back in 1936, the bank regulators told banks, If you are going to buy bonds, and have them in your portfolios, those bonds cannot be speculative. They must be investment-grade. Who is the arbiter of what is speculative and investment grade? These handful of rating agencies,” said Lawrence White, a financial expert at New York University. “In essence, the bank regulators were outsourcing this safety decision. The rating agencies’ judgments secured the force of law.” Later on, in 1973, the SEC formalized the role of the ratings agencies in the system by designating them “Nationally Recognized Statistical Rating Organizations.” Only these firms could decide what was safe and unsafe.

That system worked fine in the days of ordinary corporate or municipal bonds, when the agencies’ ratings assessments were publicly available and could be checked against performance. No rater wanted to be embarrassed by being exposed giving a faulty rating. So the agencies were more immune to pressure from the investment banks to rate bad deals. But as the era of “structured finance” took off—the sort of fancy “collateralized debt obligations” named in the S&P lawsuit—debt began to get packaged and repackaged in ever-more complex bundles of securities. It became harder and harder to double-check the ratings within those bundles. Every ratings company had its own methodology; it wasn’t standardized as methods were in accounting. In the end, there was no longer any public accountability—the embarrassment of getting a rating badly wrong—to weigh against the temptation of fees from big deals from the banks.

At first subtly, then profoundly, that began to corrupt the integrity of once-respectable ratings agencies like S&P. They became vassals of the Wall Street firms they were rating, and once again, neither the Fed nor the SEC was closely watching the change. Neither the public nor even sophisticated investors could check the ratings. And barring some catastrophic market collapse—which everyone thought at the time was highly unlikely—there was almost no way for the agencies to be caught out on the derivatives deals they rated, even as they enjoyed the government’s protection.

That was the mindset four years ago. And the “issuer-pay” model—by which the banks pay the agencies to rate their securities, creating an automatic conflict of interest—is largely intact. Sure, the public may be safe for now, a time of extreme caution on Wall Street. “We don’t really know how they’re doing now with respect to mortgage-related bonds because there have been virtually none that have come to market,” says White. “And with respect to ‘plain vanilla’ corporate and sovereign-country bonds, there is never any problem. The issuer-pay model didn’t blow up in those areas.” But at some point the market will forget the last crisis, and go back into bubble mode. Unless the government is able to exact real penalties and a genuine confession of what went wrong during the 2008 financial crisis—from S&P and others—it’s entirely possible it could all happen again.

Hagel and the Winter of the Neocons' Discontent

Reprinted from National Journal

“Why, I in this weak piping time of peace
Have no delight to pass away the time,
Unless to spy my shadow in the sun
And descant on mine own deformity.”

Richard III

The unearthing of King Richard III’s bones from a parking lot in Leicester, England, ranks as one of the most titillating archaeological discoveries ever, especially considering the super-cool way it was confirmed: with DNA fingerprinting from a male descendant of his sister Anne. But the find was also a reminder that history is a fluid thing, and it's invariably the winning side that writes it. Sure, now we can say these are King Richard's bones, curved spine and all, but we still know little else about him. The victorious Tudors killed King Richard in 1485—apparently with an ax through the head at the Battle of Bosworth Field—and then induced a first-rate spinmeister, William Shakespeare, to paint him as one of history’s worst villains. What we don't know is whether that is true.

That got me to thinking: Which history are we to believe coming out of last week’s brutal Chuck Hagel hearing, and which will dominate in the next four years? Because this is what the current conflict over America’s next Defense secretary—and the future direction of the administration’s foreign policy—is really about: two different readings of history. It is what Sen. John McCain, R-Ariz., an erstwhile Hagel friend who turned into a caustic critic, was referring to when he said that "fundamental” differences remained between him and President Obama's nominee to run the Pentagon.

On one side are fierce Hagel critics such as McCain and Bill Kristol, Washington's neocon-in-chief, who refuse to back down from their belief that the Iraq invasion of nearly a decade ago was just, and who continue to support the aggressive projection of U.S. military power abroad, especially in Syria. On the other side are Obama, Hagel, and others who warned—quite presciently—of the pitfalls of that policy, and who are running away from military intervention abroad at full speed, even as they ratchet up the "small footprint" use of drones.

And now the neocon hawks fear that, like Shakespeare’s Richard III, there will be no place for them at all in Obama's "weak, piping time of peace." It is truly the winter of their discontent.

Hagel’s most dogged enemies, particularly Kristol, used the nominee’s startlingly weak performance at last week’s confirmation hearing to attack him, yet again, as incompetent. "Has there ever been a more embarrassing confirmation hearing than Hagel’s for a major Cabinet position? For a minor Cabinet position? For a subcabinet position? We don’t know of one," Kristol wrote in his neoconservative magazine, The Weekly Standard, this week. Kristol then attacked Obama and Democrats for being less than "profiles in courage" for supporting him: "Are liberals and Democrats willing to sell their souls for  ... Chuck Hagel?"

And yet, as I have written, Hagel's policy views are invariably well-thought-out, and he himself qualifies as quite a profile in courage when it comes to the anti-Iraq war side of history. Obama’s famous dismissal of the Iraq invasion as a “dumb” war, and Hagel’s distinguished record of defiance toward his own party to oppose the war, amount to a living refutation of McCain’s and Kristol’s entire worldview. A decade ago, McCain and Kristol were leading hawks who claimed that Saddam Hussein had connections with al-Qaida and that weapons of mass destruction would certainly be found, and that George W. Bush could do it all and still preside over a strong economy. While Kristol was agitating for war and saying things like, "I think we'll be vindicated when we discover the weapons of mass destruction and when we liberate the people of Iraq" (March 5, 2003), Hagel was warning accurately that there was no evidence of Saddam's links to al-Qaida, that his possession of WMD were in doubt, and that America was in danger of strategic overreach and enraging the Arab world.

Obama, meanwhile, overcame Hillary Rodham Clinton in the 2008 campaign partly on the strength of his opposition to the Iraq war.

Now things are likely to get much worse for the hawks in the second Obama term. First, despite Kristol’s fulminations, Hagel is highly likely to be confirmed. Second, government sources tell me that one reason that John Brennan took the CIA job is that he wants to ease the agency out of the drone business. Hagel, based on his own worldview and his deep concerns about the moral use of U.S. power and the bad precedents that can be set by its misuse, is likely to also want to ratchet back or at least to exercise more caution about the drone attacks. A growing number of critics, including former President Carter, say the drone program has badly undermined America’s moral position, and it supplies a dangerous precedent to other nations that are developing their own drone programs, in particular China and Russia, and could cite Washington's policy to justify, say, political assassinations.

So get ready for the Hagel era, folks. “Grim-visaged war hath smoothed his wrinkled front,” as King Richard complained. It’s not going to be a good time to be a neocon or a latter-day Richard III.