While You Were Sleeping...

.... Jeff Connaughton was catching the banks in the act of gutting Dodd-Frank:
http://t.co/tqXfgJ02e7

And of course Jack Lew is fulfilling all expectations of being the next Timmy Geithner, as I wrote 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.

By Michael Hirsh

Updated: January 10, 2013 | 11:27 a.m.
January 10, 2013 | 7:00 a.m.

Traders work on the floor of the New York Stock Exchange, Thursday, Jan. 3, 2013 in New York. (AP Photo/Mary Altaffer)

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.

Iraq's Ultimate Cost: A New Isolationism

Reprinted from National Journal

Ten years after the invasion of Iraq, a tepid debate continues over whether the war was worth it. What is not debatable, however, is that the terrible costs of America’s diversion into Iraq after 9/11 have profoundly transformed American foreign policy. The post-Cold-War hubris that so infected American policymakers a decade ago has been replaced by its near-opposite. Today there is a new humility, indeed a kind of neo-isolationism, that is shaping major decisions as profoundly as hubris did a decade ago.

Call it the Iraq Syndrome. It has clearly become our generation's "Vietnam Syndrome," and it will likely be the dominant factor in foreign policy decisions of both Democratic and Republican administrations for years to come. Two recent indications: the return of Iraq war opponent Chuck Hagel, President Obama’s new Defense secretary, from the political dead—guaranteeing an ultra-cautious, “realist” approach to the use of American power—and the rise of what columnist George Will called “the libertarian strand of Republicanism” in evidence at the recently concluded CPAC conference, where Sen. Rand Paul won the straw poll even as he called for a scaled-down U.S. presence abroad.

Perhaps nothing more vividly illustrates this dramatic transformation in U.S. foreign policy than the reversal of roles on the world stage of the United States and France. A decade ago, in the months before the Iraq invasion, the French played the role of chief challengers to the Bush administration and were derided as “cheese-eating surrender monkeys,” in the colorful tabloid phrase of the time. Today, it is France that is taking the lead in intervention, prodding the U.S. forward in Libya, Syria and Mali.

To a degree that the American public may not even be aware of, the U.S. military is now playing a supporting role to the French, with logistical aid and airlift in Mali, much as it did in Libya. In addition, Washington is only slowly coming around to the hawkish French view of Syria's stalemate: Autocrat Bashar al-Assad won’t be moved to negotiate unless the rebels can change the military balance with Western arms. A senior Western diplomat says America’s reluctance to intervene today, even in a humanitarian crisis as bloody as Syria’s, is not unlike where Washington was at the beginning of the Bosnia crisis of the early 1990s, when then-President Clinton was criticized for his hesitation (he eventually came around to supporting NATO strikes and empowered an aggressive U.S. diplomat, the late Richard Holbrooke, to take the lead from the Europeans in negotiations).   

The main reason behind this transformation of U.S. worldviews, of course, is the terrible tally of the Iraq war in blood, treasure, and trauma. It has been vast and appears to mount with each year, a historical rebuff to the absurdly facile estimates that hawks such as then-Deputy Defense Secretary Paul Wolfowitz threw out at the beginning. In an infamous exchange before Congress in 2003, Wolfowitz dismissed estimates by then- Gen. Eric K. Shinseki that several hundred thousand troops would be needed in postwar Iraq as "wildly off the mark" and declared that the cost of war and reconstruction would never exceed $95 billion.

Today Shinseki is Obama’s secretary of Veterans Affairs, and the latest reckoning of the costs of that war come to a staggering $2.2 trillion, according to the Costs of War Project by the Watson Institute for International Studies at Brown University. The study also found that at least 134,000 Iraqi civilians died, although the Watson Institute says the death toll could be up to four times higher. An estimated 36,000 American military personnel were also killed or injured during the war. The Brown study said that the nearly 10-year war cost $1.7 trillion, with $490 billion more owed in benefits to combat veterans, and that total expenses could soar to $6 trillion over the next 40 years. In addition, the study concluded, future health and disability payments for veterans will total $590 billion, and interest accrued to pay for the war will add up to $3.9 trillion.

The 10-year return on this huge investment has been scant at best. It’s not just that the casus belli for the war, Saddam Hussein’s alleged weapons of mass destruction and relationship with al-Qaida, turned out not to exist. Iraq is barely a democracy today, much less a model. Some advocates, such as former CIA analyst Reuel Marc Gerecht, still contend that taking out Saddam Hussein was justified and that “the Iraq war convulsed the region and added jet-fuel to the Arab/Islamic discussion of democracy.” But he is in the minority, judging from polls that indicate that most Americans believe it was a foolhardy war.

The problem is not just that the war itself went wrong and seemed to lack justification; it's that few experts deem the counterinsurgency and development (nation-building) parts of the effort to have been worth the cost either. This is true of both Iraq and Afghanistan, even with an unprecedented 50-nation NATO-led alliance. As the just-departed Afghanistan commander, Gen. John Allen, said at a recent forum convened by the Rand Corp. and Foreign Policy: "It will be 20 years before we undertake something like this again.” He added, “Something I worry about increasingly as time goes on is the sense that the development strategies in Iraq and now Afghanistan have failed. And that the development dimension of what we have attempted to undertake was either the wrong approach or just flawed from the beginning."

Twenty years is probably too sanguine. A decade ago, before the Iraq invasion, neoconservative hawks ruled foreign policy thinking in Washington, evincing a great deal of confidence that the lone superpower could easily “walk and chew gum at the same time,” in a popular phrase from the time. Today we know that what most Americans, post-9/11, considered a necessary war in Afghanistan suffered because of the diversion to an unnecessary one in Iraq. We know that, rather than reasserting U.S. power, the hawks of a decade ago achieved the opposite: They succeeded only in exposing U.S. vulnerabilities to the world by creating generations of IED-savvy insurgents, generating more terrorists than existed before, and empowering Iran, the major threat today to Mideast stability.

So the debate, at least among the punditocracy, will likely go on. The war’s champions are still hoping that, someday, history will vindicate them. But the practical effects of America's overreach in Iraq are undeniable. Wolfowitz and other policymakers who dominated the Bush administration wanted to put an end to the “Vietnam syndrome” of self-doubt about the use of force. Instead they left us with an “Iraq syndrome” that that will ensure no U.S. president, Democrat or Republican, will ever rush off to forcibly change regimes again.

Here's How You 'Lean In,' Sheryl

From left: Christina Romer, Mary Jo White, Sheila Bair, Sen. Elizabeth Warren, and Brooksley Born (AP Photos).

More on Lean In:

Two Cheers for Sheryl Sandberg, Who Helped Give Us the Financial Crisis

Reprinted from National Journal

While debate rages outside the Beltway over Sheryl Sandberg’s advice for fixing a male-dominated world, here in Washington, a handful of powerful women have been “leaning” way ahead of her in taking on what may be the most chauvinistic industry in America: Wall Street. (And, in a few cases, they've done it while raising families at the same time.)

They may not be getting quite as much air time — or publicity — as Facebook’s Sandberg, whose book,Lean In: Women, Work and the Will to Lead, is now topping Amazon's best-seller list. But they may have a few things to teach her. It’s a striking theme in finance that goes back to well before the crisis of 2008: Very often the gutsiest and most prescient adversaries of Wall Street have been women, many of them tough regulators who looked over their shoulders and found scant few male supporters when it came to confronting the (typically all male) titans of finance and economics. Among them: new Sen. Elizabeth Warren, D-Mass.; former Obama economic adviser Christina Romer; retired bank regulator Sheila Bair; and Brooksley Born, who as a far-sighted derivatives overseer in the late ’90s took on the powerful Robert Rubin cabal and, for her troubles, was railroaded out of government.

A new member of this distinctive club is now expected: Mary Jo White, who will shortly be confirmed as the new head of the Securities and Exchange Commission. Despite questions about White’s potential conflicts of interest — she has occasionally represented Wall Streeters — no one doubts her toughness and willingness to confront aggressive men: During her nine-year stint as U.S. attorney for the Southern District of New York, the 5-foot-tall White won convictions of senior al-Qaida leaders and Mafiosi such as John Gotti. She has since promised "unrelenting" enforcement of Wall Street.

Setting aside Arab terrorist groups and the mob, there may be no harsher world for women to make headway in than Wall Street. Especially compared to the nerds of Silicon Valley, no corporate culture is more macho than Wall Street’s, which is perhaps why its heaviest hitters used to be known by a part of their anatomy that women don’t share.

Consider Warren, who almost immediately upon being sworn in as a new U.S. senator picked up where she had left off as  the fiery Harvard Law professor who first came up with the idea for a financial consumer-protection agency. In a February hearing, Warren quickly took the “too-big-to-fail” debate to a new level, hammering a panel of stammering regulators over their failure to prosecute bank criminality. “There are district attorneys and United States attorneys out there every day squeezing ordinary citizens on sometimes very thin grounds and taking them to trial in order to ‘make an example,’ as they put it,” Warren said. “I’m really concerned that ‘too big to fail’ has become ‘too big for trial.’ ”

Romer, meanwhile, appeared to be the only one with the guts to tell Larry Summers — in his second incarnation as a mistake-prone economic adviser, this time under Obama — that the administration’s first-term stimulus was too small. Working in a White House that author Ron Suskind described as a “boys’ club,” Romer wrote what one pundit, Business Insider’s Joe Weisenthal, called "the Memo that Could Have Saved the U.S. Economy." She showed — probably correctly — that something on the order of a $1.8 trillion stimulus was needed but was squelched by Summers, who she said made her feel like “like a piece of meat” when he “boxed” her out, according to Suskind’s Confidence Men: Wall Street, Washington, and the Education of a President. 

And then there was Bair, who saw back in the early 2000s, when she was assistant Treasury secretary under Paul O’Neill, that the lending industry and a securitization-mad Wall Street were out of control. Bair sought to impose “best practices” on the lending industry, including rules that would require documentation of a borrower’s ability to repay; and limiting refinancing to prevent loan flipping. She failed and, after a hiatus to raise her children in Massachusetts, came roaring back as the head of the Federal Deposit Insurance Corp., becoming the principal challenger to the often excessively cautious decisions of Treasury Secretary Tim Geithner on housing and regulation. In her strikingly blunt new memoir, Bull by the Horns, Bair wrote of Geithner: “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.”

Bair, a Republican from Kansas, had something common with another tough female regulator, Born, who happened to be a liberal Democrat (sexism apparently knows no politics). Both ran up against the same problem: accusations from the men in charge that they weren’t “team players.” In Bair’s case, Geithner’s Treasury Department was accused of leaking that story; when it came to Born, she found herself taking on the powerful team of Rubin and then-Federal Reserve Chairman Alan Greenspan, as well as most of Congress (at one point she was forced to leave the hospital while her daughter was in the operating room when she was called up to testify).

Born, the head of the Commodity Futures Trading Commission, was eventually pressured to step down. But much later on, one of the men who had pilloried her, Arthur Levitt, the chairman of the Securities and Exchange Commission during the Clinton years, became one of the few men to publicly vindicate her for warnings about the vast over-the-counter derivatives market that was about to help melt down the financial system. “All tragedies in life are always proceeded by warnings,” he told me. “We had a warning. It was Brooksley Born. We didn't listen to that."

So pay attention, Sheryl: You’ve got some serious role models here. Of course, it may be that the life lessons of some of these women could bring back uncomfortable memories for you. As my colleague Matt Cooper pointed out yesterday, Sandberg herself did precious little “leaning in” in the late ’90s while serving as chief of staff to then-Treasury Secretary Summers, when he helped hand Wall Street license to wreak disaster on the American economy. 

How Did Obama Create Such an Unequal Recovery?

Picture credit: Omniverse

Reprinted from National Journal

For most of his first term, President Obama successfully sold a line to the public that economists will tell you is, at least in part, intellectual snake oil. He managed to blame our historically slow economy almost entirely on President George W. Bush. Polls taken right after the 2012 election showed that one of Mitt Romney’s biggest failures—and the GOP presidential candidate had staked almost everything on this point—was persuading U.S. voters otherwise.

But this week’s dramatic economic news, timed with the start of Obama’s second term, suggests that the political debate, if not the actual economy, is at an important milestone. On Wall Street, the Dow Jones industrial average reached new levels, shooting well above 14,000 and exceeding the closing records set in October 2007 just before the Big Crash. On Friday, a new jobs report finally gave Obama what he's wanted for four years: an unemployment rate that's below where he started as president, 7.7 percent. The Labor Department said nonfarm payrolls vastly outpaced expectations by increasing 236,000 in February, dropping the unemployment rate to the lowest level since December 2008,  from 7.9 percent in January.  Also this week, the Federal Reserve Board reported that Americans have recovered the staggering $16 trillion lost in wealth since the recession.

So, let’s call it, folks: As of March 8, 2013, this has become Obama’s economy.

It’s been a good week, and his acolytes are crowing: ‘Damn is that a good jobs report,’ former chief economist Austan Goolsbee tweeted. ‘Woot woot!’ House Speaker John Boehner, struggling to put some bad spin on a bust-out week of economic news, reminded everyone,  “Unemployment in America is still way above the levels the Obama White House projected when the trillion-dollar stimulus spending bill was enacted.”  Shades of the Romney campaign! Pretty lame.

But the harshest truths about the Obama economy are not ones Republicans would be eager to highlight. First, things are not really as good as the numbers suggest, and they are all but certain to get worse. If the $85 billion in cuts in the federal budget sequester go through as planned, gross domestic product will slow 0.5 percent, and about 750,000 jobs could be lost by the end of the year, the Congressional Budget Office says. The big numbers on Wall Street are also deceiving, says Harvard economist Kenneth Rogoff, who along with coauthor Carmen Reinhart tracked 800 years’ worth of economic recoveries in a landmark 2009 book, This Time Is Different: Eight Centuries of Financial Folly. “One of the paradoxes we point out in our book is that very often the equity markets reach and surpass previous levels within a few years, despite the fact that the economy takes decades to recover,” Rogoff said in an interview.

In addition, this is a very different American economy than the one we thought we had before the recession, and not in a good way. It’s not just that 7.7 percent unemployment is still very high and something of a grim new “normal,” along with still-high long-term unemployment. The problem is also that we’ve ended up with a far less equal economy. And there is little prospect of a consensus over tax reform or deficit reduction that will change that, no matter how many dinners Obama arranges with leading Republicans, like the one this week.  

“The recovered wealth – most of it from higher stock prices – has been flowing mainly to richer Americans,” the Associated Press reported. This corroborates earlier data from prominent economists such as Emmanuel Saez of the University of California (Berkeley), whose work has shownthat the wealthiest 1 percent of the country actually made out better, in percentage terms, during Obama's "recovery" than they did from 2002-07 under Bush.

Even the high Dow numbers conceal a darker truth about inequality and a still-ailing economy beset by bottomed-out interest rates that make bonds unattractive. “Those low interest rates are the sign of an economy that is nowhere near to a full recovery from the financial crisis of 2008, while the high level of stock prices shouldn’t be cause for celebration; it is, in large part, a reflection of the growing disconnect between productivity and wages,” Paul Krugman writes in The New York Tiimes.

In addition, Wall Street, the culprit behind the last disaster, may be at least as hard to rein in as it was four years ago. On the positive side, results of "stress tests" this week showed that 17 of the nation’s 18 largest banks will survive even if the economy plummets 5 percent and the Dow Jones industrial average falls to 7,221.7. But there is a new frothiness in the market that worries close watchers such as Neil Weinberg, the editor-in-chief at American Banker, who see new temptations abroad to underprice risk, coming at the same time that even Attorney General Eric Holder is warning that the biggest banks have grown not only too big to fail, but too big to prosecute. (In testimony before the Senate Judiciary Committee on Wednesday, Holder delivered an implicit rebuke to his former Cabinet colleague, Treasury Secretary Timothy Geithner, who permitted Wall Street to resurrect itself in what is largely its former image.) 

So, yes, this is sure to be seen as Obama’s economy now. And while many of the trends are upward, in other respects what is being revealed now is the inadequacy of his first-term responses. A few years ago, some pundits, persuaded by the expert spinning of first-term economic adviser Lawrence Summers and Geithner, bought the Obama line that between the president's stimulus plan and his health care reforms, he was rectifying economic inequities that have grown since the Reagan era. The health care law, wrote David Leonhardt of The New York Times in 2010, amounted to “the federal government’s biggest attack on economic inequality since inequality began rising more than three decades ago.”

But Saez says Obama-era changes such as the health care surcharge on upper incomes, along with an increase in top tax rates back to the Clinton level, will have only minor impacts, especially relative to the changes that occurred after the New Deal.  “It’s a medium-to-small-size change that, in my view, is not going to dramatically lead to a deconcentration of pretax income,” he said in a recent interview.

So, there’s little time to crow. Obama has his work cut out for him if he wants “his” economy to look like a positive legacy four years from now.

Even Obama's AG Thinks Banks Are Too Big

I don't usually re-post, but the spectacle of Obama's own attorney general, Eric Holder, complaining that some banks have grown too big to prosecute amounts to, perhaps, the harshest rebuke we have heard yet of Holder's former Cabinet colleague, Tim Geithner, the late lord of the Treasury, who is the main culprit in allowing Wall Street to resurrect itself in what is largely its former image. This follows a Frontline interview in which Holder's chief prosecutor, Lanny Breuer, admitted pretty much the same thing. And so the "tide" continues to rise...

Wednesday, July 25, 2012

The Rising Tide Against the Big Banks

The financial catastrophe of 2007-08 has caused a few people to change their minds about Wall Street—too few, in the eyes of many critics. But no transformation is more dramatic or complete than that of Sanford I. Weill, the founder of Citigroup who once proudly hung a sign in his office that read: “The Shatterer of Glass-Steagall.” 

On Wednesday, Weill appeared to undergo the Wall Street equivalent of a conversion on the road to Damascus, renouncing the views on which he had built his entire career. It was Weill, known as the premier deal-maker on Wall Street, who more than a decade ago turned Citigroup into a giant financial supermarket, a mega-bank that grew so complex its own executives later confessed they no longer understood the businesses they oversaw.  It was Weill who hired former Treasury Secretary Robert Rubin in 1999 to ensure that the Glass-Steagall Act, which separated investment from commercial banking, would be repealed by Congress later that year. As Weill wrote later in his memoir, The Real Deal, having Rubin on board “translated into a highly visible public endorsement.”

Now Weill thinks the Street should go in the opposite direction – away from “too much concentration” – in order to maintain America’s lead in the world of finance. “What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail,” Weill told CNBC’s “Squawk Box.”   

Weill is only the latest voice to come out against the “too-big-to-fail” problem in banking in recent weeks, a trend that has been quickened by the ongoing scandal over revelations that the big global banks had manipulated Libor—the London Interbank Offered Rate, a central benchmark that banks use to set rates for lending to each other.

In the Financial Times, columnist Sebastian Mallaby, invoking the trust-busting era of Teddy Roosevelt, wrote recently that the scandal shows that "modern banks are worse than the rail and oil conglomerates of yesteryear … They must be broken up.”

Similar sentiments have been rising on the right as well as the left. “A relatively open secret on Wall Street is that the megabanks that survived the financial crisis — JP Morgan, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley, and Wells Fargo — are still very much protected by the federal government and the American taxpayer,” Charles Gasparino wrote in the right-leaning New York Post on Tuesday.

In the neoconservative Weekly Standard, Irwin Stelzer asked why Mitt Romney, who knows the issues as well as anyone because he ran Bain Capital, isn't calling for breakup of the banks himself. "They are too big to fail, and too complicated to regulate. So where is he when economists say that the better alternative is not more of the failed policies of the Obama years—regulating the unregulatable, bailing out when all else fails —but breaking up the big banks? Not for vulgar populist reasons, but to improve the functioning of the capital markets."

The issue is potentially embarrassing for President Obama and his Treasury secretary, Tim Geithner, who has consistently held out against the breakup of the banks.  On Wednesday, Geithner began defending himself in congressional testimony against accusations that he did not do enough to stop the manipulation of Libor when he was head of the Federal Reserve Bank of New York. 

What worries regulators is that the trends plainly show that the big banks are getting bigger, and there is little to restrain them, beyond a host of as-yet-unwritten "living wills" that are supposed to tell regulators how to liquidate the giant firms  in a crisis. And the largest surviving banks are beginning to push out smaller banks in important areas, having increased their overall market shares in deposits, mortgages, credit cards, home-equity loans, and small-business loans. 

As a result, the big Wall Street firms are only getting harder to unwind in a crisis, harder to comprehend, and as former TARP inspector general Neil Barofsky told National Journal on Monday, harder to bring to justice, no matter what all the new Dodd-Frank rules say. “This goes to the bigger problem of too-big-to-fail,” Barofsky said. “Because you can’t indict one of these banks. You can’t bring an indictment that would bring down our entire financial system.”

According to Federal Reserve officials quoted by Bloomberg last spring, five banks – JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, and Goldman Sachs – now hold assets equal to more than half the size of the entire U.S. economy ($8.5 trillion or 56 percent). That's vastly larger than the proportion controlled by these same banks before the financial crisis (43 percent). The banking behemoths are now about twice as big as they were a decade ago.

The Dodd-Frank law was signed two years ago this week, prompting President Obama to declare at the time: “No longer will we have companies that are, quote unquote, too big to fail.” But the trends have gone the opposite way in the ensuing period. In fact, the positions of the five banks most central to the crisis have been consolidated, said a former Treasury official who opposed many provisions of Dodd-Frank.

Perhaps the biggest irony, he said, is that in an era when regulators wanted to get rid of government-sponsored enterprises – such as Fannie Mae and Freddie Mac, the huge lending institutions that had built-in government guarantees, no matter how risky their behavior – the new rules may have effectively created more of them.