“To the extent that the job has become much more international and with more regulation and supervision within the new financial world order, that makes people such as Summers and former Treasury Secretary Tim Geithner compelling candidates,” says Deutsche Bank economist Joseph Lavorgna.Yellen vs. Summers? Depends on Risks of New Financial Crisis
Deutsche Bank’s story is that because President Obama has (purportedly) finally figured out that the “international” aspects of “regulation and supervision” are important to the “financial world order” he should appoint Summers or Geithner to Chair the Fed. It was at this juncture that I checked to see whether I had missed the inauguration of a new tradition of outrageous “August Fool’s” jokes. I expected the next paragraph of the article to propose Bill Clinton’s as Chair of the Marriage Fidelity Task Force and Todd Akin to head the “legitimate rape” counseling center. Summers and Geithner are among the greatest enemies of effective regulation, supervision, and prosecutions of banksters in the world.
Deutsche Bank is a systemically dangerous institution (SDI). The SDIs’ only fear is effective regulation and prosecution and they know that effective prosecution will be vanishingly rare in the absence of effective regulation. The SDIs’ highest priority is to maximize the three “de’s”: deregulation, desupervision, and de facto decriminalization. The SDIs have organized the effort to block Yellen from becoming Fed Chairman. They favor Summers and Geithner to run the Fed because they are the leading proponents of the three “de’s.”
The Financial Crisis Inquiry Commission (FCIC 2011: 199) documented that even within the anti-regulatory travesty that was the overall Fed system. the New York Fed under Timothy Geithner stood out for its recurrent regulatory failures at the SDIs it was supposed to regulate. Geithner infamously testified to Congress that he was never a financial regulator. I first learned of this while being interviewed on Bill Moyers on April 3, 2009.
WILLIAM K. BLACK: These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because…
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: Well, Geithner has, was one of our nation’s top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he’s a failed legacy regulator.
BILL MOYERS: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this.
TIMOTHY GEITHNER: I’ve never been a regulator, for better or worse. And I think you’re right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation.
Overwhelmed by regulation! It wasn’t the absence of regulation that was the problem, it was despite the presence of regulation you’ve got huge risks that build up.WILLIAM K. BLACK: Well, he may be right that he never regulated, but his job was to regulate. That was his mission statement.
BILL MOYERS: As?
WILLIAM K. BLACK: As president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. And he’s completely wrong that we had too much regulation in some of these areas. I mean, he gives no details, obviously. But that’s just plain wrong.Geithner spoke the truth when he said he had never been a regulator – but you’re not supposed to admit it!
Geithner was such a failure as a regulator that he thought that the fact that he had ignored his regulatory responsibilities when he was head of the N.Y. Fed as the crisis was growing massively excused him from responsibility for the crisis. When I saw Geithner’s testimony I recalled the words of a prominent director of an S&L that we (the regulators) sued alleging that he had breached his fiduciary duties. He told the press he could not understand why we were suing him because he had not attended a single meeting of the board of directors.
Geithner and Summers shared a belief in “winning” the international regulatory “race to the bottom.” Like Geithner, Summers claimed that the problem in finance was excessive regulation.
Mr. Summers, as a senior Treasury official in the late 1990s, played a leading role in the suppression of an effort by the head of the Commodity Futures Trading Commission to establish oversight of these customized derivatives [CDS], whose misuse already had contributed to financial catastrophes, including the bankruptcy of Orange County, Calif., and the collapse of a ballyhooed hedge fund, Long-Term Capital Management.Summers is one of the most culpable officials in the world for the global crisis. His disastrous attempt to “win” the regulatory race to the bottom “to avoid pushing the business overseas” created the regulatory black hole for financial derivatives that helped create the criminogenic environment that drove the crisis. Summers was blasé about shipping American jobs overseas in every industry except big finance. When it came to the SDIs it was suddenly essential that the SDIs remain located on Wall Street – where the U.S. Treasury rather than the UK Treasury would have to bail them out when they failed.
At the time, Mr. Summers emphasized that he wanted to maintain the status quo to preserve the stability of domestic markets, and to avoid pushing the business overseas.
Summers was a strong proponent of repealing the Glass-Steagall Act that had helped prevent banking crises for over 50 years. Summers was a strong opponent of some of SEC Chairman Levitt’s efforts to create effective regulation and helped to block those vital reforms that helped lead to the epidemic of accounting control fraud during the Enron-era.
Summers and Geithner were frenzied supporters of the Basel II insanity that tried to eviscerate U.S. banking capital requirements on the largely fraudulent mortgage assets that drove the crisis. If the FDIC’s tenacious rearguard battle against that insanity had not prevailed our crisis would have been vastly worse. European banks, which operated under the fully eviscerated capital requirements of Basel II, had roughly twice the leverage of the already vastly excessive leverage of U.S. banks. This is why the European banking crisis was often markedly worse than our terrible crisis.
Summers was also a strong proponent of the disastrous “reinventing government” movement under Clinton and Al Gore that maximized the three “de’s.” I have explained in prior columns how this movement maximized the three “de’s” and sowed the seeds of the Enron-era crisis and the ongoing crisis.
The purported “savings” that Gore attributed to “reinventing government” came overwhelmingly from cutting the number of federal employees. The financial regulatory agencies suffered some of the deepest cuts under Gore. The Bush administration compounded that disastrous mistake. Together, the Clinton and Bush administrations cut the FDIC staff by more than three-quarters and OTS’ staff by more than half. This “saves” money in a manner similar to not changing the oil in your car. You cut your short-term expenses modestly but you vastly increase your longer-term expenses when you blow out the engine. Summers (and Gore and Clinton) were lucky in their timing for they epitomized the phrase that became infamous during the current crisis: “I’ll be gone, you’ll be gone” (IBGYBG) (FCIC 2011: 8). Summers was gone before the Enron-era crisis exploded or the current crisis was generally recognized as a crisis. Summers was, however, Treasury Secretary when he was warned in 2000 by the coalition of honest appraisers about the emerging epidemic of appraisal fraud led by lenders who blacklisted honest appraisers in order to extort appraisers to inflate their appraisals. No honest lender would ever inflate an appraisal. The appraisers’ petition was the perfect warning flag of “accounting control fraud,” but Summers and other senior Clinton administration officials ignored the warning.
From 2007 to 2007, a coalition of appraisal organizations circulated and ultimately delivered to Washington officials a public petition; signed by 11,000 appraisers and including the name and address of each, it charged that lenders were pressuring appraisers to place artificially high prices on properties. According to the petition, lenders were “blacklisting honest appraisers” and instead assigning business only to appraisers who would hit the desired price targets (FCIC 2011: 18).George Akerlof and Paul Romer were consciously speaking to their fellow economists like Larry Summers when they explained the critical link between the three “de’s,” epidemics of accounting control fraud, and financial crises. (Akerlof is Yellen’s spouse.)
Neither the public nor economists foresaw that the regulations of the 1980s were bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself (p. 60).Summers, however, ignored the warnings and refused to learn from experience. He maintained his blind spots about regulation and elite fraud. It was Harvard’s disgraceful refusal to act under Summers’ leadership against one of the university’s top economists that caused the faculty to revolt against his leadership to become overwhelming.
Summers and Geithner remained the SDI’s closest allies even after the current financial crisis began and it was clear that their controlling officers’ frauds drove the crisis and made them wealthy. Summers and Geithner fought tenaciously to prevent the elimination of the SDIs. They remain too big to manage, too big to be efficient, too big to regulate, too big to prosecute, and too big to fail. The SDIs received the largest bailouts and special grants of credit from the Fed in world history. Indeed, the U.S. bailouts and special deals are so large that they exceed all previous bailouts in our history – combined. Summers and Geithner ensured that crony capitalism would continue to reign after the crisis. They fought against the re-adoption of Glass-Steagall and the repeal of the Commodities Futures Modernization Act in its entirety. Summers and Geithner were bitter opponents of Sheila Bair’s (none too radical) efforts to restore a modicum of financial regulation when she was Chair of the FDIC. In particular, Geithner blocked Bair’s effort to force Citi’s CEO accountable for his myriad failures.
The most scathing peer criticisms of the FRBNY’s abject failure as a supervisor under Geithner’s (non) leadership were that the NY Fed consistently failed to take vigorous actions to rein in Citi’s frauds, violations of the rules, and unsafe and unsound practices (FCIC 2011: 199).
Many people make the error of believing that the banksters are dull, humorless stiffs in gray suits. Many banksters have a finely developed sense of irony and utter contempt for financial reporters’ intelligence and independence. They find it hilarious that they can tell the WSJ that the President should make Summers or Geithner the next head of the Fed because the agency needs zealous supervisors who are tougher than junk yard dogs – and the reporter will dutifully put the farce into the paper as if it were a fact.
What the banksters reveal is that their highest priority is to block Yellen so they can get a financial high priest like Summers who will continue to venerate the “Greenspanke” creed that has caused such harm to this Nation since Greenspan was appointed in 1987. That creed proclaims that banksters cannot exist because financial markets automatically exclude fraud and that the great evil that must be eradicated from the world is regulation.
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