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.”