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."