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.