Obama Defends His Finance Reform Record to Rolling Stone: A Response
POSTED: October 26, 10:45 AM ET
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barack obama
Barack Obama speaks at a campaign event in Delray Beach, Florida.
Vallery Jean/FilmMagic
The new issue of Rolling Stone features an in-depth interview with
President Obama. An interview with a sitting president is always an
intense experience for any news outlet, but in this case the Obama
interview offered us an additional surprise. When asked a question
about financial regulation, the president turned the tables on us and
critiqued Rolling Stone's reporting on issues like the Dodd-Frank
reform bill. We – well, I, specifically – criticized the Obama
administration for not going far enough in reforming Wall Street, and
he used the interview as an opportunity to respond on that score.
Earlier this week, I spoke to a number of people in and around
Washington who were my sources during the time when I was writing the
stories about Dodd-Frank that the president referred to in the
interview. I forwarded the president's response to them and solicited
comments on his take on Dodd-Frank, then used them to put together a
sort of respectful answer to the president's critique; you can find
that answer further down this page.
First, here's the question and answer that appeared in the Rolling
Stone interview with President Obama:
Forget for a moment about obstruction by Wall Street lobbyists and
Republicans in Congress. If you could single-handedly enact one piece
of regulation on the financial industry, what would it be?
The story of Dodd-Frank is not yet complete, because the rules are
still being developed. Dodd-Frank provided a platform to make sure
that we end some of the most egregious practices and prevent another
taxpayer-funded bailout. We've significantly increased capital
requirements and essentially created a wind-down mechanism for
institutions that make bad bets, so the whole system isn't held
hostage to them going under. We have to make sure that the rules
issued around the Volcker Rule are actually enforced. So there's a lot
of good work that will be done around Dodd-Frank.
I've looked at some of Rolling Stone's articles 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 not 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 re-imposing models that
were created in the 1930s.
I will tell you, the single biggest thing that I would like to see
is changing incentives on Wall Street and how people get compensated.
That ultimately requires not just congressional legislation but a
change in corporate governance. You still have a situation where
people making bets can get a huge upside, and their downsides are
limited. So it tilts the whole system in favor of very risky behavior.
I think a legitimate concern, even after Dodd-Frank, is, "Have we
completely changed those incentives?"
When investment banks, for example, were partnerships, as opposed
to corporations, all those partners understood that if there was some
tail risk out there – some unanticipated event that might result in
the whole firm blowing up – that they were going to lose all their
money, they were going to lose all their assets. They weren't
protected. These days, you've got guys who are making five years of
risky bets, but it's making them $100 million every year. By the time
the chicken comes home to roost, they're still way ahead of the game.
So I think it's something that needs to be discussed. But that's not
something that can entirely be legislated – that's something that also
has to involve shareholders and boards of directors being better
stewards of their institutions.
President Obama's point about the repeal of Glass-Steagall follows a
mantra that Tim Geithner and other members of the president's
administration have been preaching for years. This oddly
straw-man-ish, syllogistic argument goes something like this:
The repeal of Glass-Steagall created mega-merged "supermarket" firms
that blended insurance, commercial banking, and investment banking
services – companies like Citigroup. Lehman Brothers, whose collapse
was a major event in the 2008 crisis, was not one of those companies.
Therefore, the repeal of Glass-Steagall did not cause the financial
crisis.
Now, it is true that Lehman Brothers was just an investment bank, and
not one of those supermarket firms. But Lehman Brothers didn't cause
the financial crisis all by itself (more on that in a moment).
Moreover, many of the giant mega-merged companies that were spawned by
Glass-Steagall did in fact play huge roles in the financial crisis.
For instance, President Obama failed to mention that the company whose
merger was only made legal post-factum by Bill Clinton's repeal of
Glass-Steagall – Citigroup – ultimately became the single largest
recipient of federal bailout funds, taking in nearly half a trillion
dollars in cash and guarantees, according to the Congressional
Oversight Panel. Citigroup would almost certainly have gone under in
2008 without that massive $476 billion federal lifeline, and had Citi
gone under, the impact would likely have dwarfed that of the collapse
of Lehman Brothers.
In fact, as one former regulator noted to me, the fact that the most
destrctive collapse in 2008 was from Lehman and not from a commercial
bank – well, that is really a historical accident. Had the government
elected to bail out Merrill Lynch and Lehman and let Citigroup and
Bank of America fail, we'd be having an entirely different
conversation today. That could easily have happened: the only thing
that's unique about Lehman Brothers is that then-CEO Dick Fuld and his
minions were so loathed by Henry Paulson and the rest of the Wall
Street crowd that his bank was kicked out of the lifeboat, when
everyone else was ushered on board.
Other commercial banks that in the post-Glass-Steagall environment
also blended in investment banking activities – companies like
Wachovia and Washington Mutual – also got into serious trouble and
required massive bailouts or federally-aided shotgun mergers to
survive. Many of these banks got into trouble thanks at least in part
to activities that would have been prohibited under Glass-Steagall,
like for instance originating mortgage loans and packaging them into
securities to be sold; before the repeal, banks were not allowed to
originate loans and underwrite securities.
Opponents of Glass-Steagall will argue that companies like Citigroup
and Wachovia would have been in trouble with or without
Glass-Steagall, that those firms weren't sunk by their new
financial-supermarket structures, but by dumb investments in things
like mortgages that might have been made by the dumb executives who
ran those companies anyway – i.e. those executives would have been
just as dumb if they were merely running commercial banks in the
2000s, instead of running cross-species financial behemoths that also
offered i-banking and insurance services.
That might be true. But this would be an interesting argument for
anyone in the Obama administration to make, given that president Obama
brought in many people from the leadership of Citigroup to shape his
economic policy, from chief of staff Jack Lew to transition team chief
Michael Froman to a host of people connected in some form or another
to former Citi executive and Glass-Steagall architect Bob Rubin (even
Geithner served under Rubin in the Clinton administration).
The presence of so many Citigroup executives in the Obama
administration makes it not terribly surprising that the president
would be sensitive on the subject of Glass-Steagall. The fact that two
of Obama's closest economic advisors, Geithner and Gene Sperling (who
was NEC chief under Clinton), were original architects of the
Glass-Steagall repeal is also an obvious factor here.
But it's still odd that he would focus so intently on that one point,
given that the president himself proposed and supported a sort of new
version of Glass-Steagall, called the Volcker Rule. Almost all the
pro-reform voices I know on Wall Street and in Washington liked the
original version of the Volcker rule, and many would have been content
to forget about Glass-Steagall forever had the original version of the
Volcker Rule that President Obama himself supported actually made it
through to become law.
But it didn't. Instead, the Volcker rule was gutted from within by
members of both parties during the Dodd-Frank negotiations, and as we
reported on several occasions, it was Geithner and the Obama
administration that were particularly aggressive in scaling it back
behind closed doors. That was what we criticized the president for –
not so much for failing to reinstate Glass-Steagall, but for allowing
his own policy proposal to be punched so full of holes that it would
never be an effective law.
Years after the passage of Dodd-Frank, even the critically-weakened
version of the Volcker rule that did ultimately pass is still not
officially federal law, its implementation recently delayed again
until at least 2014.
Still, most of this is irrelevant. The issue with the president's
reform efforts was never limited to a failure to reinstate
Glass-Steagall, or even to pass a strong Volcker Rule. That was always
just one part of a larger picture.
The biggest problem leading to the crash in 2008 was that a host of
firms of many different types – insurance companies like AIG (which
incidentally had an investment bank-like component, AIGFP, which
helped cause its collapse), investment banks like Bear Stearns and
Lehman Brothers and commercial banks like Wachovia and WaMu – all got
into critical trouble, often when they leveraged themselves to the
hilt to make ill-considered bets on things like subprime mortgages.
And because all of these companies were so large and so interconnected
with other, leading to what amounted to an explosively dangerous
concentration of capital, massive state intervention was required to
prevent a global depression.
The repeal of Glass-Steagall was just part of the decades-long
deregulatory effort that led to this toxic situation. Another
Clinton-era law, the Commodity Futures Modernization Act, contributed
to it as well, by completely deregulating the market for derivatives
(which were used to package all of those mortgages, were a major
contributor to the collapse of AIG, and also played a huge role in the
Jefferson County, Alabama disaster, among other things). Supreme Court
decisions allowing interstate bank mergers where before they had been
prohibited helped create the Wachovias and WaMus of the world. And a
2004 SEC decision to lift restrictions on leverage for the country's
biggest investment banks allowed companies like Lehman to borrow forty
dollars or more for every one they actually had.
Collectively, these and other policies created a market where banks
were over-large, capital was lethally overconcentrated in the hands of
a few huge firms, financial companies were all leveraged to the moon
and the fates of federal insurance programs like the FDIC were
suddenly tied to the gambling habits of some of the riskiest
investment banks in the world. It wasn't just Glass-Steagall – it was
Glass-Steagall plus all of this other stuff that made the world so
dangerous.
So the first and most critical goal of any reform-minded
administration should have been to alleviate these dangers by making
things less concentrated, i.e. by making Too-Big-To-Fail companies
small enough to fail. And Obama really didn't do that, on any front.
Reinstating Glass-Steagall or imposing a strong Volcker Rule would
have been part of that, because it would have removed the threat that
the federal government or the FDIC would ever again have to worry
about what sorts of loony gambling schemes these new supermarket firms
are getting themselves into. Obama also could also have helped reverse
the damage of the Commodity Futures Modernization Act by forcing
derivatives to be traded on simple, regulated exchanges. FDR did
exactly the same thing with stocks and commodities after the
Depression, but Obama passed on doing it with derivatives, again
allowing his own party's derivatives reform proposals in Dodd-Frank to
be severely gutted from within.
Finally, Obama had a chance to physically reduce the size of
Too-Big-To-Fail companies by supporting the Brown-Kaufman amendment to
Dodd-Frank, which would have forced big banks to cap deposits and
liabilities to under 10% of GDP. He didn't support that amendment and
it died.
The sum total of all of this is that Obama didn't really do anything
to alleviate the dangers of Too-Big-To-Fail. If anything, we now live
in a world that is more concentrated and dangerous than it was before
2008. TBTF companies like Chase and Wells Fargo and Bank of America
are even bigger and less-able-to-fail-ier than they were when he took
office. This is why Obama's answer to our interview question is so
disappointing. If I'm understanding the president correctly, he
basically says he doesn't think Glass-Steagall should be re-instated,
and beyond that, he just thinks Wall Street needs to self-regulate
better.
That's a pretty depressing take, at a time when even Sandy Weill – the
bellicose Wall Street braggart who willed the now-infamous Citigroup
merger into being and was a driving force behind the repeal of
Glass-Steagall – thinks that Too-Big-To-Fail companies should be
broken up. The only hope we really have to fix many of these problems
is to do just that, and we will need the chief executive's help there.
But President Obama apparently still isn't willing to take that step,
which is really too bad.
Editor's Note: As several readers have helpfully pointed out, I
confused "Glass-Steagall" with "repeal of Glass-Steagall" a few times
in this piece. It's since been fixed. I tried to avoid muddying the
waters by not using "Gramm-Leach-Bliley" to describe the law that
finally repealed Glass-Steagall, but I ended up confusing myself --
apologies.
A few other quick notes. Some have tried to insist that Bill Clinton
had nothing to do with Gramm-Leach-Bliley, that is was the brainchild
of Phil Gramm and the Republicans. This just isn't the case.
Gramm-Leach-Bliley was as completely bipartisan a bill as has ever
been passed. It crucially had the support of Bob Rubin and others in
the Clinton White House (Rubin of course later went to work for
Citigroup and made over $100 million there). The Citi merger also
would never have been possible without the aid of Alan Greenspan, who
granted Citi a temporary waiver to do the merger before
Gramm-Leach-Bliley was passed. Clinton, it should be noted, said
Glass-Steagall was "no longer approproate" when he signed the repeal
into law.
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doroteoaranjuez
"TBTF companies like Chase and Wells Fargo and Bank of America are
even bigger and less-able-to-fail-ier than they were when he took
office. This is why Obama's answer to our interview question is so
disappointing."
Let's all pray that Paul Krugman's tacit prediction comes true:
http://krugman.blogs.nytimes.c...
Because this is how these TBTF artholes paid Obama back:
http://www.opensecrets.org/pre...
Like
Reply
7 hours ago
Pancho Villa
"Opponents of Glass-Steagall will argue that companies like
Citigroup and Wachovia would have been in trouble with or without
Glass-Steagall, that those firms weren't sunk by their new
financial-supermarket structures, but by dumb investments in things
like mortgages that might have been made by the dumb executives who
ran those companies anyway – i.e. those executives would have been
just as dumb if they were merely running commercial banks in the
2000s, instead of running cross-species financial behemoths that also
offered i-banking and insurance services."
Right, Matt. This argument makes as much sense as saying that
automatic weapons should not be banned, since a crazy motherflower can
nonetheless use barehand karate chops to kill a bunch of people in a
movie theater. Dumb bankers cannot be excluded ex hypothesi, since
the dumb modifier is almost inherent to the noun banker, but we can
make sure they don't blow us all up by limiting the scope of their
stupidity.
Like
Reply
8 hours ago
dollared
Obama's argument that corporate governance has to change, and that
that isn't the subject of "congressional legislation," is complete
bullpocky. It is precisely up to Congress to set the rules of
investment banking, commodities trading, and other casino activity.
It would be very, very simple to write a law, for example, that
"commodities trading may not be conducted by a legal entity that
shields its interest holders from personal liability for losses
incurred in trading."
It's that f#$%king simple, and the President is a liar.
Like
Reply
11 hours ago
concernedcitizen
This is Obama-villifying the "Fat Cats" on the one hand while
taking all he can get from them on the other. Too bad people do not
pay attention to what he actually does but believes everthing he
says. He is the typical politican.
Like
Reply
19 hours ago
Mony Vibescu
No surprise Oblabla the republicrate has been reelected, he is too
perfect for the oligarchy, under his so called " reformer " banner,
this oncle Tom has served very well his masters from Wall Street and
the industrial military complex, like a good news anchor man this
actor is gonna continue and amplify the neo colonial war agenda and
police state policies that Bush has started ...
For sure the medias are gonna continue to present him for what he
is not : a social democrat working for the middle class and the poors
...
One obscene figure sums up the american' s decadence : 6 billions
dollars spent for this mascarade, when the american bureau of census
states the number of poors ( $902 a month ) at 50 millions ...
Like
Reply
1 day ago
ppatt
Then maybe Glass-Steagall II -- separating out insurance, from
investments, from commercial banking. Some hedges defy categorization.
Are they insurance or investments?
Like
Reply
3 days ago
Paul Allen
Eric Dinallo (former insurance regulator in NY) testified before
the FCIC in 2010 that under Glass-Steagall AIG Financial Products
would not have been possible. To me this helps counter the argument
that Glass Steagall would not have prevented the crisis. Without AIG
FP as the counterparty in so many hundreds of billions of derivatives
bets, much of the systemic risk we ended up with could not have
occured.
http://fcic-static.law.stanfor...
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Reply
4 days ago
1 Like
Jacobscole31
Who could actually support Obama. He is running on one of the
worst records EVER. Could someone please tell me why he should be
re-elected.
Like
Reply
5 days ago
3 Likes
ppatt
I love these "because I said so" posts. It's way more intelligent
to reference and document examples than to post uncompelling
assertions that will only elicit agreement from those who already
agree. ROFLMAO.
Like
Reply
3 days ago
in reply to Jacobscole31
Schadha100
Because there is no suitable alternative.
Like
Reply
4 days ago
in reply to Jacobscole31
3 Likes
Jason Miller
Exactly.
Like
Reply
4 days ago
in reply to Schadha100
1 Like
Jason Miller
The American people have finally reached the tipping point with
the teapublican's hard core right-wing extremism. Governor Christie
has proven that reasonable Republicans still exist. Let's work
together America, and get this country moving forward again.
http://www.youtube.com/watch?v...
Like
Reply
6 days ago
1 Like
Jim Hall
Matt, the "too-big-to-fail" guys made bets on phony derivatives
concocted by the likes of John Paulson and Golden Sacks. That's what
turned faith in the financials to tatters... And has either really
been made to pay the true price? No!
Like
Reply
1 week ago
1 Like
Marissa
My Respectful Response to Matt Taibbi's Respectful Response to
President Obama:http://marissaelinda.tumblr.co...
Like
Reply
1 week ago
Jkll23
I read your response. You seem like a nice person - but it's time
to grow up. You can look into "Obama's soul", the rest of us can look
at his actions.... if he was ever going to go over after wall street
it was when he had the greatest chance, right after the economy blew
up, when it would've been immensely political popular. He's not
playing 11 dimensional chess. Stop dreaming.
Like
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5 days ago
in reply to Marissa
4 Likes
Marissa
My Respectful Response to Matt Taibbi's Respectful Response to
President Obama
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Reply
1 week ago
walstir
“the first and most critical goal of any reform-minded
administration should have been to alleviate these dangers by making
things less concentrated, i.e. by making Too-Big-To-Fail companies
small enough to fail”
The simultaneous failure of two companies each half the size
determined to be Too-Big-To-Fail would have the same effect as the
failure of a single company that was twice as big. Smaller companies
are not a sufficient safeguard in the presence of systemic fallacies
such as the belief that real estate is always a sound investment. The
financial crisis occurred all over the world and more acutely in some
other countries than America. Spain had numerous smaller regional
banks that collapsed; but they all made the same investment mistake
and the cumulative impact on the Spanish economy was the same as the
failure of a single large bank. On the other hand, in a really strong
economy, the failure of even the biggest bank can usually be managed.
Unfortunately, big bank failures rarely happen in isolation.
Like
Reply
1 week ago
3 Likes
Harry Canary
The point you are making is the key issue of the whole crisis.
The problem is the underlying fraud in the system. It locked up
because all the players knew how much garbage they were putting out
themselves and assumed that everyone else was doing the same thing.
At that point everyone knew it was all phoney and no one could be
trusted. So they quit doing business with one another. Then the
system locked.
The only way to fix the system is to restore trust. To do that
you have to prosecute and imprison the frauds.
Like
Reply
1 week ago
in reply to walstir
2 Likes
walstir
That is not going to happen. The President has said publicly and
repeatedly that the crisis was caused by inadequate regulation and
that most of the acts that caused the crisis were perfectly legal.
His opponent hasn’t disagreed. Even easy to prove frauds like the
vast number of false debt and income declarations made by mortgage
applicants are not being prosecuted.
Like
Reply
6 days ago
in reply to Harry Canary
Dave Mitchell
The media are sitting on email evidence relating to Benghazi that
implicates the Obama Administation in the deaths of our soilders.
they are waiting until after the election to release it. Despite all
the media cover-ups Romney is leading everywhere
Like
Reply
1 week ago
2 Likes
Jim Hall
If that's all you have on Obama, aside from the fact that he's
obviously black...
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1 week ago
in reply to Dave Mitchell
2 Likes
ronnie johnson
Forget your meds again?
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1 week ago
in reply to Dave Mitchell
1 Like
An Outhouse
and that is apropos to this story, how?
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Reply
1 week ago
in reply to Dave Mitchell
1 Like
Harry Canary
That's ok you still have fox to make up stories to fit your
hallucinations and fantasies.
Read more:
http://www.rollingstone.com/politics/blogs/taibblog/obama-defends-his-finance-reform-record-to-rolling-stone-a-brief-response-20121026#ixzz2BkTY5200
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