The Obama Administration should think thrice before nominating Lawrence Summers to be the next Sec'y of the Treasury.
Today's New York Times features a long-overdue cover story on former Sen. Phil Gramm's successful efforts in the late 1990s to deregulate the financial sector, specifically credit default swaps and other exotic derivatives. These are what Warren Buffet has referred to as financial Weapons of Mass Destruction which have nearly sunk the global economy.
Lawrence Summers, who is on the short list for Treasury Sec'y in the Obama Admin, is referenced in the article as having joined with Alan Greenspan and other Clinton officials to push for precisely the kinds of deregulation being pushed by Gramm, resulting in devastation to the economy. This is the first time to my knowledge that Summers has been directly linked, along with Greenspan and Gramm, to specific actions which directly contributed to the current disaster. Here are the relevant passages:
In the final days of the Clinton administration a year later, Mr. Gramm celebrated another triumph. Determined to close the door on any future regulation of the emerging market of derivatives and swaps, he helped pushed through legislation that accomplished that goal.
Created to help companies and investors limit risk, swaps are contracts that typically work like a form of insurance. A bank concerned about rises in interest rates, for instance, can buy a derivatives instrument that would protect it from rate swings. Credit-default swaps, one type of derivative, could protect the holder of a mortgage security against a possible default.
Earlier laws had left the regulation issue sufficiently ambiguous, worrying Wall Street, the Clinton administration and lawmakers of both parties, who argued that too many restrictions would hurt financial activity and spur traders to take their business overseas. And while the Commodity Futures Trading Commission — under the leadership of Mr. Gramm’s wife, Wendy — had approved rules in 1989 and 1993 exempting some swaps and derivatives from regulation, there was still concern that step was not enough.
After Mrs. Gramm left the commission in 1993, several lawmakers proposed regulating derivatives. By spreading risks, they and other critics believed, such contracts made the system prone to cascading failures. Their proposals, though, went nowhere.
But late in the Clinton administration, Brooksley E. Born, who took over the agency Mrs. Gramm once led, raised the issue anew. Her suggestion for government regulations alarmed the markets and drew fierce opposition.
In November 1999, senior Clinton administration officials, including Treasury Secretary Lawrence H. Summers, joined by the Federal Reserve chairman, Alan Greenspan, and Arthur Levitt Jr., the head of the Securities and Exchange Commission, issued a report that instead recommended legislation exempting many kinds of derivatives from federal oversight.
Mr. Gramm helped lead the charge in Congress. Demanding even more freedom from regulators than the financial industry had sought, he persuaded colleagues and negotiated with senior administration officials, pushing so hard that he nearly scuttled the deal. "When I get in the red zone, I like to score," Mr. Gramm told reporters at the time.
Finally, he had extracted enough. In December 2000, the Commodity Futures Modernization Act was passed as part of a larger bill by unanimous consent after Mr. Gramm dominated the Senate debate.
Me thinks Mr. Summers is a poor choice to helm Treasury, unless, at a minimum, he is willing to acknowledge his prior lapses in judgment, the role his misfeasance played in the current recession/depression, and a willingness to adopt bold new measures to regulate the financial sector.