Privatized Profits & Socialized Risk
Hillary Clinton and Bob Rubin are a matched set. They were always at the table when the great decisions were made, but they are never accountable for the mistakes. Here’s former Clinton Treasury Secretary and Citibank Exec Rubin on his role in Citibank’s recent credit meltdown.
“People know I was concerned about the markets,” he says. “Clearly, there were things wrong. But I don’t know of anyone who foresaw a perfect storm, and that’s what we’ve had here.”
“I don’t feel responsible, in light of the facts as I knew them in my role,” he adds.
As I have said before, Rubin’s fight to deregulate the banking industry while he was at Treasury has a direct link to the financial crisis we face today. in 1998, Brooksley Born, the chairwoman of the commodities commission, tried to push through a more stringent regulation of derivatives. Rubin went ballistic.
Mr. Rubin made no secret of his feelings about her proposal. “It was controlled anger. He was very tough,” Mr. Greenberger recalls. “I was at several meetings with him, and I’ve never seen him like that before or after.” Ms. Born didn’t return calls for comment. Mr. Rubin says he was against the proposal because he feared it could create chaos in the markets, rather than actually improve oversight of derivatives.
But during his time in Washington, he says, “the politics would have made this impossible. Even if I’d taken a placard and walked up and down Pennsylvania Avenue saying the financial system would come to an end without strict regulation of derivatives, I would have had no traction.”
But as Ben Stein writes, what we have is chaos in the markets. Stein points to a speech last week from David Einhorn of Greenlight Capital. The very lack of transparency in derivatives that Rubin fought so hard to preserve has become our undoing.
(Einhorn) says the S.E.C. allowed broker-dealers to set their own valuations on assets and liabilities that were hard to value. And broker-dealers could assign their own creditworthiness ratings to counterparties in complex derivatives transactions when those counterparties were otherwise unrated.
In a word, Mr. Einhorn says, the S.E.C. told Wall Street to police itself to save on regulatory costs, while not bothering to “discuss the cost to society of increasing the probability that a large broker-dealer could go bust.”
A result of all this, he says, was as follows:
“The owners, employees and creditors of these institutions are rewarded when they succeed, but it is all of us, the taxpayers, who are left on the hook if they fail. This is called private profits and socialized risk. Heads, I win. Tails you lose. It is a reverse-Robin Hood system.”
This is the ultimate legacy of neo-conservative deregulatory economics–privatised profits and socialized risk.
So it is a “reverse-Robin Hood” system? Robin Hood was fiction. This is reality. Every time someone has tried to institute a Robin Hood system, the result has been a “reverse-Robin Hood” system. Does that reflect on the character of those who tried to institute Robin Hood systems or on the Robin Hood system itself? When a few individuals have the power to enact regulations for the “public good” by the force of law, is it any surprise who the “public” being served is?
Do not blame the consequences of government interference on deregulation. The sort of government bailouts that we see today would not be possible in an unregulated economy.
Actually K.M., I expect it’s more that a guardian element (government) started acting too much like a commercial element – trading money for influence with those who had a surplus. That created consequences antithetical to governments guardian role – destructive effects on the economy. Now, many think that a relatively free and elected government like ours is bound to be crap at regulating the economy due to available access to corrupt said government in the person of it’s little human elements. Of course there are other, worse effects when totalitarian governments regulate their economies. But I see part of the governments role is to guard the part of the economy that touches the little guy. Not to provide handouts, but to prevent a completely unregulated economy that eventually leads to excesses like slavery and serfdom and unthinking destruction of resources among other ills. The government should be keeping the playing field level. That’s all. But that’s where the interpretation happens isn’t it?
oops – sorry about the excessive italics…
K.M. – Yes, the bailouts would be impossible in an unregulated economy. But the excesses which lead to the situation in which said institutions needed a bailout wouldn’t be magically prevented by an unregulated economy.
The only thing that prevents such excess is appropriate regulation of financial markets, so yes, deregulation is at fault.
You might want to claim that somehow the excesses wouldn’t have been so great if the financial wizards who cooked up this mess thought there wasn’t a government safety net for them. I think there might be something to this, but I still don’t think that that situation would be preferable to the one in which regulations prevented such ‘innovation’.
Pete – I seriously have to question the notion that the folks who “cooked this mess” even considered a safety net. I think, like any Ponzi scheme they wanted to get in early, get fat, and get out with enough take to bank the next big thing.
Finance, like all other fields, has the usual bell curve of innovators being the sharp end of the point, and the wanna-be imitators fattening the middle, and, inevitably, bleeding the scam dry along with all the marks.
Never underestimate the evil genius of the real big guns of the business of moving money to make money. One of their sharpest moves has always been to spend just the right amount on really good spin artists who are able to convince the marks and wanna-b’s that regulation will keep them from getting as rich as the big boys, then stepping aside and letting the long tail lobby congress against the “death tax” for example.
This is a beautiful photograph. That’s all it is, but it’s nothing less than that. Bob Rubin, very much in the flesh, looking us in the eye almost inadvertently. Hillary Rodham Clinton seeking the fixer’s counsel in a candid moment—look at how pretty she is! The beautiful ear and ronantic neckline! So sweet!
“To the mating calls of…lawyers in love…”