Rubin to the Rescue?

In Newsweek, former Goldman Sachs CEO, Clinton Treasury Secretary, and Citigroup bigwig Robert Rubin offers his analysis of the Great Recession and proposed nostrums for preventing another:

Given my views as to the causes of the crisis, I would recommend the following:

• There should be greatly increased capital and margin requirements for derivatives and other instruments of financial engineering to create a greater cushion when trouble develops and to reduce risk exposure. I developed this view during my many years of working with derivatives before entering government, as described in my 2003 book, In an Uncertain World.
• Standard derivative contracts should trade on an exchange to increase transparency. Transactions that are custom designed would not be exchange traded but would be subject to the same capital and margin requirements as listed transactions. Disclosure requirements could be considered for customized transactions, to provide private counterparties and regulators with the transparency to understand the risks.
• There should be two sets of more stringent leverage limitations for systemically significant institutions, one defined by risk-based models and the second by much simpler measures, since mathematical models can’t capture the full range of real-world possibilities.
• There should be significant constraints on off-balance-sheet financing; for example, institutions must retain ownership of a portion of off-balance-sheet assets.
• We need a change in accounting systems to avoid the artificial effects of mark-to-market accounting for illiquid assets on balance sheets and on markets. There are other accounting approaches that would better reflect long-run values for these assets.
• We should also provide effective mechanisms for dealing with systemically important nonbank financial institutions—including bank holding companies—that get into trouble, to mitigate “too big to fail” concerns, but practical ways to do this need to be developed.
• There should be greatly increased protections, both to safeguard consumers and to reduce systemic risk. The elements should include readily understandable disclosure, suitability requirements, prohibition of practices or instruments inherently susceptible to abuse, and, if some practical way can be found, personalized advice for the most vulnerable consumers.

Fair enough, mostly no brainers, but is Rubin being disingenuous? As we’ve previously written, there seem to be growing threats to to the man’s political capital, particularly within the Democratic party. And judging by this piece from Marshall Auerback, those threats still exist, and have intensified since 2006:

As one of the people whose policies threw the global economy off the rails, Rubin may be uniquely qualified to provide solutions as to how to get the economy back on track. But that would presuppose that the man actually acknowledged mistakes (as some of his other Goldman Sachs/Clinton Administration colleagues, such as Gary Gensler, have done) and displayed at least a marginal understanding of where he went wrong.

No such luck. We get the usual self-serving “nobody could have possibly predicted a crisis of this magnitude” right at the start…

Auerback cites a damning interview with the former head of the CFTC, Brooksley Born (a position now held by the aforementioned Gary Gensler):

…as analysts sort out the origins of what has become the worst financial crisis since the Great Depression, Born has emerged as a sort of modern-day Cassandra. Some people believe the debacle could have been averted or muted had Greenspan and others followed her advice.As chairperson of the CFTC, Born advocated reining in the huge and growing market for financial derivatives.

According to Auerback:

Rubin now suggests that Born’s problem was one of style, rather than substance: she, being “too confrontational”, risked aborting any politically feasible reform of OTC derivatives. That’s certainly an interesting reinterpretation of Rubin’s actual role as Treasury Secretary, during which he laid the groundwork for today’s crisis through an aggressive championing of financial deregulation. It’s hard to think of one instance where the former Goldman Sachs CEO actually came down hard on his former Wall Street colleagues. Had he at least acknowledged some remorse or recognition of error, he would be more appropriately suited for an advisory role on how to fix the global economy, much as a reformed criminal often has useful insights on penal reform.No such luck here. If being one of the worst Treasury Secretaries ever wasn’t enough, Rubin left another unfortunate legacy at Citigroup, where he was a senior advisor after he quit the Treasury. He left Citi just before its near collapse amidst criticism of his performance. A distinguishing moment of his tenure was when Rubin got hold of Peter Fisher in the US Treasury Department to try to put pressure on the bond-rating agencies to avoid downgrading Enron’ debt which was a debtor of Citigroup…

Letting him publicly expound on getting the global economy back on track is akin to providing Kim Il Jong-il a public platform on human rights. Unlike Greenspan, who at least admitted mistakes, Rubin expects to be taken seriously as a policy maker despite acknowledging zero responsibility for the debacle that threw millions of Americans into unemployment. People around the world have lost their jobs, savings, and more largely thanks to the policies championed by this misguided deficit warrior.

Ouch.

We’ll pile on by reminding people that as Treasury Secretary, Rubin presided over implementation of the “strong dollar” policy designed by his predecessor, Lloyd Bentsen, which had damaging effects on many developing nations’ economies. He’s also featured prominently in a recent list at Motley Fool of “The 10 Dumbest Banker Quotes of All Time”. And we agree with Auerback that a sincere mea culpa for past errors, whether at Treasury or Citigroup, would buy the man some badly needed goodwill. We think he should also expand his bullet points to include the following: 

• Let’s not repeat the mistake of believing that experts always know best.
• Let’s agree that optimal outcomes often require more than just unbridled private actors.
• Let’s resolve not to get caught up in any more cults of personality, whether adorer or adoree.

Update 01/07/2010 (via Mark Thoma) – Larry Summers, who is currently President Obama’s National Economic Council chief, and was Robert Rubin’s protege and eventual successor at the Clinton Treasury, also finds his political capital under attack from both the left and the right.   

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URLs:

http://www.newsweek.com/id/225623/page/2

http://www.amazon.com/gp/product/0375757309?ie=UTF8&tag=symmetrycapit-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=0375757309

http://www.newdeal20.org/?p=7270

http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html

http://www.fool.com/investing/general/2009/11/25/the-10-dumbest-banker-quotes-of-all-time.aspx

http://www.economicprincipals.com/issues/2010.01.03/880.html

http://capitalgainsandgames.com/blog/bruce-bartlett/1373/summers-out

Hacking Supplants the FOIA; Defending Maxine

Why go through the burdensome process of a Freedom of Information Act request when you can just hack your way into sensitive government material?!? According to AP, a report on preliminary inquiries by the House Ethics Committee was stolen from a junior employee’s computer via exploitation of a connection to a P2P file sharing network. 

The report included the cases of Rep. Maxine Waters and Rep. Laura Richardson. Rep. Waters’ case was already public. She allegedly used her position to help a smaller bank, OneUnited, which her husband is involved with, gain access to Treasury officials and thus TARP funds. OneUnited still had to go through the application process, and was required by Treasury to raise $20M of equity capital in order to qualify for $12M of TARP funds. That may sound like an unseemly use of access and privilege, especially to those who detest Rep. Waters’ politics, but let’s be fair – a small African-American owned bank is far less likely to have a hotline to the Treasury or the Fed than a large investment or money center bank. Rep. Waters acted as that conduit — which is sort of the idea in a representative democracy, isn’t it? In our view, it would only demonstrate poor ethics if other small banks in her district, that she or her husband were not stakeholders in, requested similar efforts from her and were refused.

The Richardson case sounds a lot like Sen. Dodd’s personal mortgage dealings with Countrywide, which is a bigger lapse in our view, as she would have been the primary beneficiary of her actions.

Not surprisingly, the largest number of inquiries have to do with defense spending.

A fun question for voters to reflect on: Apart from obvious concerns over more sensitive government data, was this hack a good thing or a bad thing? Was it a heroic act, a criminal act, or a little of both?

URLs:

http://finance.yahoo.com/news/Ethics-report-leaked-apf-1026316031.html?x=0&sec=topStories&pos=main&asset=&ccode=

http://online.wsj.com/article/SB123258284337504295.html

https://www.oneunited.com/

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Roubini re USD Carry Trade – Back to the Future

Via an Edward Harrison post on Seeking Alpha, we learned of Nouriel Roubini’s recent comments that the USD is fueling the “mother of all carry trades” and creating multiple global asset bubbles.

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”

The dollar has dropped 12 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s. Roubini said the dollar will eventually “bottom out” as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and “rush to the exit,” he said.

“The risk is that we are planting the seeds of the next financial crisis,” said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. “This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.”

There is plenty of truth in what Roubini said, but it’s nothing new — carry trades have been a recurring feature of the post-WWII global financial system, especially since the 1960s, when the breakdown of the Bretton Woods global gold exchange system began. And as we have noted for some time, the U.S. is in a long (perhaps multi-decade) cycle where monetary policies appropriate to domestic economic conditions will have inflationary consequences abroad, and thus some residual stagflationary effects at home. This is the inverse of the 1980s and 1990s, and parallels experiences of the 1960s and 1970s. And while we previously believed that fiscal, regulatory, and other economic policies were the only important drivers of such outcomes, we now believe that demographic trends play a major and possibly decisive role. If true, we expect with near certainty that current trends will remain intact through the next decade, based on global demographics. Economic policies certainly play a critical role, but their effects unfold at the margin, i.e., outcomes can be made marginally better or marginally worse by policymakers’ decisions (though history shows that there is always the possibility of policies going off the rails, and thus having more than just marginal effects).

Despite Roubini’s protestations, it’s not clear how far USD fueled asset speculation might go. Harrison rightly points out that Japan’s quantitative Yen easing in recent years coincided with bubbles in mortgage finance. But as we have pointed out in prior assessments of the crisis, that carry trade was amplified substantially by historic leverage ratios in the U.S. and parts of Europe among investment banks, some of their clients, and private households. This was due primarily to regulatory lifting of leverage limits and public support of mortgage markets, as well as bankruptcy reform legislation that made lending to consumers more attractive (or so it seemed at the time!).  That’s clearly not the trend at present: deleveraging continutes apace in the private sector, offset only partially by governments as they try to ameliorate declining resource utilization. Furthermore, some beneficiaries of the current carry trade are behaving rather soberly, at least for now. For example, Brazil recently instituted capital taxes to act as a brake on hot flows. That’s precisely the opposite of what homeowners, consumer credit borrowers, investment banks, private equity funds, hedge funds, and many others did during the height of the Yen trade.

Unfortunately, the global financial system is a rather efficient beast these days; not necessarily at finding the best targets and optimal levels of investment, but at finding and over-exploiting any pockets of demand for credit flows it can find, and at keeping sounder regulatory constraints at bay. And if a sounder regulatory framework and capital standards are not imposed globally – a risk that seems to have a rising probability at the moment – then Roubini will certainly be proven right, and our global financial system will impose substantial social costs on billions of people yet again. The more this song repeats itself, the worse the public’s demand for retribution will be on the other side of any future crisis. Bonus caps today, firing squads tomorrow?

URLs:

http://www.creditwritedowns.com/

http://seekingalpha.com/article/169364-is-u-s-dollar-carry-trade-replacing-the-one-in-japanese-yen?source=article_lb_articles

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=atlyygQuBLUI

http://symmetrycapital.net/idlespeculation/20090209.pdf

Announcing CR1 (Credit Revolt I)

Parallel to our coverage of TR2 (Tax Revolt II), we’ve noticed that an interesting aspect of the financial crisis, and the flip side of a rising savings rate, is consumers spurning credit card companies – some in creative and demonstrative ways. From the WSJ:

When Fred Wilharm decided to ditch his credit cards, he reached for the chainsaw.

The real-estate investor from Franklin, Tenn., sliced, drilled and shredded his credit cards in his YouTube video “The Tennessee Credit Card Massacre.” Mr. Wilharm says he had just paid off $3,000 in credit-card debt after the card issuers jacked up his interest rates, and that making the video helped him deal with his anger.

His only regret about the video: “Explosives would have been nice.”

…Mr. Wilharm is one of at least several dozen people who have posted an online video of a “plasectomy,” a term credited to Dave Ramsey, a radio talk-show host with Fox Business News. Some depict cards being chopped with scissors, shredded in blenders or chewed by lawnmowers. Others show cards set on fire, or doused with liquid nitrogen and then shattered with a hammer.

It’s interesting to note that some subjects of the article sound like credit worthy borrowers, rather than folks who’ve overextended themselves. Of course, it’s not unusual to hear of banks contracting credit availability in an economy like this one – that’s a very natural outgrowth of the deleveraging process, as the banking industry withdraws from the excesses of recent years - but it will be interesting to see what kind of long term backlash this provokes among consumer credit users of all stripes (if any) and what it could mean for credit card companies.

Speaking of backlash, we’re considering a moratorium on cute, thematic acronyms, lest we inspire a reader revolt against our blog (RR1, anyone?).

URLs:

http://online.wsj.com/article/SB124528467015725739.html