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Apr 08

The partial re-education of Robert Rubin

Posted by Ron F in Volcker RuleTARPRegulationPaul VolckerGoldman SachsGlass Steagall Actfinancial crisisderivativesCongressCitigroupBanksbanking reformBankingbank failuresbailoutsAlan Greenspan

Ron F

Better late than never, I suppose. But Big Bob Rubin has apparently had a change of heart as to the virtues of financial deregulation.

Appearing before the Financial Crisis Inquiry Commission today with former Citigroup CEO Charles Prince in his capacity as former vice chairman of the bailed out bank, Rubin expressed much different sentiments about the need to prevent banks from becoming too big to fail and derivatives from adding untold amounts of undetectable leverage to the financial system than he did when he was President Clinton's deregulator in chief.

Remember, the former Treasury secretary back then pushed for the formal end of Depression-era limits on the combination of investment and commercial banking, and joined a tag team that also included former Fed chairman Alan Greenspan and ex-SEC chairman Arthur Levitt that fought off the efforts of then-Commodities Futures Trading Commission chairwoman Brooksley Born to regulate derivatives. Ironically, Born is now a member of the commission looking into the causes of the crisis.

Today, however, Rubin told Born and the other commission members in his prepared remarks that he thinks "private action is not enough" to avoid another financial meltdown, so the government should act to include "substantially increased" leverage constraints, derivatives regulation, federal resolution authority to prevent banks from becoming too big to fail and consumer protection to protect not only consumers but also the financial system.

Of course, Rubin still isn't a complete convert to the virtues of tough regulation. He stopped short of calling for limits on banks' size and scope, as the so-called Volcker Rule would impose, or for a ban on so-called naked swaps. These are derivatives in which no party has an interest in the securities of the reference entity and that are thus used purely for speculation, prompting calls in Congress to curb their use. Rubin also was vaguely disingenuous about his position on derivatives, noting that he recognized their ability to create system risk as far back as his days at Goldman Sachs, which preceded his stint at the Treasury.

I missed his live testimony, so perhaps Rubin went on to explain why he nonetheless opposed Born's efforts to rein in the use of swaps in 1999. But he sure didn't address it in his prepared testimony.

I also have a problem with his contention that the "overriding lesson of the financial crisis is that the financial system is subject to more severe downside risk than almost anyone had foreseen."

Sorry, Bob, but there were lots of critics out there warning about the risks involved in financial deregulation. It was just terribly unfashionable to pay them the least bit of attention. And those arguing for even tougher measures to reverse the deregulatory gears he helped keep in motion, because those very risks have only become greater as a result of the bailouts, are still marginalized by Rubin and other members in good standing of the club known as Wall Street and Washington, along with the mainstream press that aids and abets them.

I have to add that the prepared testimony of Citi's former CEO Charles Prince was even harder to take. Prince insisted that Citi was not "too big to manage," and that its size and complexity were not responsible for its need for a federal bailout as a result of the financial crisis.

Yet then he urged the commission to find a way to prevent banks from becoming too big to fail. "We must find a solution to this problem, whether through resolution authority, greater regulation, increased capital requirements or all the other creative and innovative measures that your commission has been discussing."

Again, no mention of the Volcker Rule there, though many observers contend that all the other measures he cites will fail without it. Sure, I suppose Prince could ultimately claim that the Volcker Rule might be one of those "creative and innovative" measures he alluded to. But if you're as concerned about the too big to fail problem as you claim to be, why not at least mention that size and scope limits might be worth at least some passing consideration?

I strongly suspect that's because they remain a taboo with everyone except Tall Paul and his few allies within that aforementioned club, which just can't seem to live without the profits big banks produce even if they must be subsidized by taxpayers.

The thing I don't get about Rubin is this: I asked him at a reception he spoke at a few years before the crisis to compare Greenspan and Volcker as Fed chairmen, and Rubin replied that while he thought highly of Greenspan, he considered Volcker to be "a great man."

Come on, Bob, the man is the only person with any real authority trying to keep the system from an even greater meltdown and he could use a bit more help from his professed admirers.

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