Clinton’s apology

By Felix Salmon
May 28, 2009

I’ve been searching for a while for a key policymaker of the bubble years to come out and apologize for his mistakes, and of all people it seems that Bill Clinton has managed to be first across that particular line. “I should have raised more hell about derivatives being unregulated,” he tells Peter Baker — and he’s absolutely right. Would that Alan Greenspan or Bob Rubin or Larry Summers could say the same thing — especially in the light of the revelations from Brooksley Born, the former head of the CFTC, about the way in which they actively agitated to keep derivatives unregulated.

Incidentally, for those of us who have sometimes suspected that Clinton has a brain the size of a planet and knows everything, this brings him back into the realm of the human:

Mr. CLINTON: You remember we had one institution failed that the New York Fed had to bail out. It had some derivative investments and it went down. Do you remember that?


Mr. CLINTON: What was the name of that? There was a bank that failed that the New York Fed bailed out an institution that had some derivative exposure? And so I talked with them.

NEW YORK TIMES: In ‘98-ish?

Mr. CLINTON: Yeah.

I’m almost positive he’s talking about LTCM here, which wasn’t a bank and which wasn’t really bailed out by the Fed — the Fed just knocked a bunch of bankers’ heads together until they agreed to bail it out themselves. But of course it wasn’t Clinton’s job to understand the ramifications of the LTCM crisis, it was his Treasury secretary’s job. And his Treasury secretaries signally failed to grok that, LTCM notwithstanding, there were massive and growing systemic risks in the financial sector generally and at highly-leveraged institutions in particular. When will they say sorry?


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Rubin will say that when he’s done counting his money.

Posted by zach | Report as abusive

Felix, I don’t think they ever will apologize. The current crisis is not a bug; it’s a known and planned-for feature of the monetary system they designed.

Posted by Unsympathetic | Report as abusive

Felix — after LTCM there was a lot of handwringing about highly leveraged institutions (defined in that way to draw in more than hedge funds) including several reports by what evolved into the FSF/ other int. groups. The US wasn’t indifferent to those risks at the time; though the US focused on restraining the amount of leverage the banks suppplied HLIs (so called indirect regulation). But after LTCM/ Russia/ the disorderly unwinding of the yen carry trade a lot of the big hedge funds delevered on their own, which meant that the issue kind of died. It was hard to make a case that the regulators needed to do more — and certainly hard to convince the Fed (which was much more hostile to leverage limits and the like than the Treasury) that there was a need to do more.

Tis true that there wasn’t a push to do more on derivatives. But it isn’t fair to say the Rubin/ Summers Treasury wasn’t concerned about the level of leverage in the system. They were. And after LTCM, the amount of leverage in the hedge fund world went down for a while by almost all measures. The problem was that no one did much when it started to creep back up in this decade, as a temporary deleveraging effectively substituted for more permanent changes.

Posted by bsetser | Report as abusive

Hierarchical lender of last resort actions by the Fed are still bail outs. They’ve been doing them since at least the early seventies when the banks bailed out the REITS. I count it as a bailout since the banks ultimately are relying on the Fed as their backstop.
It’s pernicious because it’s a stealth(ish) bailout that pretends to validate market actions and encourages risk taking without a transparent debate about the building underlying risks.

Posted by OGT | Report as abusive