Summers: “Inside Job had essentially all its facts wrong”

By Felix Salmon
January 27, 2012

In mid-2009, I went on a search for apologies, from the people who laid the intellectual and regulatory foundations for the financial crisis. I wondered whether and when Larry Summers, in particular, would apologize for what he did at Treasury, and I was heartened when Bill Clinton came out and said that, with hindsight, he was wrong about derivatives regulation.

Then, in 2010, Inside Job came out, and demonstrated the need for the likes of Summers to be asked direct questions about their culpability on the record, on-camera. But Summers refused to be interviewed for that film, despite having known its director, Charles Ferguson, for many years. And when he does sit down for a rare on-the-record video interview, these questions never seem to get asked.

So I was very happy to see that Krishnan Guru-Murthy at least tried to ask Summers these questions earlier this week. Krishnan starts off with standard Summers-interview questions, asking him what he thinks about UK fiscal policy, and Summers gives his standard wise-man answers. But then Krishan gets steadily tougher, asking Summers about the advice he gave the president-elect in 2008, and eventually about his deregulatory tenure at Treasury.

And Summers doesn’t even come close to apologizing, or admitting that he made any kind of mistake at all. Quite the opposite: he starts getting very touchy, telling Krishnan that he’s reducing complex questions to overly simplistic black-and-white narratives. Halfway through the interview, Krishnan asks Summers whether laissez-faire capitalism isn’t working for the middle classes. And Summers pushes back. “I’m a Democrat,” he says, adding that “I’ve long been someone who favored significant interventions to protect the environment.”

Protect the environment?” responds Krishnan. “Didn’t you advise the president not to sign up to Kyoto?”

“No, no,” replies Summers.

“You didn’t?”

“No. I advised that an agreement be designed in order to protect the American economy, and the United States not take on obligations that would render its businesses uncompetitive.”

Summers never explains how this differs from advice not to sign up to Kyoto, nor does he give an example of any “significant interventions” he pushed for to protect the environment. Because the interview soon moves on to the subject of deregulation, with Summers saying that he “was for moving derivatives to exchanges” — something Krishnan lets stand — and deciding to pick the ground of Glass-Steagal on which to fight, saying that Lehman and Bear Stearns might have survived had they been part of bigger banks.

Well, yes, they might — but then again, they might also have just created another Citigroup, requiring massive bailouts from the government. Personally, I don’t think that repealing Glass-Steagal was in and of itself a major cause of the financial crisis, but Summers goes further, saying that huge financial supermarkets are a good thing (he holds up Canada as a model).

Krishnan continues to push. “Even Bill Clinton says that he was wrong to listen to the wrong advice when it came to derivatives. And that was your advice.” (Has Summers ever been asked questions like this, on camera, by an American reporter?)

Summers responds, again, that “it’s complicated”, and then builds up to attacking Krishnan:

Would it have been better if the whole of the 2010 financial reform legislation had passed in 1999 or 1998 or 1992? Yes, of course it would have been better. But at the time Bill Clinton was president, there essentially were no credit default swaps. So the issue that became a serious problem really wasn’t an issue that was on the horizon… If you want to assign responsibility, If you take a market that essentially didn’t exist in the 1990s, that grew for eight years from 2001 to 2008, and then brought on a major collapse, if you were looking to hold people responsible, you would look to… officials of the Bush Administration. I’m not going to tell you that I foresaw this crisis in all its dimensions, but without sounding like Newt Gingrich here, for you to read two articles that a researcher handed you and sling this stuff is not really to give your viewers a very clear chance.

0396m.gifSummers is absolutely wrong about credit derivatives not existing in the late 1990s. He was Treasury secretary from 1999 to 2001; Euromoney Magazine had splashed the words “Credit Derivatives” all over its front cover in March 1996. And Brooksley Born, between 1996 and 1999, was literally losing sleep over those things as head of the Commodity Futures Trading Commission. Summers’s response to Born? To make sure she was marginalized, and, eventually, pushed out of her job entirely.

And of course it’s a bit rich for Summers to criticize Krishnan for asking uninformed questions (they’re not uninformed at all, actually), when he has steadfastly refused to answer informed questions from the likes of Charles Ferguson.

Eventually, Krishnan attempts another tack. “It’s not to put all the blame on you,” he says. “But you started on a trajectory that was then continued by the Bush Administration.” The reply is a classic:

“No, no, no, no. That is just not credibly correct.”

Krishnan then brings up Inside Job and the issue of the revolving door, which of course Summers took full advantage of with his $5-million-a-year job working one day a week for DE Shaw.

“Inside Job had essentially all its facts wrong,” replies Summers, unbelievably, resorting to an argument based on timing: because he didn’t work in financial services before he was Treasury secretary, and because he waited a few years before taking that job at DE Shaw, Summers says it’s “absurd” to blame the revolving door for any of his actions.

It’s weird that Summers, who loves debate, generally refuses to sit down in some public forum and answer serious, informed questions about the legacy of his tenure at Treasury; it might well be that this single interview is the closest we’ll ever get. And on the basis of this interview, it’s clear that, far from apologizing for his actions, Summers is going Full Bluster, denying any culpability, and choosing instead to violently reject and belittle any suggestion that he holds any responsibility for the crisis at all.

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Comments
53 comments so far

Why end this on a note of “elite apology”? Why do you suggest we should accept the shamelessness of a hack like Summers? Are you really this sensitive to his status? And to think that this is supposedly the meritocratic age. What a joke.

Posted by Foppe | Report as abusive

This, more so than Suskind’s Confidence Men, is damning of Summers. The extent to which he refuses to self-examine where he might have gone wrong is emblematic of all that’s wrong with our financial system. That he was so close to the President does not help my confidence in the Administration’s prior decisions during the crisis.

Posted by weiwentg | Report as abusive

“I walk into Brooksley’s office one day; the blood has drained from her face,” says Michael Greenberger, a former top official at the CFTC who worked closely with Born. “She’s hanging up the telephone; she says to me: ‘That was [former Assistant Treasury Secretary] Larry Summers. He says, “You’re going to cause the worst financial crisis since the end of World War II.”… [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.’”

http://www.pbs.org/wgbh/pages/frontline/ warning/view/

Posted by OliverBudde | Report as abusive

Summers is like many egotistical blowhards: he has a charming persona that bamboozles otherwise smart people (read Rattner’s “Overhaul”) and then loses his temper when someone outside his reality-distortion-field tries to call his bluff.

Summers was a disciple of Rubin. The two of them believed the hype about managed efficient markets. He even met with Jude Wannisky in his decline to debate the gold standard. But he fundamentally has a firm, unshakable confidence in his own abilities. Any documentary on him should be entitled “Immovable.”

He needs to try something that might humble him. Like maybe run for office. But no, then it would be the stupid voters’ fault for not appreciating his brilliance. Just like the stupid Harvard faculty.

Posted by Publius | Report as abusive

Felix,

I’m a little confused here. What are you expecting? Would you like him to cry and apologize? Do you want him to quit his job, give back the money and join the occupy protests?

I agree, he made bad policy decisions and is part of a system that hurts the USA and unfairly enriches those with an abundance of intelligence and a lack of morals/compassion. But….

I still don’t expect him to apologize.

Posted by evwarsh | Report as abusive

Not to be too defensive towards Summers, but he did not say “credit derivatives” did not exist in the 1990s. He specified “credit default swaps,” which were a very, very small part of the market at the time. Credit derivatives in the 1990s were mainly things like interest rate swaps, none of which wound up causing all that much systemic trouble.

Posted by right | Report as abusive

Poor Summers. We’re wrong half the time, and the other half we’re trying to be wrong, and nobody bothers us with all these nuisance questions. Blow up an economy and people are all over you.

An ex-Harvard colleague of his rolled his eyes about Summers in a conversation we had in the late ’90s. For full disclosure, that person was a Republican, but Summers’s circles seem to know him pretty well.

He’ll have a Nobel in hand before you know it.

http://www.wewerewallstreet.com

Posted by WeWereWallSt | Report as abusive

right, I am pretty sure that you are wrong. Credit default swaps may have been a “very, very small part” of the overall derivatives market “at the time,” but they were a pretty big part of the “credit derivatives” market. Credit derivatives are generally considered to be credit default swaps and total return swaps and various derivations of these instruments.

You are correct that interest rate swaps were a much bigger part of the market in the 1990s, but you are wrong in describing the relevant market as the “credit derivative” market. Interest rate derivatives are not really credit derivatives because interest rate swaps hedge interest (NOT credit) risk. Obviously, there is some counterparty risk (as there always is) but the focus is on interest rates. Similarly, the foreign exchange derivative market was then (and remains) much larger than the credit derivative or credit default swap markets, but again that is because they aren’t really the same market.

Posted by bklawyer | Report as abusive

bklawyer,

I don’t mean to get into a definitional debate, if you don’t want to call interest rate derivatives “credit derivatives” that’s fine. The point I was making is that Brooksley Born was not trying to regulate Credit Default Swaps because she thought they were systemically dangerous. She wanted to regulate all OTC Derivatives, including Interest Rate and Currency Derivatives, which were (and remain) a much larger portion of the market and, again, not actually systemically dangerous.

The fact that the Credit Default Swap market over the next decade rapidly expanded and became dangerous (in 2001 there was $918B notional of CDS outstanding, by 2007 it was $62T… note IR and Currency swaps outstanding were $69T in 01, $382T in 07) was not something that could have been easily foreseen in 1998 by Born, Summers, or anyone else.

Source for market data: http://www2.isda.org/functional-areas/re search/surveys/market-surveys

Posted by right | Report as abusive

Right:

BKLawyer doesn’t want to call interest rate swaps credit default swaps because they are not — they are fundamentally different. Comparing the notional amont of CDS to interest rate swaps is deeply disingenuous. In an interest rate swap, the notional amount is not at risk. Liability ticks up and down in fractions of a percentage of the notional amount on an interest rate swap or a currency swap. In a CDS, the entire notional amount is at risk, and can easily be wiped out entirely. Credit default swaps are essentially financial guarantees, and when they are called that (MBIA, FSA), they are subject to heavy regulations of disclosure, reserve requirements and insurable interests. When derivatives were deregulated in 1999, financial speculators started doing financial guarantees on ISDA forms for no better reason than they could. It turned bond markets into gambling casinos, and it was pretty easy to foresee that that was going to bring a huge amount of systemic risk with it. AIG had $500 billion of undisclosed, unhedged, unreserved CDS exposure. Who could have guessed that this might be a problem

Posted by RobNYNY | Report as abusive

RobNYNY: I understand the difference. The point is 1) Born wanted to regulate _all_ OTC derivatives, of which CDS was a very, very small part in 1998, and 2) that is the point Summers was making that Felix incorrectly lampoons him for. Born was simply not “literally losing sleep” over CDS in 1998, she was losing sleep over interest rate swaps and currency swaps.

Posted by right | Report as abusive

Ok on this credit default swaps derivatives thing.

Credit Default Swaps on mortgage bonds (ie things that caused havoc at AIG inter alia) did not exist until approx 2006. At least that was the story I read in Michael Lewis’s “The Big Short” that Mike Bury of Scion Capital had to beg banks to start creating them because they didn’t exist before then.

So Summers is correct on that point I believe. I don’t think he was referring to the more general notion of a derivative involving credit, which heck have existed since at least the 1880s.

Also Felix it’s absurd to say that “oh he waited a few years it’s still a revolving door”. There was a 6 year gap! He only went to DE Shaw cos he resigned from Harvard. Think what you were doing 6 years ago.

A revolving door is where someone leaves a sector and near immediately switches to another (eg public/private, academia/private work). Don’t dilute the meaning of the term to silliness.

Posted by CharlesBarry | Report as abusive

right: Brooksley Born didn’t “want to regulate” anything. She put out a concept release proposing that the CFTC gather enough data about the OTC markets to determine whether any OTC derivatives should be regulated.

“Greenspan … ‘maintained that merely inquiring about the field would drive important and expanding and creative financial business offshore,’ she says. CFTC economists later checked for any signs of that, and came up with no evidence, Born says. ‘It seemed totally inexplicable to me,’ Born says of the seeming disinterest her counterparts showed in how the markets were operating. ‘It was as though the other financial regulators were saying, ‘We don’t want to know.’’”
http://www.stanfordalumni.org/news/magaz ine/2009/marapr/features/born.html

Posted by csissoko | Report as abusive

To say that Summers was a disciple of Rubin is, I think, a serious misunderstanding. It would be more accurate to say that Rubin was a disciple of Summers, or, at least, of a generation of economic theorists who derived a large body of investment and deregulatory strategy from the Efficient Market Hypothesis. (Perry Mehrling’s excellent biography of Fischer Black describes the struggle through which these economists ultimately succeeded in persuading the financial world to adopt their theories.)

Summers’ intransigence is that of a brilliant economist who has successfully defended his theories against all academic challenges. What Summers fails to recognize is that the real world does not honor the assumptions that he and his fellow economists, friend and foe, treat as given.

It is important to note that Credit Default Swaps were not at the heart of the problem. They were merely, as Martin Mayer would say, “vectors of contagion”, shifting the risks to those least able to bear them. In the case of AIG it was ultimately to life insurance beneficiaries: the classic widows and orphans. (It is a fact, rarely noted, that more TARP money went to life insurance companies than to either commercial banks or investment banks.)

The underlying problem was noted by Alan Greenspan in his memoirs: that we had a sustained period of increases in productivity and per capita GDP without any increase in wages, precisely what had been seen in the 1920′s. What Greenspan failed to understand (and economists still will not acknowledge) is that when profits grow more rapidly than wages there will be a shortage of genuinely productive investment opportunities, and the need to re-invest those ever increasing profits will produce asset bubbles.

Posted by SBayer | Report as abusive

Commenters and FS are incorrect concerning the proposition that CDS were a big deal in 1999. When Brooksley Borne was getting beaten bloody by Summers, Greenspan, Rubin and the like, she was right in that CDS -would- be a problem, but they weren’t then. Total CDS notional at that time were about $1T. Not small, but not, even in my Recovering Republican view, not overly threatening. But when CDS notional began to be 1X, 2X, and 3X GDP (some reports were $70T at height of 2008), then someone – maybe even Summers – who was in a “position of responsibility” might have thought back and said woah – that Brooksley wasn’t so dumb after all. …And, done something. Of course the latter is way to much to ask. Sigh

Posted by OddsBodkins | Report as abusive

Greenspan and Larry Summers should both get a nobel prize for moving wealth into the financial industry.

Posted by destroyer-rand | Report as abusive

Greenspan and Larry Summers should both get a nobel prize for moving wealth into the financial industry.

Posted by destroyer-rand | Report as abusive

evwarsh: even Alan Greenspan has admitted that they were wrong and that the collapse of 2008 provided the evidence that their presuppositions were incorrect. I don’t think that Felix is wrong to wonder why Larry Summers can’t do the same, even if he is an intellectual bully. In fact, it would be even more important that he do so. The truth does matter, especially for someone who claims to be an academic.

Posted by Strych09 | Report as abusive

Again, Felix, thank you. It is mind-boggling and shaming that no US journalist can do their job. These little glimpses of real journalism from the UK, dutifully relayed by you, are a welcome remembrance of what a democracy looks like.

Posted by Dollared | Report as abusive

Summers and Greenspan make up a whole group of insiders who started to believe that what was good for banks was good for everyone. Not surprisingly, many of them ended up back in the institutions they wrote the rules for http://www.tni.org/sites/www.tni.org/fil es/download/infographic-neoliberalarchit ects.pdf

Posted by vivirbien | Report as abusive

As Charles Ferguson said in “Inside Job”, not one of these deregulation characters has paid a fine or gone to jail, despite their obvious culpability in ushering in The Great Recession. But here, finally, we have a denial by Larry Summers that he was ever to blame.

Interestingly, there is no honest assessment as to why Summers swept under the rug suggestions by Keynesians like Christine Romer and others, to increase the stimulus amounts in Obama’s 2009 Stimulus Bill. Alas, so much for Harvard’s motto, “Veritas”

Thanks for this honest attempt at real journalism.

Posted by SteveinMiami | Report as abusive

Some things aren’t that complicated. Larry Summers is about 1/3 as smart as he thinks he is and morally not 1/10th the principled person he likely thinks he is.

He’s seems as though he’s an underachiever who’s good at parlor tricks that add up to no value except the admiration of rich people who enjoy parlor tricks. Which is lucrative but not worthy of the trust given in the offices he’s held.

Posted by LosGatosCA | Report as abusive

Larry Summers is both an evil genius and a Corporatist. There are so few people who are as smart, arrogant and continually wrong. What’s most scary is he’s not capable of introspection. Even today, he never acknowledges past misjudgment and most wants to see the U.S financial system evolve into 5 big banks that control finance…like Canada as he sees it.

Posted by Sechel | Report as abusive

The questions are uninformed.

Question on Kyto, is saying that it needs changes before being the signed the exact same as saying it should not be signed? You must get very upset someone negotiates with you.

Question, on Glass-steagal, he is absolutely right. BSC not only “might have survived” as part of a larger commercial bank, it DID survive as part of a larger commercial bank. With the sole exception of Citigroup, the banks that weathered the storm best were the universal banks.

Question on CDS, he is again absolutely right. CDSes were a tiny fraction of the OTC market and the ones that – allegedly – kicked off the crisis didn’t exist during his tenure.

Question, on the “path”, when he left, the first round of subprime was dead, second round had not taken off. The demand for structured credit from the buyside based on RMBSes was not an issue. Frannie were having issues but even now they are untouchable. Prime Brokerage and hedge funds were only just starting to kick off. So hard to fault his answer on this.

Question, on the “revolving door”. His answer was perfectly correct. He didn’t come from finance to the public sector and he got a part time gig at a hedge fund YEARS after leaving the Treasury when it was a completely different regime there.

If this is what passes for “informed debate” then no wonder he chooses not to bother wasting his time. Yet another example of the depths which the media now plumbs.

Of course, facts are only the low-brow which is why Foppe agrees with you on how great this interview is.

Posted by Danny_Black | Report as abusive

Funny, I can remember working in the swaps department of an international bank in London before Clinton even became president. Everyone was doing it. It’s mysterious that Mr. Summers wouldn’t have heard about it.

Posted by Avedon | Report as abusive

Two words- Glass Steagall. The first thing Joe Kennedy did at the new SEC in 1934 was accept the idea of a division between investment banking and commercial banking. This view held until 1999 to prevent the abuse we saw from 2001-2008.

The Gramm–Leach–Bliley Act was a short-sighted bill championed by Republicans. I have been a conservative Republican for 40 years in banking and believe that this was a serious mistake. This is not to give comfort to Democrats as many of the banks and Wall Street firms that benefited from the change have been a revolving door between Democrat administrations under Bill Clinton and Barack Obama.

To blame Bush has become a lazy crutch for people who don’t take responsibility for their lack of action to correct real deficiencies when they see them. That goes for Summers and the idiot in the White House. It does no good at this point to assign blame. It requires action to re-establish Glass-Steagall to prevent further abuse and to dispel this idea of “too big to fail”.

If nitwits are going to commit rash acts, let them use their own money and not money they hold in trust for depositors.

Posted by SurfinUSA | Report as abusive

The fault lies with those, primarily Obama, who keep Summers and other who were responsible in positions of power. There should be no need to get Summers to apologize; he should now be irrelevant.

Posted by skeptometric | Report as abusive

Avedon, you were writing credit default swaps on mortgages and ABS backed by subprime prior to 1992?

SurfinUSA, Glass Steagall explains why LEH went under? Why HBOS and RBS had to be bought out by the UK government? Why AIG treasury dept decided that it should get a few extra bips by investing the money from their sec lending operations in AAA tranches? Anyone blaming Glass-Steagall needs to ever reach the lofty fact-free intectuall heights or explain why – with the exception of Citi – it was relative pure plays that got hit.

Posted by Danny_Black | Report as abusive

And Summers pushes back. “I’m a Democrat,” he says, adding that “I’ve long been someone who favored significant interventions to protect the environment.”

Uh, so was Rubin and a number of other swindlers and charlatans. And the fact that he uses small furry creatures to evade a question about inequality – well, shows the intellectual dishonesty, or more bluntly, the clever lying.

Listening to Summers, the best response would be the Bob Costas come back to Sandusky – And too bad economic interviewers aren’t as good as sportscasters at asking questions and following up

COSTAS: How could somebody think they saw something as extreme and shocking as that when it hadn’t occurred, and what would possibly be their motivation to fabricate it?

SANDUSKY: You’d have to ask them.

COSTAS: It seems that if all of these accusations are false, you are the unluckiest and most persecuted man that any of us has ever heard about.

Poor,poor Larry Summers…so misunderstood

Posted by fresnodan | Report as abusive

Ah yes, it is ‘complicated’ when you weave the evil web.

@Danny Black, do you consider yourself high brow because you are a bankster? Interesting comment, to endear us all no doubt as you attempt to ‘protect your own’

Posted by youniquelikeme | Report as abusive

What is truly marvelous is that anyone gives a hoot about what Summers has to say.

Here is a man who has for all intents and purposes F-ed Up every single job he has had. From the US team introducing capitalism into the Soviet Union (massive losses of GDP for years, kleptocracy) to Harvard President (created massive internal divisiveness, personally responsible for $1 billion endowment losses from derivative bets, fired by board) and an amazing string of poor decisions at every government job he has had.

What someone should be asking him is how is was able to rise to the top despite massive failures in virtually everything he touched in his professional and personal life. From a purely economic point of view, he can only be explained as a farce.

Posted by TEDBoston | Report as abusive

I don’t know if Felix or Guru-Murthy used the term laissez-faire, but it’s tough to say that finance in general or the parts of finance that most caused the crisis were any real demonstration of laissez-faire. Some particular deregulatory actions – lifting the leverage limits on banks comes to mind – clearly weren’t helpful, but is someone going to tell me that the US housing finance market is anything close to laissez-faire? It’s one one of the most regulated and subsidy distorted markets around. Similarly, a clear driver of the structured finance boom was a variety of regs that encouraged financial institutions to seek out the highest yielding AAA paper they could find and/or buy CDS from AAA counterparties with minimal diligence. The reality was poor regulation that gave rise to unexpected consequences, not no regulation.

Also, I don’t know why Felix loves Inside Job so much – it makes a few interesting points but is largely comprised of misleading half-truths. I put it in the same bucket as sensationalistic TV investigative reporting.

Posted by realist50 | Report as abusive

I don’t know if Felix or Guru-Murthy used the term laissez-faire, but it’s tough to say that finance in general or the parts of finance that most caused the crisis were any real demonstration of laissez-faire. Some particular deregulatory actions – lifting the leverage limits on banks comes to mind – clearly weren’t helpful, but is someone going to tell me that the US housing finance market is anything close to laissez-faire? It’s one one of the most regulated and subsidy distorted markets around. Similarly, a clear driver of the structured finance boom was a variety of regs that encouraged financial institutions to seek out the highest yielding AAA paper they could find and/or buy CDS from AAA counterparties with minimal diligence. The reality was poor regulation that gave rise to unexpected consequences, not no regulation.

Also, I don’t know why Felix loves Inside Job so much – it makes a few interesting points but is largely comprised of misleading half-truths. I put it in the same bucket as sensationalistic TV investigative reporting.

Posted by realist50 | Report as abusive

Goodness gracious, the man is trying to re-write world history after being part of the people that crashed the world economy.

Good luck with that!

Posted by GlenJo | Report as abusive

youniquelikeme, yeah I am low-brow enough to get tangled up in facts. In fact, I think they are rather important and I am always impressed how people like Foppe – and large swathe of the media, who are presumably doing it for the money – have to resort to fabrication to make their point.

realist50, bingo. Finance is up there with Pharama and airlines in terms of the amount of compliance necessary.

Posted by Danny_Black | Report as abusive

It’s to be expected, I suppose. Everyone has to live inside their own skin. The idea that he bears enormous responsibility for what went down doesn’t appear to be one that Summers can or will deal with, regardless of the evidence. And time has only made the situation worse, what with the blogs, all the spilled ink, the movie, the occupiers…

It’s common knowledge, at this point, that Born was pushed out the window once she questioned the regulation of the “financial weapons of mass destruction” Wall Street was wielding. Rubin, Greenspan and Summers already have their spot in the history books reserved and they all know it. That’s got to be tough, not something Summers seems to be able to wrap his head around.

The first law of self knowledge is admitting your mistakes. Summers isn’t there.

Posted by NCimon | Report as abusive

NCimon, and exactly what responsibility does he have? Please show a causal – or at least vaguely plausible causal link – between his behaviour and the financial crisis.

Lots of ink has been spilt, mostly by lying, idiot journalists cutting and pasting from each other or dishonest bloggers – thinking here Ritholtz and Yves Smith in particular – looking to make money out of the crisis but very little actual fact based reporting.

Posted by Danny_Black | Report as abusive

Back at you DB, Where in your fact-free assertions (not arguments, those include objective empirical evidence) can you show where all this hypothesizing is wrong?
The economy was brought to the brink of total collapse,, and how this happened was hypothesized to be the result of numerous actions on the part of various players. While I would agree, some of these hypotheses appear to be “just so” stories, many also appear to provide plausible and objectively provable scenarios.
OTOH – you simply claim (with exceptional incredulity) that “[f]inance is up there with Pharama and airlines in terms of the amount of compliance necessary.” That alone demonstrates your duplicity and willingness to engage in FUD in order to protect the criminal syndicates that make up Wall Street.

Posted by OnkelBob | Report as abusive

Have you ever tried to turn on your car but nothing happens, so you look under the hood and find a mouse nest? Yeah, Larry Summers is the big rat that ate your car’s electrical system. Now we are having “magneto” trouble.

Posted by thedarshan7 | Report as abusive

Couple of suppositions from which to proceed.

1. L. Summers is a narcissist and sociopath. This is why he is both incapable of introspection and angered by those who question him. It is also why he doesn’t care what you think.

2. Credit default swaps were invented circa 1991. They absolutely existed during Summers’ tenure as a policy making official. (This is fact, not supposition).

3. Brooksley Born & others who sought to regulate OTC derivatives in the 1990s were not concerned with how or when individual subtypes of contracts would blow up. They did not care about the discrete dangers of CDS or interest rate swaps or synthetic CDOs (which actually did not yet exist). They cared about the overall system that hid huge amounts of exotic debt off the balance sheets of systemically important financial institutions. They realized that, without more transparency in these markets, it was only a matter of time before someone screwed up and the chain of counterparty risk would cause dominoes to fall. Or cause governments to prop up the screw-ups. The call was for a study of these risks, and the unregulated, opaque system in which they were conceived and traded.

4. The reason Summers et. al. (including Phil Gramm) should have taken these risks seriously can be spelled out in four words: Long Term Capital Management.

5. Gramm Leach Bliley matters not just because it repealed Glass Steagall (which, BTW, Danny, was passed at the direct behest of CitiGroup and no one else) but because it cemented in law the general de-regulation and non-regulation of an opaque and unaccountable financial system whose main purpose appeared, even by the mid 1990s, to be, in rank order: money laundering for drug dealers and dictators, compulsive gambling, and screwing poor folk.

Posted by Eericsonjr | Report as abusive

OnkelBob, please let me know exactly what evidence I would need to show:

1) BSC was taken over by JPM and JPM survived – and in fact thrived during the crisis. The major banks that suffered during the crisis in the US were LEH – pure play investment bank – Morgan Stanley – pure play investment bank – Merrill Lynch – pure play investment bank – WaMu – commercial bank – Citigroup – the only mixed bank. BoA, suffered as a result of overpaying for crippled banks such as Countrywide and ML DURING the crisis. This is common knowledge.

Banks that did well during the crisis in the US were HSBC, Barclays, Deutsche Bank and JPM, all of which are universal banks with major investment banks attached. Is this even under dispute?

2) CDS written on any kind of ABS didn’t exist before 1998 and the first ISDA template was 2005. So prior to 2005 they were barely written at all. The ISDA for any sort of CDS was written in 1999. When Summers left the Treasury, the notional amount of CDS written on EVERYTHING was around 1 trillion USD [Source Fabozzi Handbook of Fixed income securities]

For reference vanilla interest rate swaps alone were around 65 trillion – http://www.interestrateswapstoday.com/si ze-of-swap-market.html

3) In 2004 – well after Summrers had left – structured credit based on housing of any sort was 411bn out of a 1770billion ABS or less than a quarter of the ***structured credit market*** which was not a large part of the fixed income market then.

http://www.google.co.uk/url?sa=t&rct=j&q =bma%20cdo&source=web&cd=8&ved=0CFMQFjAH &url=http%3A%2F%2Fwww.public.asu.edu%2F~ chliu1%2Frecapmarkets_dese%2Freadings%2F 16_CDO_Primer_BondMarketAssn.pdf&ei=NOAm T-vIOpDp8QO7zdHVBw&usg=AFQjCNGXnDSRn_yic 8uOV6xgrXPQjcjAcA&cad=rja

As for hedge fund growth, anyone with a passing knowledge of the market knows they took off post 2001. Total AUM in 2000 was 450billion USD, now between 1.8 trillion and 4 trillion depending on your definition

http://www.google.co.uk/url?sa=t&rct=j&q =hedge%20fund%20asset%20under%20manageme nt%20growth%202000-%202008&source=web&cd =9&sqi=2&ved=0CGMQFjAI&url=http%3A%2F%2F www.aima.org%2Fdownload.cfm%2Fdocid%2F61 33E854-63FF-46FC-95347B445AE4ECFC&ei=Z-E mT9ntGoeP0AXp14W-Aw&usg=AFQjCNHITDbVe-ba VFrSVbIG9N3RoibEGQ&cad=rja

Pay as you go CDS on ABS was invented in 2005.

http://www.google.co.uk/url?sa=t&rct=j&q =paug%20cds&source=web&cd=3&sqi=2&ved=0C EAQFjAC&url=http%3A%2F%2Fwww.securitizat ion.net%2Fpdf%2FNomura%2FSyntheticABS_7M ar06.pdf&ei=AuYmT76oB4Sx8gOlseWrBw&usg=A FQjCNEUK5YiGHBCyZWbDPKRv2BK1HHH0Q&cad=rj a

4) Summers bio:

1991–1993, world bank as economist.
1995-Jan 2001, Treasury
Oct 2006 DE Shaw

http://en.wikipedia.org/wiki/Lawrence_Su mmers

AIG brought down by illiquidity in its treasury referenced in “On the Brink”, “Too Big to Fail” and “All the Devils are Here”

Direct quote from FCIC:

“Finally, AIG was increasingly strained by its securities lending business. As a lender of securities, AIG received cash from borrowers, typically equal to between 100% and 1002% of the market value of the securities they lent. As borrowers began questioning AIG’s stability, the company had to accept below-market terms—sometimes accepting cash equal to only 90% of the value of the securities. Furthermore, ****AIG had invested this cash in mortgage-related assets, whose value had fallen****. Since September 2007, state regulators had worked with AIG to reduce exposures of the securities lending program to mortgage-related assets, according to testimony by Eric Dinallo, the former superintendent of the New York State Insurance Department (NYSID). Still, by the end of June 2008, AIG had invested 75 billion in cash in
mortgage-related securities, which had declined in value to 59.5 billion. By late August
2008, the parent company had to provide 3.3 billion to its struggling securities
lending subsidiary, and ***counterparties were demanding 24 billion to offset the
shortfall between the cash collateral provided and the diminished value of the securities.
****”

that help? Sorry I don’t have more Wikipedia links or to some spastic working for the NYT or people whose business model involves trashing traditional investment banking.

Posted by Danny_Black | Report as abusive

Eericsonjr, if you are claming that CDS existed in any recognisable form on anything in 1991 let alone on RMBSes – which is the CDS that had any sort of issue – then you are simply a liar. End of story.

Posted by Danny_Black | Report as abusive

Eericsonjr, the kindest thing is that you might be confusing CDS with structure note bets on credit or Total Return swaps that bankers trust and CDFP were peddling. That is not a CDS and is tantamount to calling a corporate bond mutual fund a “credit derivative” because the payoff is related to the underlying credit.

Posted by Danny_Black | Report as abusive

Mr. Black:
Just what I posted – Summers, Greenspan and Rubin refused to allow Born to have hearings on the possible dangers of securitization, to discuss it at all.

Posted by NCimon | Report as abusive

NCimon, when did Born talk about the “dangers of securitisation”? And how exactly did securitisation lead to the financial crisis?

Posted by Danny_Black | Report as abusive

Mr. Danny NCimon is right rubin, greenspan and summers already denied to permit born to get heared.
http://splusdirect.com

Posted by shees570 | Report as abusive

shees570 – says the spambot….

Posted by Danny_Black | Report as abusive

The man is a shameless liar and a narcissist of the highest order. He should fit right in in academia!

Posted by LABrown | Report as abusive

LABrown, throw in moron on top and Jesse Eissinger better worry about his reigning title as financial commentator ever.

Posted by Danny_Black | Report as abusive

Summers is like Clinton, arguing semantics: the fact is that he is one of the technocrats who oversaw the decline and fall of the great american economy. The house was burning down around him and he was not screaming fire.

Posted by colburn | Report as abusive

i think it should be get punished for doing the such a badjob and we have to take care in future.
http://splusdirect.com

Posted by Sam12 | Report as abusive

i think it should be get punished for doing the such a badjob and we have to take care in future.
http://splusdirect.com

Posted by Sam12 | Report as abusive

I couldn’t believe this interview. As you suggest, Felix, the guy is not only mendacious but a deeply unpleasant human being. I did my own, shorter blog about the interview here:- http://www.ianfraser.org/larry-summers-w ashes-hands-of-all-responsibility-for-cr isis/ The very idea that Summers should even be considered for the World Bank role shows how little we seem to have learnt since the crisis and fills me with mild horror.

Posted by IanFraser | Report as abusive
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