Felix Salmon

When Wall Street captures Washington

Felix Salmon
Mar 16, 2012 21:12 UTC

One of the themes running through Noam Scheiber’s new book is the idea that professional technocrats have a tendency to take at face value much of what they’re told by Wall Street. Bankers are very good at capturing/flattering mid-level political operatives, although admittedly they’re less good at it now than they were before the crisis.

And certainly there’s no shortage of bankers who have gone into government and have then proceeded to advance the interests of the financial-services industry: Bob Rubin is the prime example.

As for legislators, it’s probably no surprise that representatives from places like New York or Charlotte or Delaware will be very friendly when it comes to the financial-services industry. But more generally the industry rains all-but-indiscriminate funds on lawmakers on both sides of the aisle, with impressive results.

If Bill Clinton’s economic team set the parameters of what you might call Rubinite economic orthodoxy, then Obama’s team has more or less stayed within those parameters: the few exceptions, from the like of Christy Romer, have had almost no real impact. If you want more heterodox ideas, then you’d actually be better off looking at the Bush years: first the massive, fiscally-disastrous tax cuts, then the equally massive and fiscally-disastrous wars in Afghanistan and Iraq, and finally the highly-interventionist policies of Hank Paulson during the crisis.

It must be emphasized, of course, that Dodd-Frank — pretty much the first and last bill to pass Congress since 1980 which the financial-services industry didn’t love — had a lot of support from Democrats, and very little support from Republicans. And all you need to do is look at George Bush’s nominees to the SEC to see how much appetite the last Republican president had for regulation with teeth. Meanwhile, Mitt Romney is quite open about the fact that he thinks the financial-services industry is just great, and that he’ll do anything he can to help it out.

So if you’re in favor of increased regulation of financial-services companies, then you’ll support Obama over Romney. But this is a lesser-of-two-evils thing, as Scheiber’s book points out. And interestingly, the more experience that a policymaker has had in and around Wall Street, the tougher that policymaker is likely to be. When Larry Summers was Treasury secretary, for instance, he pushed through the Commodities Futures Modernization Act and was basically a hardline deregulator. After he’d spent some time earning lots of money from banks and hedge funds, however, and returned to the Obama administration, he had much less time for what they wanted to do.

The Obama-era Summers stands between tough-on-Wall-Street former bankers like Gary Gensler, at the CFTC, and much easier-on-Wall-Street lifelong technocrats like Peter Orszag, who of course wound up taking a highly lucrative job at Citigroup, and Tim Geithner. To be honest, it’s not a particularly broad spectrum. Wall Street has always been very good at getting what it wants from the government, no matter which party is in power. Scheiber thinks that there’s a chance that Obama will get tougher in his second term; I’ll believe it when I see it. Because in general, if the board of Goldman Sachs has essentially no control over how Goldman behaves, then the SEC and the Federal Reserve have even less.


As the weather has twisters , we have entered into the financial twister that is the greatest depression in history , the rate of devaluation is so great that the markets are confusing it with capitalization.

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Goldman’s conflicts, part 917

Felix Salmon
Mar 6, 2012 17:44 UTC

Andrew Ross Sorkin weighs in today on Goldman’s conflicts in the takeover of El Paso Corporation by Kinder Morgan, as laid bare in a blistering opinion by Delaware Chancellor Leo Strine. Steven Davidoff has described the decision as demonstrating that “Chancellor Strine is a bold judge, one who is brilliant and willing to make waves” — and so it’s worth extracting some of the more Rakoffian bits of Strine prose.

While Sorkin leads his column with the script that Goldman CEO Lloyd Blankfein was given when he called El Paso CEO Doug Foshee, for instance, he omits the gloss that Strine provides on that script:

Certain Chancery staff have experienced a troubling side effect to reading this evidence: Lionel Richie’s 1980’s treacle, “Hello,” came to mind and is stuck in their heads. See LIONEL RICHIE, Hello, on CAN’T SLOW DOWN (Motown Records 1983) (“Hello!/Is it me you’re looking for?/I can see it in your eyes/I can see it in your smile/You’re all I’ve ever wanted/And my arms are open wide …./And I want to tell you so much I love you ….”).

Similarly, while Foshee officially says that he has “acted at all times in a manner consistent with our values of stewardship and integrity, and always conducted myself in the best interests of El Paso, its employees, and its shareholders”, that has to be read in the context of the way in which Strine utterly skewered him:

At a time when Foshee’s and the Board’s duty was to squeeze the last drop of the lemon out for El Paso’s stockholders, Foshee had a motive to keep juice in the lemon that he could use to make a financial Collins for himself and his fellow managers interested in pursuing an MBO of the E&P business. The defendants defend this by calling Foshee’s actions and motivations immaterial and frivolous.

It may turn out after trial that Foshee is the type of person who entertains and then dismisses multi-billion dollar transactions at whim. Perhaps his interest in an MBO was really more of a passing fancy, a casual thought that he could have mentioned to Kinder over canapés and forgotten about the next day.

It could be.

Strine saves his most acid commentary for Goldman.

The defendants begrudgingly concede that El Paso’s long- standing financial advisor, Goldman, had a “potential conflict” because: (1) it owned approximately 19%, or $4 billion worth, of Kinder Morgan stock; (2) it controlled two of Kinder Morgan’s board seats; (3) it had placed two senior Goldman principals on the Kinder Morgan board who thus owed Kinder Morgan fiduciary duties; and (4) the lead Goldman banker working for El Paso, Steve Daniel, personally owned approximately $340,000 of Kinder Morgan stock.

The phrase “potential conflict” is footnoted; Strine notes drily that “Goldman’s answering brief used the phrase ‘potential conflict’ to describe its position fifteen times.” In fact, as Strine says, this wasn’t a potential conflict at all: instead, the conflict was “actual and potent”.

Goldman’s position — beautifully demolished by Strine — is that it had Chinese walls in place, and that its M&A team was blissfully ignorant of the enormous stake that Goldman had in Kinder Morgan getting El Paso on the cheap. (Never mind the fact that Goldman’s M&A team was led by someone who personally had a $340,000 stake in Kinder. As Foshee himself put it, that’s a conflict “between one person’s brain”.)

But here’s the thing: as Francesco Guerrera points out, if Goldman’s only interest here was getting a nice check for its M&A team, there was an easy and non-conflicted way for them to do that.

This unruly mess wouldn’t have happened had Goldman resigned from El Paso right after the Kinder Morgan approach. Goldman would have probably been hired by Kinder Morgan, earned similar fees and avoided uncomfortable questions about divided loyalties.

Which definitely makes it seem as though the only reason for Goldman to stay on as an El Paso adviser was to ensure that El Paso and Forshee sold themselves for a modest sum to Goldman and its fellow owners of Kinder.

Guerrera adds that “what Goldman did isn’t illegal, just inappropriate in an age in which Wall Street’s morals and behavior are under the public microscope”. But Strine actually goes further than that — he says quite clearly that “the plaintiffs have a reasonable probability of success on a claim that the Merger is tainted by breaches of fiduciary duty”. And Davidoff notes that “Goldman Sachs’s engagement letter with El Paso probably limits its liabilities to no more than $20 million”. It’s entirely possible that Goldman’s actions in this case were both inappropriate and actionable; what’s more, Goldman will probably end up settling the case at some point, for a multi-million-dollar sum.

All of this comes as Nick Dunbar of Bloomberg reports on the numbers involved in Goldman’s shenanigans in Greece.

On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.

The question at this point is surely why any client would ever trust Goldman on anything. Goldman seems to have a habit, here: it recommends a certain course of action, involving a deal which the client is barred from testing in the market. (El Paso wasn’t allowed to shop itself to anybody other than Kinder; Greece wasn’t allowed to check the market price of the swaps which Goldman was selling it, because Goldman said that if Greece did that, the whole deal would be off.)

This is surely the most magical and mysterious aspect of Goldman Sachs: that despite mountains of evidence that its actions are always orchestrated to result in the best possible outcome for Goldman Sachs, its clients still seem to trust it to give excellent and impartial advice in their own best interest. Maybe that’s the key skill that Goldman investment bankers are hired for. Not analytical or strategic expertise, but rather the ability to snow clients and get them to do whatever Goldman wants.


A Goldman former employee tells us clients are called muppets:

http://www.reuters.com/article/2012/03/1 4/us-goldman-smith-idUSBRE82D0RV20120314

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Send Indra Nooyi to the World Bank

Felix Salmon
Mar 2, 2012 20:08 UTC

When it comes to the World Bank presidency, pretty much everybody agrees on two things: (1) it shouldn’t be an American; (2) it will be an American. We can and probably should get hung up on (1), but given political realities, it makes sense to ask: if it’s going to be an American, then who should it be? It shouldn’t be Larry Summers, that’s for sure, and it shouldn’t be Jeff Sachs, either. But there’s another name floating around which is a much better idea than either of those two men: Indra Nooyi.

Nooyi, the chairman and CEO of Pepsico, has a lot of things going for her. Firstly, she’s a woman — and it’s generally understood that the Obama administration would love to nominate a woman to the job if it possibly can. Here’s Alan Beattie:

Bank policymakers say that the US proposing a female candidate – who would be the first woman to lead the institution – could help neutralise the charge that the appointment process was “business as usual”. Although administration officials have been cagey about likely contenders, candidates that have been discussed include Susan Rice, US ambassador to the UN, Lael Brainard, top international economics official at the Treasury, and Indra Nooyi, chief executive of PepsiCo. Laura d’Andrea Tyson, who was White House chief economic adviser to former president Bill Clinton, is also a possible contender.

Nooyi definitely stands out in that crowd. Rice, Brainard, and even Tyson are smart and capable technocrats — but they’re not leaders in the way that Nooyi is. One of the problems with US nominees to the Bank presidency is that they tend to be the kind of people who have risen to positions of importance (but never quite the very top) within their own organizations, without having ever had much visibility or power in the world more broadly.

The list of potential nominees from non-US countries is full of heavy hitters with serious global reputations, including quite a lot of former heads of state. The US nominee should be of that general caliber, if only to make it clear that the US takes the Bank seriously and isn’t steamrolling a number of extremely high-profile foreign candidates, only to install in their rightful place the Under Secretary of the Treasury for International Affairs. That’s an important job, to be sure, but it’s also a technocratic job where you always do what you’re told. It’s more fixer than leader.

Nooyi, by contrast, has led one of the world’s biggest multinational companies for five years, and has been in Pepsico’s C-suite for over a decade. During that time she has made a real and credible commitment to sustainability; she even managed to funnel $6 million to Sachs’s Earth Institute.

On top of that, she’s Indian. Born in Chennai, she didn’t arrive in the US until 1978, when she was 23. Nooyi’s an American now, and she’s certainly American enough to lead the World Bank, given the precedent of Jim Wolfensohn. But she wouldn’t only be the first woman to lead the Bank; she’d also be the first non-white person to lead the Bank. And that, of course, is something which is long overdue.

Nooyi is very comfortable among the upper reaches of global VVIPs, and, like Wolfensohn, she also has the significant advantage, for a World Bank president, of being rich enough to afford her own private jet. What’s more, the Bank job would allow her to turn even the criticisms of her tenure at Pepsico to her advantage. Consider this:

“It’s a very enticing vision to be more focused on health and wellness, to be focused on global hunger and all of those things,” says Ali Dibadj, an analyst with Sanford C. Bernstein & Co. “The problem is, you have to remember where three quarters of the company comes from: sugary, salty, fatty” foods.

Nooyi has at this point made more money than she could possibly ever spend; she’s clearly committed to making a difference in the world. And she’d be more able to do that at the helm of the World Bank than she would be staying on at Pepsico with restive shareholders pressuring her to sell more soda. Nooyi and the Bank need each other; her nomination makes perfect sense.


PepsiCo was not created by Indra Nooyi but existed many years prior to her joining the company. Since then it has been selling salty snacks and sugary soft drinks – true. But Indra Nooyi has tried to steer the company towards a more sustainable business model while also sustaining earnings growth and profitability. So I believe one should get this straight. Indra Nooyi joined a company that sold unhealthy products. Since then, she has taken significant steps to improve the company’s product portfolio and its sustainability credentials. Definitely this shows that she has the best interests of the consumer and the planet and shareholders at heart. And let’s not forget, at the end of the day PepsiCO is a profit making company.

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Don’t send Sachs to the World Bank

Felix Salmon
Mar 2, 2012 16:59 UTC

In 2002, Jeff Sachs took the top job at one of the most ambitious university departments in the world: the Earth Institute at Columbia University. And he’s done that job very well, judging by the main metric that universities care about. When he re-upped his contract last April, the press release gushed about all the multi-million-dollar donations that the Earth Institute has received, including $20 million from the Gates Foundation and $28 million from the Lenfest Foundation to endow climate change research.

Now, however, Sachs wants to leave: he’s got his eye on a job where the sums of money involved make those numbers seem positively puny.

My quest to help end poverty has taken me to more than 125 countries, from mega-city capitals to mountaintop villages, from rain forest settlements to nomadic desert camps. Now I hope it will take me to 18th and Pennsylvania, to the presidency of the World Bank. I am eager for this challenge.

To a certain extent, Sachs’s job application reads almost like self-parody: “the president of the World Bank spends a lot of time travelling in first class to poor countries. I have been doing that for years, so I’m obviously highly qualified for the job.”

And of course Sachs has one crucial thing going for him: he’s American. The next World Bank president will, sadly, be an American, a fact which takes a lot of highly-qualified potential candidates, including many former heads of state, out of the running.

But even if the next president of the World Bank is an American, we can still do better than Sachs. The reason that Sachs shouldn’t get the job is basically the same as the reason why Larry Summers shouldn’t get the job: he’s an arrogant economist who nearly always thinks he’s the smartest guy in the room. The presidency of the World Bank is a diplomatic position: if you want to do it effectively, you need to be able to wrangle not only the vast staff working for you, but also the various executive directors who are your superiors and who have a tendency to want to micromanage your decisions. Insofar as Jim Wolfensohn, say, was a successful World Bank president, he was successful because he was a smooth-talking investment banker who was expert at schmoozing important people.

Sachs, by contrast, is angry; he’s one of life’s natural campaigners. That’s great when you’re hanging out with Bono, or even Bill Gates. But it’s less likely to get you very far when you’re trying to persuade the Nigerian president to revolutionize his domestic policy.

Which is one reason why Hillary Clinton would be much better than Sachs for the job: she knows the international diplomatic back-channels, while also knowing how to tactically assert power when necessary.

Besides, Sachs has two big strikes against him. One is the “shock therapy” he administered to Eastern European countries, especially Russia, in the wake of the fall of the Berlin Wall. It was a complete disaster, and Sachs has never accepted his share of the blame for it. He still thinks, as far as I know, that his ideas were good ones, and were just poorly implemented. But they weren’t good ideas, not least because the political institutions in the countries he was dealing with were obviously not up to the task of effectively and honestly implementing his drastic prescriptions.

More recently, Sachs has been investing an enormous amount of personal and financial capital in his Millennium Villages project — a well-intentioned project which attempts to demonstrate the power of investment to turn around poor villages, but which virtually nobody outside the project thinks is capable of demonstrating any such thing. Before even thinking about nominating Sachs to the World Bank, Obama should take a straw poll of Bank employees. Most of them have pretty strong opinions about the Millennium Villages, and it would be very useful to know if he would be entering an institution whose employees in large part consider him to be much better at public relations than at wrestling with messy empirical truths.

Sachs’s worldview, boiled down, is that development is easy, we know how to do it, and that given enough money, it’s relatively trivial to spend that money in an effective way to reduce poverty around the world. When World Bank presidents come in with that attitude, the results can be wasteful at best and downright counterproductive at worst. I’m not, in general, a fan of politicians. But in this case, we’d be better off with a smart politician in charge of the Bank — someone able to build consensus and approach tough problems with modesty — than we would with an arrogant economist.


This is a poorly cited, ad hominem attack.
What him here, make your own assessment: http://www.youtube.com/watch?v=wf530FLMw 3w
The snarky claim that he is at the Earth Institute to raise wads of cash is downright low. My girlfriend’s work for the Red Cross relies heavily on the work of the Earth Institute, which Sachs founded.
Substantiate the “shock therapy” label that gets pinned on Sachs. In particular, research Sachs key proposition during his work in Easter Europe: having the international community inject large amounts of foreign currency into Stabilization Funds to help quickly stabilize currencies of post soviet nations. He succeeded in doing this in Poland (see Zloti Stabilization fund). He was blocked from doing the same for the Ukraine/Russia. Does that sound like shock therapy? Or is it painting of a whole profession with a single brush? Your claims about Millennium Villages are equally unfounded. Please do your homework next time. I’d be happy to see Sachs at the helm.

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Broke bureaucrat of the day, St Louis Fed edition

Felix Salmon
Feb 1, 2012 17:54 UTC

Binyamin Appelbaum has helpfully aggregated all the Fed presidents’ financial disclosure statements in one place. The richest Fed president is Dallas’s Richard Fisher, who used to run an investment fund called Value Partners. And the legacy of Value Partners is still visible in Fisher’s statement: he owns more than $500,000 of stock in an obscure clothing company called Cherokee Inc, for instance, which was one of Value Partners’s biggest investments.

But the most striking disclosure comes at the other end of the scale, from St Louis Fed president James Bullard. Bullard’s a career central banker who has never had a lucrative private-sector career, but he’s still doing OK for himself: his annual salary is $281,300, which should be more than enough to bring up a family of four in St Louis.

Here’s the thing, though: Bullard’s disclosure form is completely blank. Which means that, except for his house and his Federal Reserve retirement benefits, he has no investments at all worth more than $1,000 — not even a savings account. Or, to put it another way, the president of the St Louis Fed, earning well over a quarter of a million dollars a year, is living paycheck-to-paycheck. Every two weeks, he gets paid $10,819, less taxes and deductions, and yet by the end of the year he still doesn’t have even $1,000 in a checking account.

Now there might be a good reason why Bullard was completely cleaned out for some reason and left with absolutely nothing but the roof over his head. Maybe there was a lawsuit, or medical bills, or something like that. But still, Bullard’s balance sheet is quite astonishingly bare, for someone in his exalted position.

Which makes a cynical old journalist like me start wondering about the revolving door. It actually makes perfect sense to live beyond your means when you’re in the public sector, if you know that you’re going to make a lot of money in the private sector later on. It’s called consumption smoothing, and it’s entirely rational. You might not be able to lavish money on your family from a cashflow perspective, but that’s fine, because you’re still a wealthy man if you take into account the present value of massive future earnings.

So James Bullard, regulator of financial institutions in the mid-west and across the country, has an incentive to be very nice to those institutions, since they’re capable of rewarding him with lucrative work if and when he leaves the Fed. Work which he’s likely to want, if he continues as broke as he is right now.

Bullard, at just 51 years old, has a pretty long and lucrative private-sector career ahead of him, should he be so inclined. And when he filed that financial disclosure form, I wonder if he was thinking about the day when he would be able to fill it out with more than nothing.

Update: The instructions do say that Fed presidents should “exclude any personal account”; I’m unclear on what that means. Certainly other Fed presidents include checking accounts in their disclosures; Richard Fisher’s contain more than $500,000 in aggregate, on top of various money-market funds and the like, one of which contains more than $1 million.


Fischer seems to have an even stranger approach to money demand than to money supply. If my eyes don’t deceive me and I understand correctly he has $500,000 in checking accounts ? Why ? Is he preparing for a possible impulse purchase of an Island somewhere ?

It seems to me to be crazy to hold so much wealth in an account which pays near zero interest (my US checking account pays exactly zero, but I guess if you have a balance of hundreds of thousands you don’t focus on avoiding fees).

Fisher has a strong personal interest in low inflation since so much of his wealth is, for some incomprehensible reason, not in TIPS. This creates conflict of interests. I strongly suspect that he feels that he should, perhaps that he must, make sure that inflation is costly to him personally. I suspect that he would consider shielding himself from inflation to be immoral. That is, he feels morally obliged to have a personal interest at stake when making policy decisions. I guess this because I guess he considers inflation to be absolute evil (the way the Pope views birth control pills) so he considers having a personal interest in low inflation virtuous.

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Germany, Greece, and the conspiracy of the technocrats

Felix Salmon
Jan 31, 2012 22:56 UTC

Der Spiegel has a long and meticulously reported piece on the state of affairs as it exists right now between Germany and Greece, naturally concentrating on attitudes within Germany. Meanwhile, Yanis Varoufakis has a much more Greek take on the same subject at CNN. And by far the most striking thing, here, is how similar the two pieces are.

The German article is headlined “European Politicians in Denial as Greece Unravels”, while the Greek one plumps for “Why it’s too late to save Greece’s sovereignty”. They’re both saying the same thing: Germany has been treating Greece’s insolvency as though it were some kind of liquidity crisis, which can be solved by lending Greece more money. But of course that’s the worst possible thing you can do with an insolvent debtor: it only makes things worse rather than better.

Here’s Varoufakis:

German leaders, unwilling to confront their bankers and the fault lines developing throughout the eurozone, pretended to believe that the problem was Greece and that Greece could be “cured” by means of loans and austerity. At the same time, Greek leaders, unwilling to confront their electorate, pretended to believe that they could deliver the targets demanded by Germany.

This can be seen as a conspiracy of the technocrats: both sides deliberately agreeing to the impossible so that Europe would be dragged into ever-greater fiscal union. After all, the more money that Germany lends to Greece, the more control it’s going to demand, and the greater the gap between Greece’s promises and its reality, the more control it’s going to feel the need to concede.

But the problem is that the technocrats aren’t managing to bring the two countries’ respective populations along for the ride. The Spiegel article is full of various German politicians saying in no uncertain terms that more money is simply not forthcoming. And the Spiegel article has some very strong demonstrations of why Greece is going to need to devalue if it’s going to have any hope of growing:

In Mediterranean tourism, Greece has to compete with non-euro countries like Croatia, Tunisia, Morocco, Bulgaria and Turkey, which can offer their services at significantly lower prices. The per-hour wage in the hospitality industry was recently measured at €11.39 in Greece, as compared with only €8.49 in Portugal, €4 in Turkey and as little as €1.55 in Bulgaria.

Devaluation alone isn’t enough, of course; it has to be accompanied by a large number of defaults and insolvencies. As the Spiegel article notes, thousands of companies and banks could be forced to declare bankruptcy. But maybe that’s exactly what Greece needs. Bankruptcy is a cleansing process which gives the opportunity to start over.

The Eurocrats are petrified of a Greek insolvency because they know it risks spilling over into Portgual and the rest of the continent. Sovereign defaults tend to be contagious — look at Latin America in the 1980s. But since a default in Greece is inevitable at this point, best it get done sooner rather than later. The German press has worked this out; it remains to be seen how long Europe’s technocrats can remain in denial.


@ GASinclair hit the nail on the head

Felix you need to research Der Spiegel archives – there is a good article on the germans and dutch assisting the greek govt with its admin – like its cadastral land database, the fundamentals of a taxation system etc, computer network – the oligarch politicians did not invest in the rudiments of a government administration sufficient to operate some form of taxation (no surprise)

and Der Spiegel has been sour on Merkel for quite a while, their owner is politically partisan

who would lend greek politicians anything on their current level of behaviour? i support the greek people but not that fakelaki mafia running greece, they are a shameful mendacious mob, who use their inhabitants suffering as a form of economic blackmail

an orderly default by greece is not such a gut wrench for the other eurozone states – 145 billion could do a lot of good than into the fakelaki mafia maw.

it is time to stop the greek-germany binary as well, the IMF has recently warned that fakelaki mafia they will not receive funding if they don’t implement those promised reforms

on a happy note, the greek people are welcome to work in the other regions of europe until the fakelaki political mafia are swept out of office and into the dustbin of history, shame on them and their shameless politics

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

Felix Salmon
Jan 27, 2012 09:19 UTC

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.


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

Jon Corzine, rogue trader

Felix Salmon
Dec 12, 2011 14:53 UTC

Dealbook has a big piece on what went wrong at MF Global today, which removes any doubt about the way in which the firm’s sudden death was entirely the fault of Jon Corzine. The idea that Jon Corzine was a “rogue trader” has been raised in the past by the likes of Bill Cohan and John Carney, just on the basis of the size and riskiness of MF Global’s $6.3 billion bet on European sovereign debt. But now it’s looking increasingly as though Corzine demonstrated virtually all of the pathologies of the rogue trader more generally.

Lots of financial firms make big bets and blow up. But what we saw at MF Global was much more than that. In fact, as Corzine detailed at great length in his prepared testimony last week, his big sovereign-debt bet didn’t actually lose money at all. But MF Global died all the same, because the bet was so large and risky that it caused a fatal cascade of downgrades and margin calls.

Now the risk of such a fatal cascade is always front of mind at any broker-dealer, and all such firms have mechanisms in place to prevent any single bet getting big enough to imperil the company as a whole. What distinguishes rogue traders from traders who simply have big losses is fourfold:

  • they develop an ability to circumvent risk-management controls;
  • they aspire to be recognized as a star trader making huge amounts of money for the firm;
  • they tend to arrive earlier and leave later than anybody else, as they jealously guard their trades;
  • and they panic when losses start appearing, doing things which are downright illegal in the process.

Corzine had much more ability to get around risk-management controls than most rogue traders, because he was the CEO. As a result, his big sovereign bet was, relative to the size of the company which made it, by far the largest rogue trade of all time. And the way that he circumvented existing controls was brazen:

Soon after joining MF Global, Mr. Corzine torpedoed an effort to build a new risk system, a much-needed overhaul…

The size of the European position was making the firm’s top risk officers, Michael Roseman and Talha Chaudhry, increasingly uncomfortable by late 2010, according to people familiar with the situation. They pushed Mr. Corzine to seek approval from the board if he wanted to expand it… Mr. Roseman eventually left the firm.

In August, some directors questioned the chief executive, asking him to reduce the size of the position. Mr. Corzine calmly assured them they had little to fear.

“If you want a smaller or different position, maybe you don’t have the right guy here,” he told them.

As CEO, of course, Corzine could and did overrule or ignore any concerns about his big trade: “One senior trader said that each time he addressed his concerns, the chief executive would nod with understanding but do nothing,” we’re told in the Dealbook piece. Only the board had the ability to rein Corzine in — but Corzine made it abundantly clear that as far as he was concerned, the board had only one job: to keep him in his job, or to fire him. If they wanted him to run the company, he was going to run it his way, with all the risks that entailed.

Of course, Corzine was happy to structure his bet in such a way as to minimize its perceived riskiness:

The firm bought its European sovereign bonds making use of an arcane transaction known as repurchase-to-maturity. Repo-to-maturity allowed the company to classify the purchase of the bonds as a sale, rather than a risky bet subject to the whims of the market.

This is absolutely the kind of thing that a rogue trader does, rather than a CEO. A CEO wants to be paranoid about all risks; a rogue trader wants to hide them. It’s clear which one Corzine was.

Corzine’s risk circumvention has been widely reported already. But other parts of Corzine’s pathology were new to me. For instance:

He fashioned new trading desks, including one just for mortgage securities and a separate unit to trade using the firm’s own capital, a business known as proprietary trading.

Not to be outdone, Mr. Corzine was the most profitable trader in that team, known as the Principal Strategies Group, according to a person briefed on the matter. Mr. Corzine traded oil, Treasury securities and currencies and earned in excess of $10 million for the firm in 2011, the person said…

His obsession with trading was apparent to MF Global insiders over his 19-month tenure. Mr. Corzine compulsively traded for the firm on his BlackBerry during meetings, sometimes dashing out to check on the markets. And unusually for a chief executive, he became a core member of the group that traded using the firm’s money. His profits and losses appeared on a separate line in documents with his initials: JSC…

At Goldman, which he joined in 1975, the young bond trader quickly gained a reputation as someone able to take big risks and generate big profits. Even after ascending to the top of the firm, he kept his own trading account to make bets with the firm’s capital.

I still can’t quite believe this, although it does seem to be true — did Corzine really have his own personal trading account while also being CEO, both at Goldman and at MF Global? At Goldman, which was still a partnership when Corzine was in charge, there would at least have been serious limits on what he could trade, and the bank was big enough to be able to withstand losses in his personal account. But at MF Global, where he was charged with turning around the entire company, the picture of the CEO trading on his Blackberry during meetings is, frankly, bonkers.

Does this happen elsewhere? Are there other brokerages where the CEO has his own personal P&L line in the trading books? Citadel, perhaps.* But this is not a good idea. You want the CEO encouraging the rest of the trading desk, not competing with them. And you want the CEO judging himself by the performance of the firm as a whole, rather than obsessing over the profits and losses he’s personally responsible for.

Certainly the fact that Corzine was working two jobs — as well as more general rogue-trader pathology — helps to explain the fact that he “impressed colleagues” with his work ethic:

He often started his day with a five-mile run, landing in the office by 6 a.m. and was regularly the last person to leave the office.

(I’ll guess, though, that he wasn’t up at 2:30 most mornings, trading the European markets from the foot of his bed.)

In the macho world of Wall Street, working incredibly long hours is generally grounds for admiration, so it’s easy to see how this didn’t raise any red flags. But it should have.

And then, at the end of the story of any rogue trader comes the spiral of panic-driven illegal activity.

MF Global filed for bankruptcy on Oct. 31. As the firm spun out of control, it improperly transferred some customer money on Oct. 21 — days sooner than previously thought, said people briefed on the matter. And investigators are now examining whether MF Global was getting away with such illicit transfers as early as August, one person said, a revelation that would point to wrongdoing even before the firm was struggling to survive…

A deal became crucial as trading partners and lenders circled the firm. LCH.Clearnet, the firm responsible for clearing the vast majority of MF Global’s European sovereign debt trades, was also demanding $200 million to maintain the positions, atop $100 million it had claimed from MF Global earlier in the week, one person briefed on the situation said.

Other people close to the investigation, led by the Commodity Futures Trading Commission’s enforcement division, have said that as the firm rushed to pay off creditors, MF Global dipped again and again into customer funds to meet the demands.

It’s quite common for rogue traders to go to jail; as one of the biggest rogue traders in history, it looks as though Corzine might well join their ranks. It would certainly be a great shame if he avoided that fate by dint of the fact that he was CEO and therefore has some kind of plausible deniability about the mechanics of the illegal transfers. Everything in this sorry story has his fingerprints all over it.

*Update: Citadel calls to say that Ken Griffin, the CEO, does not engage in trading at the company.


MacTM19 shared this video on another Reuters story:
http://www.youtube.com/watch?v=xm3VMrKqJ SA
Watch Joe Biden praising Jon Corzine as his mentor on economic stimulus! And just watch Jon Corzine’s body language while Biden feeds his ego! This says all the things Felix Salmon has been describing in his article…

Posted by matthewslyman | Report as abusive

Treasury’s promise, one year on

Felix Salmon
Dec 8, 2011 22:32 UTC

In November 2010, on what was pretty much his last day working for Treasury, I spoke to Michael Barr, an assistant secretary; he was upset about a post of mine which said that Treasury was going to do absolutely nothing with respect to holding banks accountable for the various mortgage scandals.

Not true, he said: in fact, the government was doing a lot of things targeting banks and holding them responsible for their actions.

Barr rattled off a laundry list of reviews which are being done by various arms of the government, including what he described as an “11-agency, 8-week review of servicer practices, with hundreds of investigators crawling all over the banks”. That information is finding its way to the state attorneys general, in their review. Meanwhile, said Barr, an alphabet soup of regulators (OTS, OCC, FDIC) is looking at various financial services companies (MERS, along with lots of different servicers, trustees, and banks); HUD is holding everybody to FHA and HAMP guidelines; and the FTC is looking at non-bank lenders. And keeping everything coordinated is the new Financial Fraud Enforcement Task Force which has been put together under the leadership of Justice’s Tom Perrelli.

“Why are we investing these resources and including Tom Perelli in the discussions?” asked Barr. “We’re holding the banks accountable to fix it.” I asked him whether he thought that was even possible. “Their conduct suggests they can’t,” he said, adding that “they can be held accountable for not following the law. HUD can assess significant fines on them.”

Barr was clear about what he expected to happen in 2011. Specifically, he said, “if there are legal violations found, banks are responsible for fixing them and for addressing the problems.” And more generally, the government’s actions “will increase the chance that when foreclosures happen, they will happen according to established law.”

The timetable for all this? The reviews should be largely completed this year, with the full scope of the problems being apparent by the end of January. By the end of the first quarter, the banks should be in serious discussions about how they’re going to fix what’s broken. And then it gets necessarily hazier: “Institutions are resistant to change and have difficulty implementing,” said Barr, but “you’ll see flow improvement over the course of the next year.”

Could I hold Treasury to that? Sort of: “You should hold us to whether things get better or worse. If a year from now nothing has changed, that would be a reasonable criticism.”

Well, here we are, a year later, and so it’s time to check in and see what has been achieved. I asked Treasury, and they sent me the November Housing Scorecard, which is mainly notable for the fact that JP Morgan Chase “was found to be in need of substantial improvement under the program” and will no longer get servicer incentives from Treasury. They also sent me written testimony from October about how HAMP is coming along. (Slowly.)

What they didn’t point me to — because it doesn’t exist — was any kind of settlement between the attorneys general and the banks. This time last year, it looked almost certain that such a settlement was going to happen; now, with Massachusetts going its own way and California proving unwilling to give in very much, the chances of seeing any settlement at all are diminishing by the day. Realistically, if we don’t see something in the next few weeks, the chances of getting a big settlement will be very small indeed.

So the one big thing which everybody expected to have seen by now hasn’t happened. And because it hasn’t happened, the banks haven’t paid any fines; they haven’t detailed how they’re going to compensate the people who they mistreated in various foreclosure processes; they haven’t substantially improved their servicing operations; and they certainly haven’t embraced principal reductions as a tool for getting the housing market back onto a healthy footing. In fact, they haven’t really done anything at all, since it behooves them to keep any improvements they might be able to make as a bargaining chip they can use in negotiations with the government.

Going forwards, it’s still likely that the banks will end up paying some kind of fine, and promising that they’ll clean up their act in future. But the fine won’t hurt — it’ll be a cost of doing business. And the promise will be worthless, as such promises always are — I’ve never seen an agreement with real teeth, where penalties actually get enacted. In other words, the servicing system will continue to be broken, the banks will continue to make things worse rather than better, and the government will have failed in its self-imposed task of getting a grip on this problem and doing something meaningful about it.

I do think that there are people in government who have tried. But I also think that — as I said last year — they’re doomed, ultimately, to failure. Treasury said that we would have seen real progress by now; we haven’t. And there’s very little chance of getting anything substantive done between now and the election — in fact, things seem to be moving in exactly the wrong direction. Which makes me think that in the battle of Treasury vs the banks, the banks — predictably — have won.


What didn’t happen, which you don’t mention, was that “11-agency, 8-week review of servicer practices, with hundreds of investigators crawling all over the banks”. Instead what happened was hundreds of investigators went and drank coffee and ate donuts at the banks and then went home. since there was never an investigation the attorneys general never had any ammunition to get a settlement with the banks. So some of them did their own investigation and what they found was so bad they are suing, not settling. Thanks, Office of Thrift Supervision. Thanks, Fed. Thanks, Treasury. After all, Teh Timmeh said, “Save the banks at all costs.” And so it was tried.

Posted by Acharn | Report as abusive