Felix Salmon

It looks like Neel Kashkari did manage to get that financial-services job by year-end after all: he’s moving to Newport Beach and joining Pimco as a managing director in charge of “new investment initiatives” (which seems to mean, at least in the first instance, equities). You can be sure he’ll be earning substantially more there than he would have been making had he simply stayed in “Information Technology Security Investment Banking”, whatever that might be, at Goldman Sachs.

Pimco seems to be establishing itself as a key part of the revolving-door structure in contemporary finance: if you’re a senior government bureaucrat making decisions affecting the financial industry, there’s a good chance that if and when you leave there’ll be a job waiting for you in sunny southern California. It’s win-win for everybody: technocrats will tend to treat the financial industry with kid gloves when they’re in power, so as to maximize their chances of getting a good job upon their exit, while the likes of Pimco “make billions” as a result of doing so.

Who, in this clubby world, will stand up for the rest of us? Is there any way to prevent civil servants from parlaying their experience into seven-figure salaries in the private sector once they leave government? The short answers, of course, are no one, and no. If Pimco feels no compunction about hiring the likes of Greenspan and Kashkari today, it’s certainly not going to stop doing so tomorrow.

Today’s must-read is Laura Blumenfeld’s tale of Neel Kashkari, mountain man, building a wooden shed in the wilds of Northern California:

Kashkari is recalling his testimony before Congress, while splitting logs to feed the stove for the winter. He is down to his last two chain-sawed trees.

“Members of Congress will tell you they agree with you, and then in public they blast you. I understand their anger, but the playing at politics when so much was at stake –”

Whack. The ax blade flies off its wooden handle.

I’m not sure why exactly Kashkari invited Blumenfeld to hang out with him in the mountains, watching “sweat dot the skin between the hairs on his forearms [as] he does 20 reps of lower-back extensions”, but it’s quite the portrait — especially with the accompanying photo gallery by Linda Davidson — of the Washington technocrat on detox.

Kashkari, like Bernanke, has regrets, but his are small and pretty technical:

He also made mistakes — a punitive interest rate on the American International Group intervention, he says, and a clause allowing unilateral changes to the Capital Purchase Program contracts — decisions executed quickly in the crisis and recognized belatedly by him on the road to Lake Tahoe, while biking up a 9 percent grade, his thoughts grinding round.

What’s more, he’s not out of the rat race, by any means: he’s still wedded to his BlackBerry, complete with Bloomberg alerts; he covets home delivery of the Wall Street Journal; he’s talking about going back to Washington some day; and he’s even talking to Hank Paulson about taking another job in financial services before the year is out. All the log-splitting is essentially an extended vacation, not a true change of lifestyle. After all, he is a Goldman man. Given his extremely valuable experience at Treasury, it would be foolish for him not to monetize that somehow.

It’s December, which means it’s bonus season, and time for more than the usual amount of bellyaching about pay. Will Bank of America’s TARP repayment give it a bit more wiggle room in terms of CEO compensation, thereby broadening the field of potential successors to Ken Lewis? Will General Motors be able to find a CEO when it’s state-owned and therefore probably won’t be able to pay a typical private-sector salary? Will Goldman Sachs be able to persuade shareholders that its $16 billion bonus pool is reasonable?

Meanwhile, there’s an even bigger row over pay at state-owned banks across the pond, with RBS’s directors threatening to resign en masse if the Treasury vetoes its bonus plan.

The underlying problem here is a fundamental disconnect between the plutocrats and the people. Politicians and their constituents simply have no time any more for people paying themselves multi-million-dollar salaries, especially when the companies in question only exist in their present form thanks to hundreds of billions of dollars in government interventions.

Back in March, at what was in hindsight the low point for both the markets and for political sentiment more generally, I genuinely feared class warfare. I don’t think we’re there any more: it’s hard to keep that angry for that long, and feelings have become a little more muted. But that doesn’t mean that the anger has disappeared entirely.

We’re at a fork in the road right now. People who were comfortable with seven- and eight-figure salaries a couple of years ago have a natural tendency to want to return to the status quo ante; the rest of us see a once-in-a-lifetime opportunity to bring executive pay down to the kind of levels which normal human beings can relate to. Given that the pay levels of old clearly did no good and colorably did a great deal of harm, that doesn’t sound like an unreasonable request. But there aren’t any mechanisms in place to make it happen, and when the likes of Kenneth Feinberg try to impose some kind of sense and order, the immediate reaction is to try to wriggle out from under his oversight.

So the plutocrats, it seems are going to win. They had a nasty couple of years, by plutocrat standards, and in a handful of companies operating under de facto state control they don’t quite have the free rein they would ideally like. But the system as a whole hasn’t changed, and those who thought that it might can’t quite believe how naive they were.

I am pleased, proud and honoured that Willem Buiter has chosen the comments section of my blog to make what is as far as I know his first public statement since being appointed Citigroup’s chief economist:

I joined Citi for two reasons. First, because Citi is the one truly global bank. Second, because Citi is an institution that, following its challenges during the global financial upheaval of late 2008 – early 2009, changed course resolutely and radically to return to its core strengths: global commercial banking, financial infrastructure services and investment banking.

The global scope of Citi’s activities and its presence in every systematically important asset market mesh very well with my long-standing interest in open economy macroeconomics and in the joint determination of economic activity, inflation and asset prices and rates of return.

I am pleased, proud and honoured that this Citigroup has appointed me its Chief Economist.

It is a little bit odd that Buiter gave no indication on his blog that he ever saw Citigroup in such a fine light — but I’m encouraged by his popping up in the blogosphere like this, and hold out a tiny bit of hope that his trademark very long blog entries might yet continue largely unabated.

On the other hand, I’m not holding out that much hope. This statement doesn’t sound particularly candid, and Citi doesn’t like any of its employees going too far off the reservation. My guess is that Buiter’s writing is going to be mostly confined to Citi research papers from now on.

Update: Buiter leaves his FT perch.

I will continue to write and publish fast and furiously and to speak out in public on the issues of the day. I plan to contribute regularly again to Martin Wolf’s Economists Forum, to write columns left, right and centre and perhaps even to start another blog. But it won’t be Maverecon because it cannot be Maverecon.

With Jon Corzine losing the governorship of New Jersey yesterday, it was yet another bad day for former heads of Goldman Sachs. It’s worth running down the list, since the venerable pairing of John Weinberg and John Whitehead came to an end in 1990.

First up there was the pairing of Robert Rubin and Stephen Friedman. Both of them attempted to become venerable eminences grises, but neither succeeded, in the end. Friedman became chairman of the New York Fed, where he helped to which put together the deal under which AIG’s CDS counterparties, foremost among them Goldman Sachs, got paid out at 100 cents on the dollar, He was also involved in approving and which also approved Goldman’s request to become a bank holding company. He then inexplicably bought tens of thousands of shares Goldman shares in the open market — a clear conflict of interest given his position at the Fed — resulting in his resignation shortly afterwards.

Rubin, of course, looks even worse. As arguably the most Wall Street-friendly Treasury secretary ever, he helped to inflate the deregulatory financial-services bubble on the basis that big banks were extremely sophisticated and more than capable of looking after their own risk books. He then moved to the ultimate cushy job at Citigroup, where he got paid $10 million a year despite having no employees, no P&L, and no defined responsibilities. In hindsight, his main contribution to the bank was to be the biggest internal cheerleader for the fixed-income group, which he encouraged to take on ever-greater amounts of risk despite the fact that no one in senior management (including himself) really had a clue what they were doing. Result: disaster.

Rubin and Friedman were succeeded by Corzine, whose post-Goldman career has been spent almost entirely in politics. He was pretty ineffective in the Senate, before moving to the governorship of New Jersey. (In a classic case of the squid’s tentacles being everywhere, he there helped oversee the incoherent mess at Ground Zero, due to New Jersey’s 50% stake in the Port Authority of New York and New Jersey. The chairman of the Lower Manhattan Development Corporation, charged with rebuilding at the site, was former Goldman senior partner John Whitehead.) Never much of a natural politician, he basically bought both jobs, which at least meant that he wasn’t corrupt. But after he was almost killed in a 91 mile-an-hour car crash where he wasn’t wearing a seatbelt, he lost a large chunk of whatever leadership ability he had formerly held. His political demise yesterday, at the hands of an oafish opponent, comes as little surprise.

Corzine, in his turn, was replaced (indeed, ousted) by Hank Paulson. Paulson’s post-Goldman career, of course, was spent as the Treasury secretary who oversaw the biggest financial meltdown since the 1929 crash. Reading Andrew Ross Sorkin’s Too Big To Fail, which was clearly written with a lot of help from Paulson, he comes across as a man who was always at least one step behind the curve, someone who could never get ahead of the unfolding crisis, who was prone to inconsistent and ad hoc decisionmaking, and who went out of his way, even before getting a waiver allowing himself to talk to Goldman Sachs, to be as helpful to them as he possibly could.

Paulson seems to have spent a large amount of the crisis throwing up in his office bathroom, and even into Nancy Pelosi’s wastebin. Of course, he couldn’t simply go see a doctor, like the rest of us, because he’s a Christian Scientist. Similarly, he hobbled his ability to communicate by refusing to ever touch email: instead, any time he wanted to say anything to anybody he’d have to do so over the phone or in person. No wonder he was semi-permanently hoarse, and his phone records are insane.

Paulson’s biggest failure, of course, was that of Lehman Brothers: he set up an emergency weekend confab at the New York Fed in an attempt to save it, but refused steadfastly to ever consider any public help at all, and also failed to keep British regulators in the loop, despite the fact that their assent would be needed in the event that Barclays were to acquire Lehman. In fact, when the fateful phone call to the Brits was made, it was the hapless Christopher Cox who made it, rather than Paulson. In general, Paulson was more of a bully than a leader, and he managed to be equally unpopular both on Capitol Hill and at the White House.

Looking at the list, it seems to comprise men who are very long on hubris, and who have no doubt that if they can run Goldman Sachs, they can do anything else, with normal rules not really applying to them. All of them, post-Goldman, have been tarnished. If Lloyd Blankfein has any sense, he’ll retire quietly.

Update: Goldman calls to say that Friedman, as chairman of the New York Fed, was not personally involved in the decisions that the Fed made involving Goldman. I’ve updated the post accordingly.

Richard Painter, who drafted and approved the ethics agreement signed by Hank Paulson when he became treasury secretary, has come to the conclusion that such agreements can never really work as intended:

This essay concludes that government ethics law in its current state is not up to the task and that the United States is not prepared to implement bailouts in a manner that will instill public confidence. Although these problems could be alleviated through stricter ethics rules or a more systematized approach to bailouts, most solutions would be more costly than the problems they attempt to solve. Bailouts thus impose a substantial burden on government ethics that may be impossible to remove, in addition to the economic cost bailouts impose on taxpayers. Designing a bailout free economy may be the only acceptable alternative.

Painter’s essay is excellent, and highly recommended, precisely because he offers no solutions to what is an intractable problem. Here’s a little bit:

Requiring Treasury officials coming in from Goldman Sachs or other investment banks to dump their bank stock and stock options may not have been enough when they retain close ties to their former employers. There were also probably too many senior Treasury Department officials from Goldman; perhaps there were too many from the banking industry in general.   

This is very true. The saga of the government’s response to the financial crisis is one where all the key decisions are made by bankers, be they of the commercial, investment, or central variety. In a parliamentary system like the UK’s, the finance minister is an elected representative of the people. Of course, as we’ve seen in the UK, that doesn’t necessarily make bank bailouts any more taxpayer-friendly. But at least it serves as some kind of check on the banking industry bailing itself out whenever it gets into trouble.

The impression I get from the current spate of crisis books is that the likes of Paulson and Geithner became entirely consumed with the problems in the financial sector, and viewed political considerations, and the will of the people more generally, as an obstacle to be overcome rather than as any kind of guiding light. That may or may not have been a good thing. But either way, it’s fundamentally undemocratic.

There’s a curious coincidence of newspaper stories today: just as the NYT’s Louis Uchitelle writes a long piece about Paul Volcker being marginalized, the WSJ runs a story about how he could end up being responsible for what would arguably be the single most important piece of economic policy implemented by the Obama administration.

Here’s how Uchitelle ends his piece:

He travels infrequently to Washington, he says, and when he does, the visits are too short to bother with the office. The advisory board has been asked to study, amid other issues, the tax law on corporate profits earned overseas, hardly a headline concern.

So Mr. Volcker scoffs at the reports that he is losing clout. “I did not have influence to start with,” he said.

Well yes, the tax law on overseas corporate profits is one of the issues that Volcker is looking at. But he’s also, says the WSJ, looking at something much bigger and much more far-reaching:

White House advisers are examining whether to curb the corporate tax code’s bias toward raising money from tax-deductible debt issues rather than from stock sales…

Tax experts for decades have bemoaned the tax code’s bias toward debt over equity: Interest on most corporate debt is tax deductible, while dividend payments are not.

“The disparity between debt and equity financing encourages corporations to finance themselves more heavily through borrowing. This leverage in turn increases the financial fragility of the economy, an effect we are seeing quite dramatically today,” Jason Furman, now deputy director of Mr. Obama’s National Economic Council, told a congressional panel last year.

This is something I’ve been pushing for a while, and it’s a really good idea. As the WSJ article shows, the US, with its 39.1% corporate tax rate, manages to raise just 3.2% of GDP through corporate taxes. Meanwhile, Australia, with a 30% corporate tax rate, raises 6.6% of GDP from corporate taxes. If Volcker starts taxing debt as well as equity, that would do wonders for the US fisc, and would reduce the systemic danger that debt poses to the economy. What’s not to love?

The secret Paulson-Goldman meeting wasn’t the only time that Hank Paulson treated his buddies at Goldman Sachs especially well while at Treasury. In fact, it wasn’t the only time he did so before he got the now-famous waiver.

A bit further on in the Sorkin book, while Paulson is trying to work out what should be done with an imploding Lehman Brothers, we find this:

If all that weren’t enough to deal with, [Lehman president Bart] McDade had just had a baffling conversation with [CEO Dick] Fuld, who informed him that Paulson had called him directly to suggest that the firm open up its books to Goldman Sachs. The way Fuld described it, Goldman was effectively advising Treasury. Paulson was also demanding a thorough review of Lehman’s confidential numbers, courtesy of Goldman Sachs.

McDade, though never much of a Goldman conspiracy theorist, found Fuld’s report discomfiting, but moments later was on the phone with Harvey Schwartz, Goldman’s head of capital markets. “I’m following up at Hank’s request,” he began.

After another perplexing conversation, McDade walked down the hall and told Alex Kirk to immediately call Schwartz at Goldman, instructing him to set up a meeting and getting them to sign a confidentiality agreement.

“This is coming directly from Paulson,” he explained.

In many ways, this is worse than Paulson’s meeting with Goldman’s board: in this case, Paulson is forcing Lehman to open its books fully to a direct competitor, for no obvious reason. And in this case it’s not at all obvious that Paulson got a sign off from Treasury’s general counsel before doing so.

I suspect this is what happens when you do all your business by phone rather than by email: you’re so comfortable with the fact that you’re not leaving any kind of paper trail, it becomes much easier to cross the line and abuse your position as the most powerful Treasury secretary in living memory to the benefit of your former firm. If the Moscow meeting wasn’t enough to precipitate some kind of Congressional investigation of Paulson, this should be.

Update: There’s more, a few pages later:

As they were making yet another pass through the earnings call script, Kirk’s cell phone rang. It was Harvey Schwartz from Goldman Sachs, phoning about the confidentiality agreement that Kirk was preparing. Before Schwartz began to discuss that matter, however, he said that he had something important to tell Kirk: “For the avoidance of doubt, Goldman Sachs does not have a client. We are doing this as principal.”

For a moment Kirk paused, gradually processing what Schwartz had just said.

“Really?” he asked, trying to keep the shock out of his voice. Goldman is the buyer?

“Okay. I have to call you back,” Kirk said, nervously ending the conversation, and then almost shouted to Fuld and McDade, “Guys, they don’t have a client!”…

McDade, reasonably, was concerned about sharing information with a direct competitor: How mcuh did they really want to divulge? At the same time, he felt they couldn’t take a stand against a plan that he believed had originated with Paulson…

McDade, turning back to his preparations for the fast-approaching call, made his position clear: “We were told by Hank Paulson to let them in the door. We’re going to let them in the door.”

Andrew Ross Sorkin’s new book is out today, and breaks some pretty stunning news, dating from the end of June, 2008. At this point, we’re still months away from the now-famous but then-secret waiver, issued in mid-September, which allowed Hank Paulson to talk to Goldman Sachs; he’d promised not to do that when he moved from Goldman to Treasury.

But it turns out that Paulson just happened to be in Moscow at the same time that Goldman’s board of directors was having dinner there with Mikhail Gorbachev. (You know, as one does.) Take it away, Andrew:

When Paulson learned that Goldman’s board would be in Moscow at the same time as him, he had [Treasury chief of staff] Jim Wilkinson organize a meeting with them. Nothing formal, purely social — for old times’ sake.

For fuck’s sake! Wilkinson thought. He and Treasury had had enough trouble trying to fend off all the Goldman Sachs conspiracy theories constantly being bandied about in Washington and on Wall Street. A private meeting with its board? In Moscow?

For the nearly two years that Paulson had been Treasury secretary he had not met privately with the board of any company, except for briefly dropping by a cocktail party that Larry Fink’s BlackRock was holding for its directors at the Emirates Palace Hotel in Abu Dhabi in June.

Anxious about the prospect of such a meeting, Wilkinson called to get approval from Treasury’s general counsel. Bob Hoyt, who wasn’t enamored of the “optics” of such a meeting, said that as long as it remained a “social event,” it wouldn’t run afoul of the ethics guidelines.

Still, Wilkinson had told [Goldman chief of staff John] Rogers, “Let’s keep this quiet,” as the two coordinated the details. They agreed that Goldman’s directors would join him in his hotel suite following their dinner with Gorbachev. Paulson would not record the “social event” on his official calendar…

“Come on in,” a buoyant Paulson said as he greeted everyone, shaking hands and giving bear hugs to some.

For the next hour, Paulson regaled his old friends with stories about his time in Treasury and his prognostications about the economy. They questioned him about the possibility of another bank blowing up, like Lehman, and he talked about the need for the government to have the power to wind down troubled firms, offering a preview of his upcoming speech.

How on earth did Paulson think this was OK? Goldman Sachs was a hugely powerful for-profit investment bank, and there he is, giving private chapter and verse on his opinions about the US and global economy, talking about internal Treasury matters, and previewing an upcoming (and surely market-moving) speech. All in secret, at a “social event” which somehow got kept off his official calendar. Oh, yes, and one other thing — the whole shebang took place in the Moscow Marriott Grand Hotel, in the context of Goldman directors joking about how all the Moscow hotels were surely bugged.

This is sleazy in the extreme, and will only serve to heighten suspicions that Paulson’s Treasury was rigging the game in favor of Goldman all along. (It’s also a bit peculiar, to say the least, that the only two times Paulson met with private-sector boards he was out of the country, and arguably outside US jurisdiction.)

Paulson didn’t have this meeting out of fear or necessity: in fact, he told the directors that although there might be tough times ahead, “I think we may come out of this by year’s end.” (Blankfein was skeptical.) There was nothing in the way of extenuating circumstances which could possibly justify the secret rendezvous. This is definitely a situation where Wilkinson should have pushed back and said no way — but it’s hard to say no to Hank Paulson. Whose reputation has now taken yet another serious lurch downwards.

The AP tallies Tim Geithner’s phone calls:

In the first seven months of Geithner’s tenure, his calendars reflect at least 80 contacts with Blankfein, Dimon, Citigroup Chairman Richard Parsons or Citigroup CEO Vikram Pandit…

Ken Lewis appears on Geithner’s calendars only three times. Morgan Stanley CEO John Mack also appears three times.

Why would Geithner speak to Paulson Blankfein so much more frequently than Mack? Well, there’s always this:

Mack was on the phone with Mitsubishi’s chief executive, Nobuo Kuroyanagi, and a translator trying to nail down the letter of intent. His assistant interrupted him, whispering, “Tim Geithner is on the phone—he has to talk to you.”

Cupping the receiver, Mack said, “Tell him I can’t speak now. I’ll call him back.”

Five minutes later, Paulson called. “I can’t. I’m on with the Japanese. I’ll call him when I’m off,” he told his assistant.

Two minutes later, Geithner was back on the line. “He says he has to talk to you and it’s important,” Mack’s assistant reported helplessly.

Mack was minutes away from reaching an agreement. He looked at Ji-Yeun Lee, who was standing in his office helping with the deal, and told her, “Cover your ears.”

“Tell him to get fucked,” Mack said of Geithner. “I’m trying to save my firm.”

Geithner should, in the interest of listening to the people who are going to tell him something he doesn’t already know, have made extra effort to talk to Mack after being told by him to get fucked. But the guy’s only human, and it’s understandable that he might not have.

Update: I thought “Blankfein” when I was posting this, but wrote “Paulson”. Wonder what that means. Many thanks to Justin Fox for noticing.

It’s a day for long readings: not only Ryan Lizza in The New Yorker, but also Andrew Ross Sorkin, whose book excerpt in Vanity Fair — all 12,000 words of it — is now online in full.

If the excerpt gives any indication of the quality of the book as a whole, Sorkin has succeeded in writing the book of the crisis, with amazing levels of detail and access. Many books end up having much less detail than the day-to-day journalism in the papers, choosing instead to concentrate on the bigger picture. This one, by contrast, has a lot of detail, and it’s worth reading the Q&A with Sorkin to get an idea of how much reporting went into it.

The VF excerpt covers a period which has been rather overshadowed, in retrospect, by the collapse of Lehman Brothers — the week after that epochal event, when Morgan Stanley came thisclose to failing. At the time, my predictions that Morgan Stanley was going to fail resulted in my getting a serious death threat, so I was interested to read Sorkin’s account of this period to see how close I had been. The answer is very: on Wednesday September 17, Morgan Stanley’s CFO calculated that the bank was going to run out of money by the end of the week, and that was just one of many life-threatening crises for the bank.

All manner of options were looked at, including really messy mergers with Wachovia or Citigroup or JP Morgan. Nothing looked remotely attractive. China’s CIC bank had cash to play with but didn’t seem overly keen to do a deal; Japan’s Mitsubishi was also interested, but culturally pretty much incapable of moving with speed and decisiveness over the course of a sleepless weekend.

And then there was the too-many-cooks problem: because Morgan Stanley was systemically important and its collapse would almost certainly cause Goldman to domino into failure as well, Tim Geithner and Hank Paulson and Ben Bernanke were all breathing down the neck of Morgan Stanley’s CEO, John Mack. None of them had had much sleep either, and they were making rushed and ill-thought-through decisions, like trying to get Goldman to merge with Wachovia or even buy Citigroup. The Goldman-Wachovia deal, pushed by the Fed, almost happened, until it was vetoed by the very people who had encouraged it in the first place.

In Sorkin’s telling, Wachovia CEO Bob Steel has a moment of minor glory shouting at the Fed’s Kevin Warsh over a speakerphone, but it’s John Mack who has the real brass balls, fighting with Paulson himself and telling Geithner to “get fucked” while he’s putting a deal together with Mitsubishi. Mack’s a hero of this story: while everybody else is panicking, Mack is clear-eyed and doing the right thing for his employees and his shareholders. But how close did his gamble come to failing? I asked Sorkin, who replied:

As you’ll see in the book in the chapter that follows the excerpted material, the Mitsubishi deal briefly almost falls apart two weeks later, leaving Mack anxious that the firm was imperiled all over again. Of course, in the end, the deal is completed and disaster averted.

Mack had only bad choices to make: Sell to JP Morgan for $1 a share, which would have meant at least 20k employees would be fired, if not more; sell half the firm to the Chinese for next to nothing, which likely would have meant he would have had to raise capital again because CIC was only prepared to contribute a couple of billion; or pursue the deal with Mitsubishi. Of those choices, he clearly made the right one, but as you said, things could have turned out very differently. One other thing to consider: In the book, I provide a scene inside Morgan Stanley’s board meeting that Sunday afternoon — it was edited from the excerpt for space — but the group was pretty unanimous in its view that it should pursue Mitsubishi, despite someone else in the room suggesting otherwise. (There’s a fun little surprise in that scene, so I won’t spoil it for you.)

I’m looking forward to reading the book, including the board-meeting easter egg. But this excerpt, more than anything else I’ve read in the orgy of one-year-later reminiscing, shows just how close the entire financial world came to collapse. It should be required reading for anybody in Congress who is breathing easily again and thinks that the worst is over and we don’t need to do too much in the way of regulatory reform. These crises can come out of nowhere, and it’s imperative that the next time round, we have institutions capable of dealing with them, instead of having to rely on dumb luck and the occasional deus ex machina from Japan.

Yikes the Ryan Lizza piece on Larry Summers is long — over 11,500 words. And even then it manages to say absolutely nothing about some key issues, such as the $5.2 million he was paid by DE Shaw to work one day a week in 2008; or the allegations of Summers actively working to marginalize the influence of Paul Volcker; or l’affaire Shleifer. But Lizza does get Summers to admit to mistakes during his tenure at Treasury, at least as regards the subject of derivatives:

In Rubin’s memoir, “In an Uncertain World: Tough Choices from Wall Street to Washington,” he describes the debate that he and Summers had over the issue. “Larry thought I was overly concerned with the risks of derivatives,” Rubin writes. “His argument was characteristic of many students of markets, who argue that derivatives serve an important purpose in allocating risk by letting each person take as much of whatever kind of risk he wants. Larry’s position held together under normal circumstances but seemed to me not to take into account what might happen under extraordinary circumstances.” Summers told me, “If we had known that derivatives markets would mushroom the way they did and that regulators would remain spectators, we would have acted. With hindsight, all of us with involvement in financial policy wish we had done more to forestall problems.”

This is a good find from Rubin’s book — which was written, remember, in 2002, many years before the CDS exposure at AIG Financial Products threatened to bring down the entire global financial architecture. And although it’s now pretty clear that Summers’s deregulatory impulses as Treasury secretary had pretty gruesome consequences, it still reflects well on Summers — a man of no small ego — that he is willing to admit as much.

Lizza also provides a lot of detail on Obama’s decision not to nationalize the banks:

On March 31st, Summers sent the President a page-and-a-half memo outlining the reasoning behind the decision not to nationalize any banks. Obama was on his way to the G-20 meeting in London, and he wanted to be prepared with the best case against it.

The memo was divided into four sections. First, Summers explained that there was no legal authority to take over large bank-holding companies like Bank of America and Citigroup. Next, he pointed out that full nationalization of a financial institution might trigger systemic shocks, as investors retreated from other banks, creating exactly the kind of panic that nationalization was intended to prevent. (As Sperling often argued, “You might come out and say, ‘I’m gonna take over Bank of America and Wells Fargo, but everybody else is safe!’ Maybe they believe you. And maybe they don’t. But if you get this wrong the Dow’s at thirty-five hundred! You’re the worst economic manager in the history of the United States!”)

Furthermore, Summers said, there was a medium-term risk that nationalized banks would lose value, in the same way that the act of foreclosure decreases the value of a home. Summers pointed to the example of Sweden, which was regularly cited by economists who favored nationalization. But Summers noted that Sweden didn’t nationalize for two and a half years, by which time the situation had become so severe—interest rates had reached a hundred per cent—that there were no other options. In addition, Nordbanken, the largest bank nationalized in Sweden, was already eighty per cent government-owned. Summers concluded by emphasizing that nationalization was a strategy that governments turn to only after it is very clear that nothing else can work.

In hindsight, Summers was right and those urging nationalization were wrong. (Which group includes Paul Krugman and Nouriel Roubini, as well as me.) What I’m particularly happy about is that the debate took place, in a lot of detail, within the White House, between people who had no ideological axe to grind and who were intent on working out the objectively right thing to do, given the uncertainty surrounding the banking system and the economy.

I can see why Summers’s memo could not have been leaked at the time — the worst possible outcome would have been to reveal that the nationalization option was being seriously debated at the White House, sending markets into a tailspin which then would have gotten even worse when the government revealed that it wasn’t going to nationalize after all. But in hindsight, Summers seems to have made some very strong arguments.

Lizza’s article concludes with this:

So far, none of the worst fears of those who believed that the stimulus was too small or that nationalization was the only option or that taking over car companies would destroy the fabric of capitalism have materialized. Indeed, several private forecasters have credited the stimulus with blunting the impact of the recession—it probably added around three points to the G.D.P. last quarter—and the banking system has dramatically stabilized since the stress tests were completed.

This doesn’t mean that all these decisions were necessarily exactly right. But in politics, the quality of the implementation is often at least as important as the quality of the original decision. And the way that the Obama administration has spent its $787 billion, or avoided nationalizing the banks, or bailed out the auto industry, has been extremely professional and effective.

Indeed, in homage to the great dsquared, I’ll ask a question: can anybody give me an example of something with the following three characteristics:

1. It is a policy initiative of the current Obama administration
2. It was significant enough in scale that I’d have heard of it (at a pinch, that I should have heard of it)
3. It wasn’t fundamentally extremely well-managed during the execution.

The point here is that policy initiatives are sometimes good and sometimes bad. We all disagree with some of the Obama administration’s decisions, like for instance the tariffs on Chinese tires. But once that decision was made, it was handled very well, and seems to have had very little in the way of negative knock-on consequences. Similarly, after the PPIP was announced with great fanfare, it was allowed to get scaled back to a tiny fraction of its original size and ambition once it became clear that it was neither particularly useful nor particularly popular.

I don’t know how much credit can be given to Summers for this one; I personally would be inclined to give most of the credit to Obama himself. But Summers has clearly settled into a very important role in this administration, and I can see how his ingrained contrarianism and skepticism might be very good at keeping everybody else that much more intellectually honest and well-prepared.

Update: Dean Baker is unimpressed.

Update 2: The consensus of the commenters seems to be that Afghanistan and pushing healthcare reform through Congress both meet my criteria. I also like Carol Shannon’s nomination of Cash-for-Clunkers.

Bob Zoellick will say in a speech tomorrow that central banks have proved that they can’t be trusted with regulatory authority, and that in the US Treasury, rather than the Fed, should be the main risk regulator.

It’s an interesting idea, and I’d love to read his argument; weirdly, however, the World Bank has released only excerpts from the speech, rather than the speech itself.

I can understand why the Bank might not want to release the speech until after it’s been delivered. But in that case, why release the excerpts now? It smacks of trying to artificially manipulate the news cycle in a manner unbecoming to a major multilateral institution. On the other hand, Zoellick clearly doesn’t think the Bank’s present form is sustainable:

Bretton Woods is being overhauled before our eyes. This time, it will take longer than three weeks in New Hampshire. It will have more participants. But it is just as necessary. The next upheaval, whatever it may be, is taking form now. Shape it or be shaped by it.

Maybe trying to manipulate news coverage is part of Zoellick’s attempt to shape the new World Bank?

From the WSJ’s Fuld profile:

The U.S. government had supported J.P. Morgan Chase & Co.’s purchase of Bear Stearns months before Lehman collapsed, and, just days later, funded a massive bailout of American International Group. Mr. Fuld couldn’t believe the government couldn’t find a way to save Lehman.

In conversations with friends, he blamed then-Treasury Secretary Henry Paulson Jr. for deciding not to step in. Mr. Fuld’s wife, Kathy, would frequently email him news commentaries critical of Mr. Paulson’s role, say people familiar with the matter.

She sent him one column from Portfolio.com, headlined “Hank Paulson, Revisionist.” The piece asked: “Does Paulson seriously believe that anybody is going to swallow this — the idea that he didn’t want to see Lehman’s failure, but was powerless to prevent it?”

Yeah, that was me. Little did I suspect I was only serving to entrench Fuld’s anger at Paulson.

Remember this?

Jackie Speier (D-Calif): Do you use email?

Hank Paulson: Do I use email? No, I don’t use it, personally.

JS: You don’t use it personally, or professionally?

HP: Yeah, I just don’t. So I’ve never used it for any business communications. Just never use it.

JS: So while you were secretary of the Treasury you never used email?

HP: No.

JS: How did you communicate with people?

HP: Telephone.

I wonder if Eric Falkenstein had it in mind when he wrote this:

People who meticulously avoid email should not be trusted, because it is simply too calculating, as if they know they are regularly committing crimes. A phone conversation can always be disavowed, you just say you were talking about last weekend’s bar mitzvah.

(Via Weisenthal)