Clinton Confesses: Rubin and Summers Gave Bad (strike that) Excellent Advice on Derivatives

The following guest post was contributed by Jennifer S. Taub, a Lecturer and Coordinator of the Business Law Program within the Isenberg School of Management at the University of Massachusetts, Amherst (SSRN page here).  Previously, she was an Associate General Counsel for Fidelity Investments in Boston and Assistant Vice President for the Fidelity Fixed Income Funds.

Considering that much of the disastrous deregulation of the U.S. financial system occurred on President Bill Clinton’s watch, I was encouraged by his televised confessional Sunday. He admitted to Jake Tapper that he was led astray by two of his secretaries of the treasury, Robert Rubin and Lawrence Summers.

What an important and timely revelation. Admitting we have a problem is the first step to recovery. With financial rehab next up on the Senate’s agenda, it’s useful that someone is discrediting those who persist in promoting failed ideas. What to do about the $450 trillion (notional) over-the-counter (OTC) derivatives market will be at the top of the agenda. This is about big money. Really big. Industry began lobbying last year to protect the annual $35 billion haul that just five US banks bring in trading derivative contracts.

Reform ideas range from the most sensible recommendation by Professor Lynn Stout (return to a regime where naked credit default swaps are not enforceable), to Senator Blanche Lincoln’s very strong amendment (prohibiting the banks that have access to the Fed’s discount window from trading derivatives), to the necessary but insufficient (mandating all standard derivatives be cleared on exchanges and requiring collateral to be posted), to the weak (the current Senate bill, rife with exceptions).

Remember, this market includes potent credit default swaps, a key ingredient to the crisis. The existence of this $60 trillion (now $45 trillion) notional value market, protecting and connecting counterparties across the system, led to a $180 billion taxpapayer-funded bailout of AIG. And, as we have just learned, CDS played a central role inside the synthetic Abacus 2007-AC1 vehicle, a device that helped Goldman Sachs rob purchasers to pay Paulson.

Yet, in spite of the power of Clinton’s admission, or perhaps because of it, just after the interview with Tapper, Clinton counselor Doug Band swiftly dispatched a disclaimer. In a moment of blatant grade inflation, Band said that Clinton believed Rubin and Summers provided “excellent advice on the economy and the financial system.”

On some level, there is room for admiration. After all, Clinton appeared to own his own mistakes and rejected the Greenspan-Style Blame Game. Retrieving one’s advisors from under the bus and resuscitating their reputations may seem honorable. However, in the same breath, Band placed the blame solely on Greenspan’s “arguments against any regulation of derivatives.”  This is nonsense. Greenspan was not alone on this.

Anyone who has watched the Frontline program on Brooksley Born, read 13 Bankers, or reviewed the 1999 report on the OTC derivatives markets by the President’s Working Group (for which Summers was a signatory) knows that Rubin and Summers gave Clinton very, very bad advice and also crushed any reasonable, dissenting voices. On page 16, the PWG report specifically states: “The sophisticated counterparties that use OTC derivatives simply do not require the same protections under the CEA as those required by retail investors.” It’s now time for Doug Band should issue a new update, in which Bill Clinton states that his original on-air recollection was correct.

Moreover, how could Summers’s championing Gramm-Leach-Bliley be considered “excellent advice”? When Jim Leach remarked upon GLB’s enactment, ”This is a historic day. The landscape for delivery of financial services will now surely shift,” it’s clear he had no idea how right he was.

Back to Clinton’s original confession. What was the fuss about? Let’s take a look. He revealed that concerning advice from Rubin and Summers on derivatives:

“I think they were wrong and I think I was wrong to take it because the argument on derivatives was that these things are expensive and sophisticated and only a handful of investors will buy them and they don’t need any extra protection, and any extra transparency. . .  And the flaw in that argument was that first of all sometimes people with a lot of money make stupid decisions and make it without transparency. . . And secondly, the most important flaw was even if less than 1 percent of the total investment community is involved in derivative exchanges, so much money was involved that if they went bad, they could affect a 100 percent of the investments, and indeed a 100 percent of the citizens in countries.”

With these comments, Clinton, however vaguely, seemed to admit he was wrong for signing the Commodities Futures Modernization Act of 2000. It would have been nice if he explicitly apologized to Brooksley Born for not heeding her truly excellent, prescient advice. Among other things, the CFMA blocked the SEC from regulating credit default swaps as securities. And, it forbade the states from enforcing anti-gambling laws against those who bought credit protection without owning the underlying reference obligation.

Clinton’s words also challenged the conventional wisdom concerning the “sophisticated investor.” Much of our recent deregulation rested on the premise that sophisticated investors can fend for themselves and have the ability to select and monitor “private,” unregulated investment options, and that such investment choices only affect the direct owners, not underlying investors nor market integrity. Based upon the sophisticated investor myth, deregulators argued, successfully, that a wide swath of complex investment options did not need government mandated disclosure or substantive protections, such as restrictions on conflicts of interest. (I’ve covered some of this history in a draft paper, “Enablers,” and in “Recommendations for Reality-Based Reforms of Hedge Funds and Other Private Pools of Capital.”)

Clinton called attention to the imperfect performance of these so-called sophisticates when he noted that “sometimes people with a lot of money make stupid decisions” and they can affect us all. In light of the sad record of sophisticated investors to match up to the complexity and cunning of securities manufacturers and purveyors, it seems untenable to continue to believe that they can fend for themselves. Since and including the collapse of LTCM, the news pages have been filled with stories of institutions and individuals who meet the legal definitions of “sophistication” being duped or swindled.

One cannot forget that two such people who made “stupid decisions” with billions in other people’s money included Rubin and Summers. Notoriously, during Larry Summers’s tenure at Harvard, certain swaps were put in place; then, according to Nina Munks of Vanity Fair, “for reasons no one can seem to explain, the university simply forgot to (or chose not to) cancel its swaps. The result was a $1 billion loss.” (The decision about when to cancel the swaps took place after Summers had left Harvard.) And, then, there was Rubin, who, while a board member at Citibank, earned over $126 million, yet refused to take personal responsibility for the firm’s misuse of derivatives or lax oversight of mortgage underwriting for the loans it purchased.

Finally, the most galling thing about the sophisticated investor presumption is that the same individuals who promote the concept as a means for protecting the shadow banking system hide behind their own pseudo-ignorance, defending themselves for apparently not being able to properly select or monitor investment choices. Let’s hope they cannot have it both ways.

37 responses to “Clinton Confesses: Rubin and Summers Gave Bad (strike that) Excellent Advice on Derivatives

  1. Sophisticated investors would not need protection if they actually had to lose money on their bad investments.

    The problem is not that “people with a lot of money made stupid decisions”. The problem is that taxpayers made them whole despite those stupid decisions.

    Break up the big banks.

  2. Your last sentence is a vain hope
    Wall Street is all about having your cake and eating it too

  3. It is certainly good news to have Clinton admit a problem and a mistake, in however limited a fashion. However, much more is needed including effective action to solve the problem.

    I think opponents of these policies need stronger arguments and more effective organization, drawing together the broad spectrum of Americans and indeed world citizens who are adversely effected by these policies.

    To do this:

    1. The enormous cost of these policies must be demonstrated and emphasized in simple and clear terms. The problem needs to be phrased in terms of people’s pocketbooks, their take home pay, their savings and retirement funds, and the profits of the many small and medium sized businesses suffering from these policies. For example,

    2. The use of terms like “investment”, “growth”, “innovation”, and “research and development” to promote and defend these policies needs to be aggressively confronted and debunked. It needs to be made clear that the trillions of dollars spent on housing in the 00’s and goofy telecom and Internet schemes in the 90’s represents trillions of dollars not spent on critical human needs such as energy production, more efficient energy systems, transportation, and so forth. We see the consequences of this in rising energy prices and a declining standard of living. Yet another bubble, whether involving investments in China or blinking gadgets here at home, would represent further disastrous diversion of trillions of dollars from productive activities.

    3. The framing of the problem as one of “deregulation” versus “regulation”, the “free market” versus the “government” needs to be rebutted and avoided. Quite clearly, these are policies of huge government subsidies to a few giant politically connected banks. The fact that these banks have stockholders and the executives are not civil servants (they are in fact paid far more than civil servants and subject to less strict rules) does not mean they are not intimately connected with the government. It is certainly true the policies have been and continue to be promoted with labels such as “free market”, “deregulation”, “private sector” and so forth, but the reality is otherwise. Many businesses and people outside of a small and shrinking charmed circle are suffering from these policies, but are misled by the “free market” rhetoric. The implicit and explicit claims by the banks to represent the “free market” or “private sector” should be aggressively challenged and debunked; they are almost laughably absurd at this point.

    4. The long standing tactic of blaming the failure of policies labeled as “free market” and similar terms (emphasis on labeled), with the failure then used to promote further policies labeled as “free market” or “deregulation”, on the government should be recognized and aggressively countered. Blaming the government for fiascos that follow policies labeled as “free market” is not unusual. It happened after the Savings and Loan fiasco of the 1980’s, the Internet bubble, the Great Depression, the California electricity market “deregulation” fiasco of 2000, and a number of other cases. Rather, this long history of “crying wolf” should be pointed out simply and clearly, that the purported “free market” policies are frequently selective deregulation combined with increases in government subsidies for politically connected firms, and once again that the aggresive use of labels such as “free market” does not mean the policy actually is “free market”. Certainly not in the case of the current Too Big to Fail policies nor the sharp increase in FSLIC guarantees during the Savings and Loan “deregulation” of the 1980’s.

    Drawing a clear distinction between the present policies fraudulently promoted as “free market” or “deregulation” and actual “free market” or “deregulation” policies will enable opponents of these policies to reach out to private citizens, businesses, and organization across the political spectrum, all of whom are suffering greatly from these policies.



  4. Taking a cynical view, one could wonder why Clinton allowed himself to be so easily misled (he was noted as being quite the policy wonk).

    Was he hoping to inspire the creation of a supra-national government to deal with the problems which any economist worth his salt (i.e. those not being paid to push the ever-open capital markets neo-liberal view) would have inevitable from such regulatory relaxation?

    Or did he simply trust the men who “saved the world?” (for what, one might ask)

  5. Clinton signed the bill in December of 2000 nearly the end of his presidency. I suspect he was not fully informed and was relying on advice. I think he simply did not think it through. Although he did point out that Republicans controlled Congress and they may have been able to pass it over his veto. But, as he pointed out, he should have forced them to override his veto. So was Clinton simply lazy at this point?

  6. So, Clinton plays ball with big big money for eight years in office. Then he makes himself two or three hundred million over the next ten years giving speeches and writing books. Then, after the disaster, he blames his advisors for giving him bad advice.

    No doubt those of us alive in 2026 will be hearing the same things from Obama.

    Of course, what is missing here is that every intelligent observer who was not cashing in on the game at the time understood that the arguments of Greenspan, Rubin, Summers were complete nonsense.

    It is not sensible to expect a man to recognize the truth when his payoff depends upon not recognizing it.

  7. “Taking a cynical view, one could wonder why Clinton allowed himself to be so easily misled (he was noted as being quite the policy wonk).”

    The cynic in me always thought that this was his buy-in to the Carlyle Group.

  8. Fed Statement: Music To My Ears:

    According to WSJ, in a stunning statement of clarity, the president of the Philadelphia Fed said he supports taking away or limiting Fed powers that allow “lending to corporations, individuals and partnerships under ‘unusual and exigent circumstances.’”

    Plosser recognizes that the Fed is part of the problem. The Fed is the enabler of bailouts and bank subsidies. Reduce the Fed’s powers and you ratchet down the moral hazard in the current financial system.

  9. Re: @ Fred…..sorry, but of all the twelve(12) Fed Banks…the NY Fed controls 90% +/+ of the Central Banks (say) sway. Actually the other eleven (11) are a ruse,too show a more fair,and balanced Democratic Federal Banking System…Not!

  10. One other thing: Clinton’s claim in the interview that if Arthur Levitt had been in charge of the SEC there would have been no problem should produce a smirk. Levitt’s a nice and interesting fellow, but he was one of the people who, along with Rubin and Greenspan, deep sixed Brooksley Born’s recommendation that CFTC regulate derivatives.

  11. Hank,
    That’s a valid point, but I would say in semi-defense of Arthur Levitt, he has also been much more contrite than Rubin, Greenspan, or Summers in recognizing his mistake and sorrow on the matter (see the Frontline special).

  12. Point taken. I did hear him say clearly in a Tom Keene interview that he thinks it was a mistake and that Brooksley Born was right.

  13. Clinton’s presidency was the great Kumbaya moment of economists and liberals – when the economic elite had demonstrated to their satisfaction that very lightly regulated markets and a “networked” government could run the country without the harsh hand of strong regulation. Born had no chance.

    The hand of regulation doth offend Summers, so he cut it off.

  14. I don’t need or want mea culpas. I wish them all well; now please leave. What is needed is recognition of their mistakes and repudiation of their philosophy.

  15. Re: @ art….all I want is “Sharia Law”….?

  16. Brad Thrasher

    Wall Street was raking in $35 billion annually brokering CDS and somehow they managed to lose money that required the most massive infusion of corporate welfare ever?

    Well good freakin’ luck regulating stupid.

  17. Guest post wrote:

    “Yet, in spite of the power of Clinton’s admission, or perhaps because of it, just after the interview with Tapper, Clinton counselor Doug Band swiftly dispatched a disclaimer. In a moment of blatant grade inflation, Band said that Clinton believed Rubin and Summers provided “excellent advice on the economy and the financial system.”

    Double Speak

    “His mind slid away into the labyrinthine world of doublethink. To know and not to know, to be conscious of complete truthfulness while telling carefully constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them…”

  18. Rubin: I Actually Supported Regulating Derivatives

    04-20-10 05:35 PM – Huff Post – excerpt

    “Clinton-era Treasury Secretary Robert Rubin, who will go down in history as one of the men who killed derivatives regulation, insisted today that he has long thought that derivatives should, in fact, be regulated.”

    “To know and not to know, to be conscious of complete truthfulness while telling carefully constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them, to use logic against logic, to repudiate morality while laying claim to it, to believe that democracy was impossible and that the Party was the guardian of democracy, to forget, whatever it was necessary to forget, then to draw it back into memory again at the moment when it was needed…”

  19. An excellent post Ms. Taub. Thanks!

  20. “Among other things, the CFMA blocked the SEC from regulating credit default swaps as securities. And, it forbade the states from enforcing anti-gambling laws against those who bought credit protection without owning the underlying reference obligation.”

    Any chance these two prohibitions can be rescinded? Let the states press on this and leave it up to the courts to decide if a naked cds is or isn’t gambling.

  21. Re: @ Anonymous…..America has always prided itself as a country of laws – unfortunately the commoners need not apply – thus,..incubates atrophy fomenting anarchy!

  22. Another outstanding post by Miss Taub.

    I am hoping that James and Simon could get some kind of COMMITMENT from Miss Taub to become a part of this site in some form or fashion. I mean like as some kind of permanent fixture here at “Baselinescenario”. I’m guessing before long she will be committed (if she isn’t already) to writing for her University’s magazine or maybe some magazine like The Atlantic or Forbes magazine. I know James and Simon couldn’t give her a salary for her writing, but this site could get her some public recognition.

    Maybe Miss Taub could write for this and some other publication simultaneously??? Anyway, it’s just a thought from the peanut gallery here.

  23. duped in Texas

    I have to hand it to Jennifer. She’s one I’ll keep an eye on from here on out. Good job.

  24. What is truly mind boggling given the destruction and damage left in the wake of the banking crisis is that supposedly rational people who made up the boards of directors as well as share holders of these banks were willing to pay people like Rubin hundreds of millions in salaries, bonuses and stock options to ultimately destroy their companies as well as the worlds financial system.

    Now a former President comes forward just in time to throw his former Treasury Secretary along with Larry Summers under the bus in order to save his own standing through revisionist history. Sure bill. The devil made you do it.

    What has been happening over last few weeks is no less than watching a group of rats sensing that the ship of state is sinking fast, looking for the nearest exit and will to stomp on any thing or anyone in order to get to the head of the line.

    In listening to William Blacks testimony on the Lehman Bankruptcy – Transcript and Video at, it was if a blast of fresh air was sweeping through the halls of Congress and one that has been overdue for decades. If President Obama is looking for an honest reformer, might I suggest Professor Black for either the position of Treasury Secretary or chairman of the Federal reserve if its still around after the dust settles.

    If Mr. Clinton is to be praised for coming forward even ten years after the fact, let history show that those we hold in the highest regard are just as human and prone to fallibility as the rest of us. Thanks Bill. Better late than never I guess.

  25. Brad Thrasher

    Barbara, are you subscribing to the theory that the Fed is in fact the “bad bank,” or was that just a throw away line in your post?

  26. The FED is the ultimate, even now, bad bank. It is an enabler of the gambling addition at the TBTF’s. I was so sorry to see Bernanke kept on. On a personal level, I like Ben. As a leader of the American banking universe, he is not even close to tough enough. He’s proven to be (a) incompetant, (b) complicit, and (c) disinterested in the average citizen. He is so typical of an ivory tower regulator.

  27. Its sad, because I’ve done so much research on this very subject for years now. I have been trying for so long…fabricating,and making up excuses to vindicate Bill Clinton to no avail. Both parties voted in the congress with almost an equal amount of Dem’s,and Gop’s voting for,and against. Just plain sad. They all enter politics as middle-class,and leave as multi-multi millionaires,…pathetic – a true greek tregedy about to unfold. Thanks…”Keep up the Good Digging for America’s Sake”

  28. Clinton also admitted that nothing in NAFTA turned up right in Haiti , with rice farms driven off their land and ending up in the cities to get crushed by the earthquake. Well if NAFTA was a bust there it was also a bad idea for Mexicans who fled north for the same farming problems and the U.S. ers whose jobs went south and the west to China.

  29. I, for one, believe that the problem with today’s sophisticated investor is the they have been intellectually captured by those in big finance. And, at this point, I further believe that that capture may have ended for most. As the Goldman action moves forward and more of this kind of circumstance is uncovered, the level of “sophistication” may rise to the point that none of the TBTF’s have investor trust, and they may collapse of their own weight. They are presently surviving quite well on the idea that business as usual is still producting results, but at one observer at CNBC said the other day, remember Drexel -one day successful and then when the dishonesty/fraud occurred, they were out of business.

  30. Dave Samples

    I view stuff like G-L,CMFA,NAFTA politically the trends of the time.

    I can’t blame Clinton for supporting them or there(obvious failure) failure. I listened to Ross Perot’s “giant sucking sound” and progressive bloc of democrats worrief about financial destruction if the G-L,CMFA was passed. I didn’t care, because times were good and things were a boooooooming!

    But in the end, does it really matter? America time at the top may be over and that is just history. We can fade away like Britan or burn out like Germany but the same result happens.

  31. Dave Samples

    their failure bleh, time for bed.

  32. Another thing that Clinton was VERY, VERY wrong about was appointing Greenspan. Not once, but twice. I have still not understood from any of the analysis why Clinton would do such a stupid thing.

  33. Another excellent post by Jennifer Taub. Thank you!

  34. I agree, this is an excellent post. Larry Summers, IIRC, is set to leave the administration at years end. Perhaps a woman who CAN do math will replace him, say..Brooksley Born? Bob Rubin should just go read for the next 5 years and brush up on what a CDO is, find out how ARS and the municipal bond markets became a life-blood sucking blight for Main Street USA. If either do not see the disease, then how can they possibly advise and prescribe the correct remedies to heal the economy?

    Unless and until the architects of this very fine mess in the making for over 20 years are rightfully excluded from powerful/influential positions, the remedies of correcting overly enabled cronyism governance (both in the political realm and business realm) will be even more difficult.

  35. I’d like to submit a chronological timeline where all readers can read between the (quite easily mind you) lines,and follow the flow of money (you can frame ,and rewrite history to your wanting,but you cannot rewrite the actual historical event which is locked in a time vault vacuum)as I always espouse – “Follow the Money”! Thanks,and please “Keep on the Good Digging for America’s Sake”

  36. A bit of perspective: during the ’80’s and 90’s, AIG had a similar reputation in the insurance world as Goldman Sachs does now in banking. Savvy, innovative, growth-obsessed, sharp-elbowed. A cliff-walker with the arrogance that comes from being sure-footed – so far. Completely devoid of humility. It’s a bad combination. I know. I worked for them, developed products for them, and then formed my own company and beat them at their own game.

  37. Re: @ tom…..I’m glad you saw the light. They are the scum of the earth,and when I say “SCUM” (acronyms need not apply here),I mean they’re made up of the “Blood and Spit” of Satan himself!!!