By James Kwak
First Bill Clinton said he got bad advice from Robert Rubin on derivatives. Then a Clinton adviser issued a statement essentially taking it back and blaming Alan Greenspan. (Jennifer Taub discussed some of the substantive issues on this blog.) Dan Froomkin asked Rubin, who said, “I thought we should regulate derivatives; I thought so when I was at Goldman Sachs and I thought so afterwards.” But Froomkin points out that Rubin was part of the team that suppressed Brooksley Born’s attempt to regulate derivatives back in 1998.
Brad DeLong defends Rubin, although it seems like a somewhat lukewarm defense. DeLong’s point #3 is: “Brooksley Born and her organization are the wrong people to regulate derivatives.” (That’s a statement of Rubin”s thinking at the time.) Norman Carleton, a Treasury official at the time, also defends Rubin with two posts on his blog that spell out DeLong’s point #3. In the first post, he says that Rubin favored regulation but was concerned with giving the CFTC jurisdiction over the OTC derivatives market. In the second, he explains the issue (legal certainty of existing contracts, something I don’t really want to get into here, so go read the argument there) and concludes with this logically plausible but somewhat bizarre argument:
“Rubin had proposed to Born that, instead of the CFTC asking questions about the need for regulation of the OTC derivatives market, the President’s Working Group on Financial Markets issue the questions. Born point blank refused this suggestion, thus pushing Rubin into Greenspan’s camp, much to the relief of ISDA and other Wall Street groups lobbying on this issue. They knew they had a problem with Rubin.
“Brooksley Born was so sure she was right in her legal position that she could not compromise in face of the practical and political realities. While, not to make too fine a point about it, she has been proven right and Greenspan wrong about the dangers of the OTC derivatives market, Greenspan was the better politician. History might have been different if Born had agreed to Rubin’s suggestion.”
I say “bizarre” because Carleton’s implication, not to make too fine a point about it, is that the failure to regulate OTC derivatives is Born’s fault (the title of the post is “The Importance of Political Competence”), because if she had agreed with Rubin’s suggestion, then Greenspan would have been in the minority and derivatives would have been regulated. The picture you get in your mind is Greenspan and Born on the two sides and Rubin in the middle trying to broker a compromise with Born. (Although I wonder why Rubin, one of the most powerful figures in the administration, felt like he had to side with Greenspan simply because Born wouldn’t agree with him.)
So I think the fact of the matter is that we don’t know what Rubin thought about derivatives regulation in the mid-1990s, because somehow he managed to avoid making public statements about it at the time, or at least public statements that anyone can find using Google. (As opposed to Greenspan, all of whose speeches are nicely archived at federalreserve.gov.) It is true that the President’s Working Group report on the topic didn’t come out until 1999, and the Commodity Futures Modernization Act wasn’t passed until 2000, both after Rubin had left the government.
Now, Carleton was there at the time, and he is backing Rubin’s claim that he favored derivatives regulation. So maybe he did. But that still leaves Froomkin’s key issue unaddressed: “Precisely what Rubin told Clinton about the overall merits of regulating derivatives remains a mystery, and there is no evidence that he ever actively supported their regulation when it mattered” (emphasis added). If Rubin did favor regulating OTC derivatives, why didn’t he do anything about it? That, to me, is the real question, not what Rubin may have thought in the privacy of his own mind (or the privacy of the Oval Office).
The only answer to this to emerge in this “debate” is DeLong’s point #5: “The Federal Reserve has adequate powers to stem financial crisis and keep it from becoming a threat to the economy, and is also not worried about derivatives.” (Again, that’s a statement of Rubin’s beliefs at the time.) Maybe Rubin’s position was that derivatives should be regulated, but that the Federal Reserve was already regulating them sufficiently. It is plausible that one might have held such a belief, although it has been clearly proven wrong in the interim.