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.
"I thought we should regulate derivatives; I thought so when I was at Goldman Sachs and I thought so afterwards," he told HuffPost during a break at an event for the Hamilton Project, a think tank he founded to support Wall-Street-friendly Democrats. Rubin was chairman at Goldman Sachs before joining the Clinton administration in 1993; after he left, he went on to head Citigroup, which he nearly bankrupted with his excessive risk-taking.
The financial instruments known as derivatives have become a hot-button issue due to their central role in the financial crisis. Derivatives allow investors to make wild, nontransparent bets without any capital requirements. Combine them with the popping of the housing bubble and you've got a financial meltdown of massive proportions.
Democrats are trying to make most derivative contracts transparent and public, and President Obama has said he'll veto any financial reform bill that doesn't do so.
Rubin can in fact point to a long paper trail suggesting that he supported regulating derivatives -- at least in theory.
But in practice, in 1998, Rubin was one of several top Clinton administration officials who quashed an attempt by Brooksley Born, then head of the Commodity Futures Trading Commission, to regulate them.
Here, for instance, is a statement from Rubin, then-Fed Chairman Alan Greenspan, and then-SEC Chairman Arthur Levitt publicly trashing the idea. "We have grave concerns about this action and its possible consequences," they wrote.
The official line was that Treasury Department lawyers believed that if Born's commission began regulating derivatives, investors in existing contracts could somehow refuse to honor them -- even though Born's proposal exempted existing contracts.
Summers famously called Born and told her: "I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II." Summers, of course, is now Obama's top economic adviser.
Born's proposal went nowhere and she left office the next year.
Rubin's position on derivatives was thrust back into the news on Sunday, when former President Clinton told ABC News's Jake Tapper that Rubin and his successor at Treasury, Larry Summers, gave him bad advice on regulating derivatives; that they were wrong, and that he was wrong to listen to them:
Now, on derivatives, yeah 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. The money they're putting up guarantees them 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, not investors, and I was wrong about that. I've said that all along. Now, I think if I had tried to regulate them because the Republicans were the majority in the Congress, they would have stopped it. But I wish I should have been caught trying. I mean, that was a mistake I made.
But Tapper later updated his blog post on the matter with a statement from Clinton counselor Doug Band that "during the interview, reflecting on a derivatives debate that occurred twelve years ago, President Clinton inadvertently conflated an analysis he received on a specific derivatives proposal with then-Federal Reserve Chairman Alan Greenspan's arguments against any regulation of derivatives."
And Rubin, in a statement delivered by his publicist this afternoon, indicated that his opposition to Born's proposal did not reflect his overall position. "My concern about the 1998 concept paper was based on legal advice I received that it could create significant legal uncertainty," he told HuffPost. More generally, Rubin repeated, "As far back as when I was at Goldman Sachs, I have been concerned about the potential that derivatives could create systemic risk."
Nevertheless, 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.
In his 2003 memoir, "In an Uncertain World",(co-written by Washington Post Co. executive Jacob Weisberg) Rubin had this to say on the subject:
"I do think... that derivatives, with leverage limits that vary from little to none at all, should be subject to comprehensive and higher margin requirements. But that will almost surely not happen, absent a crisis.
While economically useful under most circumstances for more precise risk management, derivatives can pose risks when market conditions become very volatile. That occurs because of various technical factors that can cause derivatives users to suddenly need to buy or sell in the underlying markets to maintain appropriate hedge positions. With the truly vast increase in the amount of derivatives outstanding, it is at least conceivable that the effect on already disrupted markets could be vast."
Quite prescient, really. And Rubin also noted that Summers later "characterized my concerns about derivatives as a preference for playing tennis with wooden racquets -- as opposed to the more powerful graphite and titanium ones used today. Perhaps, but I would still reduce the leverage allowed on derivatives substantially."
Rubin and Born found themselves face to face on April 8, when Rubin testified before the Financial Crisis Inquiry Commission. Born is on that commission.
Born: Do you now think that there is a need for any regulation of the OTC derivatives market?
Rubin: I think that there should be, and I thought this when I was at Goldman Sachs. I think that there should be regulation of over-the-counter derivatives, but I also think that the regulation of listed derivatives should be enhanced, particularly through increased capital and margin requirements....
Born: You've said in the past that there was no political will to regulate over-the-counter derivatives. In your view, was the lack of political will related to pressure by the financial services industry?
Rubin: I think there were very strongly held views in the financial services industry in opposition to regulation, and I think that they were not overcomeable. That's probably not a word, overcomeable, but not surmountable at that point....
Born: Do you think that the lack of political will may also have been affected by a pervasive view that the market was appropriately self-regulatory, and that there wasn't a need for regulation?
Rubin: I don't -- that's a level of sophistication -- it's a terrifically interesting and important question, but I don't think when you got into the political arena that really was what this was about. I think this was more about the interests of those who were involved and their ability to effect those interests. Effect, e-f-f, effect those interests. Rather than the much more sophisticated question that you're raising.