According to most commentators, the president's press conference went a long way towards taking the spotlight off the roiling anger over AIG, bonuses, and Wall Street abuses -- and putting it back where the president wants it: on the imperative need to pass his budget.
But the best laid plans of our remarkable president may be laid to waste by a bank rescue plan that is the product of exhausted ideas put together by men far too beholden to Wall Street.
Even if the president desperately wants the spotlight to move on from the bank rescue, we should not allow it to. So today let me turn the high beam on one of the main architects of the plan -- less in the news than Tim Geithner, but no less important -- Larry Summers.
To understand why a man as brilliant and accomplished as Summers can be so wrong about what to do with the banks and Wall Street, it would be useful to turn to The Innovator's Dilemma by Harvard Business School professor Clayton Christensen. The book explains how even very successful companies, with very capable personnel, often fail because they tend to stick to the strategies that made them successful in the first place, leaving themselves vulnerable to changing conditions and new realities. So you can have brilliant managers who miss what's needed for success in the future because they are too tied to the past.
This describes Summers to a T.
He is one of the top economic minds of his generation, a tenured professor at Harvard by the time he was 28, with plenty of real word experience -- ranging from heading the Treasury to heading a major university. But his core beliefs and assumptions helped lay the groundwork for the current crisis.
As Treasury Secretary under Clinton, Summers played an important role in convincing Congress in 1999 to pass the Gramm-Leach-Bliley Act, which repealed key portions of the Glass-Steagall Act and allowed commercial banks to get into the mortgage-backed securities and collateralized debt obligations game. The measure also created an oversight disaster, with supervision of banking conglomerates split among a host of different government agencies -- agencies that often failed to let each other know what they were doing and what they were uncovering.
At the signing of the bill, Summers hailed it as "a major step forward to the 21st Century."
Summers also backed Phil Gramm's other financial time bomb, the Commodity Futures Modernization Act, which allowed financial derivatives to be traded without any oversight or regulation. So it was on his watch that the credit-default swaps warhead that has blown up our economy was launched.
Indeed, during a 1998 Senate hearing, Summers testified against the regulation of the derivatives market on the grounds that we could trust Wall Street. "The parties to these kinds of contract," he said, "are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies and most of which are already subject to basic safety and soundness regulation under existing banking and securities laws."
It would be hard to make assumptions that turned out to be more wrong than Summers' were.
For a more accurate portrayal of what Summers described as "largely sophisticated financial institutions," check out Matt Taibbi's devastating depiction of AIG's upper management as utterly clueless about the "selective accounting" scam being run by credit-default swap pimp Joseph Cassano, head of AIG's 400-person Financial Products unit (Taibbi dubs Cassano "the Patient Zero of the global economic meltdown"):
For six months before its meltdown, according to insiders, the company had been searching for a full-time chief financial officer and a chief risk-assessment officer, but never got around to hiring either. That meant that the 18th-largest company in the world had no one checking to make sure its balance sheet was safe and no one keeping track of how much cash and assets the firm had on hand. The situation was so bad that when outside consultants were called in a few weeks before the bailout, senior executives were unable to answer even the most basic questions about their company -- like, for instance, how much exposure the firm had to the residential-mortgage market.
Taibbi describes Cassano getting on a conference call with investors in 2007 and, as his credit-default swap portfolio was racking up $352 million in losses, announcing: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions."
These are the kinds of "parties" Summers was so confident could regulate themselves and be "eminently capable of protecting themselves from fraud and counterparty insolvencies."
Of course, not just the Financial Products unit at AIG, but also the toxic balance sheets at megabank after megabank tell a very different story.
In a speech at the Kennedy School of Government in September 2000, Summers declared: "The traditional industrial economy was a Newtonian system of opposing forces, checks and balances... While, in contrast, the right metaphors for the new economy are more Darwinian, with the fittest surviving."
He forgot to add the part about the fittest surviving by being bailed out by the rest of us.
Real economic Darwinism -- or Randian capitalism -- would mean letting old institutions that have failed die. Keeping them on life support is not just catastrophically burdensome for taxpayers, but also prevents new institutions from flowering.
In a fawning new profile of Summers in The New Republic, we discover that Summers' tired thinking extends to the way he views being tired.
Noam Scheiber reports that "Summers functions on exceedingly little sleep.... To power through the day, Summers relies on a punishing Diet Coke regimen. The combination of fatigue and extreme caffeine intake can produce the occasional verbal and physical tic: Summers is a chronic foot-tapper and sometimes turns over words and clauses like an engine that won't start."
The notion that driving yourself to the point of exhaustion and chronic foot-tapping is a sign of commitment and achievement is as obsolete as the belief that pumping more money into the same institutions that created the crisis will solve it.
Summers' old boss, Bill Clinton, once said, "Every important mistake I've made in my life, I've made because I was too tired."
Many Wall Street high-flyers could echo this -- if they had any self-awareness. Instead, they subscribe to our culture's veneration of exhaustion. Taibbi describes how Wall Streeters, when challenged, "talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40."
The country would be better off if Wall Street execs and, more importantly, Summers and Geithner -- who, we are admiringly told, works 15 hours a day -- knocked off early and came back to work the next day refreshed... and with some fresh ideas.
Tune in to watch me co-host CNBC's Squawk Box on March 31st, 7-9am ET
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