Larry Summers deserves the same fate as A-Rod: Both merit banishment from the fields they sullied by inflating the numbers of their trades and making it impossible to assess the achievements and risks of their eras. Yet A-Rod is now a disgraced cheater and Summers is widely discussed as the possible next chairman of the Federal Reserve, a fact that attests to the odd workings of American justice -- a morality play that sometimes seems reserved for the discernible confines of sport.
In baseball, they just threw the book at some of the worst-offenders of the steroids era, not least Alex Rodriguez, whose chemical-laced pursuit of the all-time home run record has given way to a quest for another title: legal client with most hours billed. In high finance, Summers, champion of a different kind of steroid -- the balance sheet stimulant known as derivatives -- is among President Barack Obama's top candidates to take over the most powerful central bank on earth.
The takeaway from this story is disturbing. Doctor the baseball record books and face banishment and hate. Doctor the financial records in one of the most expensive investment bubbles of all time and get the keys to the machinery of American monetary policy.
In baseball, where the sanctity of statistics is almost sacred, years of numbers got juiced by testosterone, human growth hormone and other artificial power-boosters. That makes it impossible to rightfully compare legends of the game like Jimmie Foxx (534 career home runs in the first half of the last century) to steroid-reliant phantom greats like Rafael Palmeiro (569 home runs in more recent times).
In finance -- an area of life in which the soundness of the numbers ought to matter more than any other -- the balance sheets got similarly juiced by derivatives until the chemical effects wore off, housing prices collapsed and the economy descended into the ditch from which it has yet to escape.
Yes, the housing bubble would have happened derivative bubble or not. Cheap money sloshed into the United States from around the globe -- not least, from China -- keeping interest rates exceedingly low. That turned musty patches of Florida swamp into subdivisions worth vast sums of money in a reckless frenzy that was bound to end badly.
But the derivatives bonanza enabled the bubble to swell to exceedingly dangerous proportions. Those banks writing mortgages to anyone with a signature and bundling the loans into securities could argue that much of their dubious paper was effectively insured by exotic derivatives like credit default swaps. They could buy into this fable and peddle it to the bewildered suckers purchasing their toxic securities, including pension funds. They could do this, because no regulator was tasked with checking to ensure that the derivatives supposedly standing in as insurance were actually backed by real dollars set aside lest losses emerge.
And who was responsible for making sure no regulator did such a job? Who gets the blame for the global financial panic that ensued when housing prices fell, mortgages became liabilities, and the insurance claims washing up via derivatives contracts vastly outweighed the money stashed away in reserve? Among others, Larry Summers, now a monument to the dangers of the cult of deregulation.
Back in the late-1990s, Summers, then treasury secretary in the Clinton administration, joined with Fed Chairman Alan Greenspan to demean and silence Brooksley Born, who chaired the Commodity Futures Trading Commission. Born proposed that her agency study the possibility of keeping a greater eye on derivatives, an action that prompted Summers to accuse her of putting global finance at risk. (This bit of history has recently come under furious revisionism from access journalists willing to let Wall Street-financed interests use their columns to spew disinformation from the comfort of anonymity.)
In baseball, A-Rod has drawn punishment that will probably end his career with the taint of shame from which he will never recover. Decades from now, students of the game will look back at these times and see a period effectively expunged from the record books and buried in asterisks.
Back in the steroid era, the market paid handsomely for home runs and the players did what they needed to deliver, securing contracts running to nine-figures. And now baseball has said that's not okay -- far too late, and with a record of willful ignorance to account for, but with consequences nonetheless. (Delicious irony: That last A-Roid contract, the 10-year, $275 million extension the Yankees gave him in 2007, was effectively brokered by Goldman Sachs.)
Back in the housing boom, the market paid even more handsomely for seemingly solid bonds backed by mortgages, and the banks did what they had to do to bring them into creation. They scattered home equity lines of credit like grocery coupons, doctored appraisals, and bought off the credit rating agencies to apply AAA stamps. They persuaded the marketplace that all the risks were hedged by derivative contracts.
The bank executives who oversaw this orgy cashed their stock options and loaded up on beach houses, yachts and rare sports cars. Even as the financial system teetered toward collapse and the economy sank into the worst downturn since the Great Depression, they hung onto their hoard. No one of consequence surrendered real wealth, let alone went to jail, though their shenanigans cost tens of millions of people their homes and livelihoods.
And now one of the prime figures in facilitating the fantasy that fueled this destructive boom may yet be given the biggest job of his life: Fed chairman.
If only important matters operated more like baseball.
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