‘Larry Summers for Fed Chair’ proponents are working hard to reverse his generally poor reputation and seem to have gained some ground. They’ve tempted even Fed skeptics like me with reports that Summers doesn’t believe much in quantitative easing. But his supporters are also making claims that don’t stand up to the facts.
For example, some Summers fans have tried to rewrite history by claiming that his pre-2008 opposition to derivatives regulation was nothing more than an objection to CFTC Chair Brooksley Born’s so-called “crude” proposals. In fact, Summers fought for legislation banning virtually all regulation for over-the-counter derivatives, not just the type favored by Born.
What’s more, he continued to defend pre-crisis banking practices long after Born’s 1999 resignation, as shown by his harsh dismissal of Raghuram Rajan’s famous 2005 warning of rising financial sector risks. Summers even led the charge to discredit Rajan.
My reason for writing about Summers once again, though, isn’t to discuss specific policies but to revisit the character issues that seem to follow him from job to job. And to explain why they matter.
Two weeks ago, I shared an account of White House officials being driven to wits’ end by Summers’ obsession with status symbols, such as personal chauffeurs and important-looking seating locations at presidential speeches. In another post a few months ago, I referred to his mantra that you should never admit mistakes.
Call me old-fashioned, but I think we should be wary of power-hungry egotists whose personal philosophy is to obscure the truth. And there’s one more story – told in Ron Suskind’s Confidence Men and then again in former FDIC Chair Sheila Bair’s Bull by the Horns – that helps to explain why.
Both authors wrote extensively about the Obama administration’s what-to-do-about-the-big-banks discussions in 2009. For much of the first half of that year, policymakers debated using the FDIC’s resolution process or other methods to shift at least some of the burden of the financial crisis onto the right parties. By that, I mean bank shareholders, creditors and executives, not taxpayers. Citibank was the test case, since it was horribly managed and surviving solely on a succession of Treasury Department bailouts.
How the banks preserved our toxic status quo
Unbeknownst to most of us in 2009, the battle lines in the debate were weighted strongly against Citi.
Treasury Secretary Tim Geithner was the bank’s guardian angel, advocating relentlessly for its interests and fighting to block proposals its management didn’t like.
On the other side: Summers, Bair, President Obama, former Fed Chair Paul Volcker (Obama’s top independent economic advisor) and CEA Chair Christine Romer all wanted Citi to pay a steep price for its mismanagement. All five of these heavyweight policymakers wanted to restructure Citi as a prelude to a tougher approach to all of our mega-banks. And Bair was suggesting a prepackaged bankruptcy, in which the bank would continue to operate as a smaller entity after haircutting creditors, stripping bad assets, tossing out management and wiping out shareholders.
In other words, there were five top policymakers who wanted to strike a blow on behalf of taxpayers and just one – Geithner – defending Citi’s management. (I’m not counting Citi’s hopelessly captured regulators at the Fed and the Treasury Department’s Office of the Comptroller of the Currency, since these organizations weren’t part of Obama’s inner circle.)
Against these seemingly insurmountable odds, how the heck did Geithner win?
My reading of Confidence Men suggests four reasons (the fourth repeated in Bull by the Horns):
- Rather than leading from the Oval Office, the president relied on his lieutenants to set direction. He never actively pushed them to restructure Citi even after explicitly stating that he wanted to see this happen.
- Geithner convinced the others that he was putting together a restructuring plan (which would require Bair’s help), but never actually did so.
- Volcker had almost no influence because he spoke mostly with Obama and his role was informal.
- The FDIC was remarkably kept in the dark. Geithner, who had no interest in the regulatory process and knew little about bank resolutions, was in the driver’s seat as Treasury Secretary. Neither he nor Summers told Bair, our foremost expert on these matters, that Obama favored a restructuring. Summers’ decision to withhold information was especially damaging, since he and Bair stood on the same side of the debate. But this is apparently how Summers rolls, always working to elevate his own role while marginalizing other players.
Here’s an excerpt from Confidence Men describing Summers’ underhanded approach:
Bair got a call from Summers’s office … Summers was gracious and eager, particularly interested in discussing the basics of how a prepackaged bankruptcy might work on a bank like Citi. Bair ran through it.
Summers was circumspect. He didn’t tell her that he and Romer were now, for the most part, in Bair’s camp and that they’d be in a “showdown” Sunday with Geithner about the future of big banks like Citi. He asked how deep the hole was – the hole that some funds, from somewhere, would have to fill if the bank were shut down and reopened. She said it was about $600 billion tops, and explained the “intrinsic value” calculus.
…Without context, though, Bair couldn’t really discuss how these cost estimates could shape options and policy. She just considered it an informational call and told Summers to call anytime.
And this is Bair’s direct account of the same conversation (from her book):
It was a confusing conversation because his comments seemed completely opposite from what I was getting from Tim. Again, only later would I learn (by reading Ron Suskind’s book) that Summers had been pushing to nationalize Citi and break it up. If only he had let me know, we could have worked with the White House to impose some accountability on the institution. It would have completely changed the political dynamic and the growing anger and resentment against the government’s seemingly endless willingness to throw money at big institutions. The public justifiably wanted retribution. Citi should have been led to the pillory.
In other words, Summers refused to enlist Bair’s support even as he needed her answers to basic questions. And he kept the reasons for his questions secret. Kind of like engaging your doctor in general discussion without revealing your symptoms or requesting an examination.
Ultimately, Geithner exploited Summers’ poor teamwork to shield the big banks from any serious challenges to their government-sponsored chokehold on the economy. Geithner’s success was one of our biggest failures. And the story behind it shows that Summers’ character flaws matter. They’re not harmless personality quirks, as his supporters would like you to believe. On the contrary, the man’s humongous ego can stand in the way of policies that need to be enacted. In my opinion, this is inexcusable. It should rightly eliminate him from the Fed Chair discussion, and before you even consider his poor track record as a public figure.
On a related matter…
Congratulations are in order to India Prime Minister Manmohan Singh. In my earlier post on the Fed succession, I asked the following:
Why not appoint someone with a track record of getting things right, you ask? Someone like a Rajan – with a proven ability to think critically about economic theory, while foreseeing developments that more famous economists only recognize in hindsight?
Last week, Singh chose Rajan to be the next governor of the Reserve Bank of India, to replace the outgoing chief, Duvvuri Subbarao, on September 4.
In a world of fairness and accountability, there would have been a bidding war for Rajan’s services. As it is, India’s central bank will get a guy who saw the global financial crisis before the fact, whereas Obama’s shortlist consists only of folks who’ve been blinded by the spectacularly flawed models of mainstream economic theory.