Never Say You're Sorry
Odds are you've never heard of Gary Gensler, the man President Obama has nominated to run the Commodity Futures Trading Commission (CFTC). But it's slightly more likely you've heard of Brooksley Born, the woman who held that position under Clinton in the late 1990s. Amid the cascading financial crisis and cries of "Nobody could have predicted!" from many of those who were instrumental in bringing it about, Born has emerged as one of the rare voices that warned of the perils ahead. In 1997 she began to sound the alarm about the growth in the derivatives market, which, unlike traditional futures, were not traded on a regulated exchange. Born argued that derivatives should be brought under regulatory supervision, or they "could pose potentially serious dangers to our economy."
She proved prescient. These instruments, specifically credit default swaps, increased risk throughout the global financial system, eventually bringing down AIG, the world's largest insurance conglomerate. George Soros, economist Alan Blinder and many others now name the failure to regulate credit default swaps as one of the prime causes of the collapse.
But in 1998 powerful voices close to the Clinton administration--Robert Rubin, Larry Summers and Alan Greenspan--argued that the derivatives market was just fine. They had allies among the Wall Street banks who were making money hand over fist in the unregulated, over-the-counter market.
Then there was Phil Gramm, the mastermind behind the 2000 Commodity Futures Modernization Act, which definitively kept derivatives unregulated. Attached to a massive omnibus bill during the lame-duck Congress in December 2000, while the nation's attention was captivated by Bush v. Gore, the CFMA passed overwhelmingly in both houses and was signed into law by President Clinton. But Gramm wasn't sneaking anything past the White House, which had hammered out the details in lengthy negotiations with the senator. And one of the men charged with shepherding the bill through Congress was none other than the Treasury's under secretary for domestic finance, Gary Gensler.
Gensler was well qualified to dive into the arcana, having spent eighteen years at Goldman Sachs before taking a job at Treasury. When it came to derivatives, he shared the prevailing deregulatory ethos. (He declined to speak to me on the record for this column.) The New York Times editorial board found Obama's nomination of Gensler "troubling." Iowa Senator Tom Harkin, who chairs the Agriculture Committee, which has jurisdiction over Gensler's nomination, released a statement saying that he is "concerned about the deregulatory orientation in this nominee's past." And fellow committee member Bernie Sanders issued this terse statement: "It is imperative that we not continue the same mistaken policies that got us into this mess in the first place. I have real concerns."
In Gensler's defense, he did do regulatory penance. He worked for Senator Paul Sarbanes helping to craft Sarbanes-Oxley, and he wrote a book criticizing the mutual fund industry for the ways it rips off investors. But the fact remains: on the biggest issue of commodity futures regulation in the past decade, he was a star player on the team that got it exactly wrong.
It's not just Gensler, of course: many on the Obama economic team, most notably Summers, director of the National Economic Council, facilitated the creation of the bubble economy and the deregulatory mayhem that brought us to this moment. Indeed, Summers, who has consolidated his power in the White House to the point that the press refers to him as Obama's "chief economic adviser," was a proponent of policies--from the lifting of capital controls in developing economies to the repeal of Glass-Steagall--that proved spectacularly misguided.
So one might ask: why do these people keep getting plum jobs? Two reasons. The first is a simple rule about Washington, which is that membership in the establishment comes with lifetime tenure. Working inside the Beltway means never having to say you're sorry. If Henry Kissinger, international man of mystery cum war criminal, can flit around Washington and be fondly invoked in presidential debates as a sage of foreign relations--well then, everyone else, no matter what they've done, can as well.
The second reason might be called the Gus Frerotte Principle. Frerotte is a 37-year-old NFL quarterback who played most recently for the Minnesota Vikings. For most of his career he's been a middling QB. Yet he's managed to last fifteen years in the NFL, playing for seven different teams. This year he landed the starting job with the Vikings. Frerotte's not alone. There's an entire class of journeymen NFL quarterbacks who despite never quite excelling manage to hang around the league for years getting job after job on team after team. Though this often causes fans to throw up their hands in frustration ("This guy again!"), the reason is fairly straightforward. Being an NFL quarterback is an exceedingly difficult, complicated job, with a very steep learning curve. When a coach is deciding between a known quantity like Frerotte and some promising but untested newcomer, the incentives all push toward Frerotte.
Which brings us to Gensler. Running a regulatory body like the CFTC, like helming a pro football team, is complicated and difficult. So it's not surprising, particularly during a crisis, that there's a strong bias toward those like Gensler, Summers et al., who are "game tested." Of course, it would be far preferable to go with someone game-tested who got it right the first time--like Born. That said, having gotten things wrong in the past shouldn't necessarily be disqualifying. (Though according to one Senate aide who met with Gensler, he never offered a simple "my bad" about his role in the derivatives debacle--even behind closed doors.) Indeed, longtime journeyman Kerry Collins, whose career was not unlike Frerotte's, took the starting job on the Tennessee Titans this year and led the team to thirteen wins while making the Pro Bowl. The lesson: times change, and people sometimes learn from their mistakes.
But as the Obama administration continues to fill thousands of government positions, they'd do well to heed the words of a wise man who once said that "tallying up your years in Washington is no substitute for judgment." That was President Obama, whose primary campaign was largely predicated on the principle that having gotten something crucial, like the Iraq War, right when other people got it wrong was of such overwhelming importance that voters should elevate someone who'd been a state senator just a few years earlier to the highest office in the land over a competitor with years in Washington under her belt.
The voters agreed, and I continue to think they got it right. Maybe the president should go back and read some of his old speeches the next time there's an opening in his administration.