car·riage re·turn

n. the lever or mechanism on a typewriter that would cause the cylinder on which the paper was held (the carriage) to return to the left margin of the page

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Filling the New Cabinet,Part I:Treasury

Picking a New Treasury Secretary:Balancing Culpability and Expertise

This is the first post in an ongoing series highlighting potential Cabinet appointees for the Obama Administration. Future posts will follow the same form,first listing pertinent information from each individual’s CV,then analyzing the blend of pertinent past performance in other positions and any ideological considerations.

Without further delay:

The Contenders:

- Paul Volcker:Chairman of the Federal Reserve (1979-1987);President of the Federal Reserve Bank of New York (1974-1979);Under Secretary of the Treasury for International Monetary Affairs (1969-1974);Vice President and Director of Planning,Chase Manhattan Bank (1965-1969);Deputy Under Secretary of the Treasury for Monetary Affairs (1963-1965);Director of Financial Analysis,US Treasury (1962);Financial Economist,Chase Manhattan Bank (1957-1962);Economist,Federal Reserve Bank of New York (1952-1957)

- Larry Summers:President of Harvard University (2001-2006);Secretary of the Treasury (1999-2001);Chief Economist,World Bank (1991-1993);Professor of Economics,Harvard University (1983-1991)

- Robert Rubin:Co-Chairman,Council of Foreign Relations (incumbent);Director and Senior Counselor,Citigroup (incumbent);Secretary of the Treasury (1995-1999);Assistant to the President for Economic Policy and Director,National Economic Council (1993-1995);Co-Chairman of Goldman Sachs (1990-1992); Vice President and COO,Goldman Sachs (1987-1990);General Partner,Goldman Sachs (1971-1987);Risk Arbitrage Associate,Goldman Sachs (1966-1971);Attorney,Cleary,Gottlieb,Steen &Hamilton (1964-1966)

- Governor Jon Corzine (D-NJ,2006-present):US Senator from New Jersey (2001-2006);Chairman and Co-CEO of Goldman Sachs (1994-1998);General Partner,Goldman Sachs,(1980-1994);Trader,Goldman Sachs (1975-1980);Employee,Bank Ohio (1973-1975);United States Marine Corps Reserve (1969-1975)

- Timothy Geithner:President of the Federal Reserve Bank of New York (2003-present);Director,Policy Development and Review Department,International Monetary Fund (2001-2003);Under Secretary of the Treasury for International Affairs (1999-2001);Staff,United States Treasury Department (1988-1999);Researcher,Kissinger Associates,Inc. (1985-1988)

Though no appointment is expected this week,the state of the economy has made this decision the present focal point of the transition. Volcker,Summers,and Rubin are presently economic advisers to the President-elect,while Corzine,who endorsed Obama after he became the presumptive Democratic nominee,has been mentioned as a top candidate for the post,which could make him the third CEO of Goldman Sachs to serve as Treasury Secretary in the past ten years.

Mr. Volcker

Paul Volcker’s relationship with the Federal Reserve dates to the Truman Administration. In 1952 he joined the Federal Reserve Bank of New York as an economist. After five years Volcker moved to Chase Manhattan Bank,where he remained until 1962. He then joined the Treasury Department,becoming Deputy Under Secretary for Monetary Affairs in 1963. In 1965 he became a Vice President at Chase,only to return to the Treasury in 1969,this time as Under Secretary for International Monetary Affairs. In 1975 he became President of the Federal Reserve Bank of New York,where he remained until his confirmation as 12th Chairman of the Federal Reserve in 1979. Though he was a Democrat,Volcker was reappointed by President Reagan in 1983. In 1987,at age 59,he was succeeded by Alan Greenspan,who was two years his senior. The New York Times observed on the occasion:

The main philosophical difference between Mr. Volcker,a Democrat,and Mr. Greenspan,a Republican,appears to be in their views of the structure and regulation of the banking system. Mr. Volcker has tended to resist deregulation of banks while Mr. Greenspan is more favorably disposed to it.

Hmmm.

Volcker is credited with lowering inflation from a an average of 12.8% when he took office in 1979 to 3.2% in 1983,though his policies also were attributed as the cause of the recession of 1981-1982,when some interest rates rose above 20% and unemployment rose to the highest levels since the Great Depression.

To Volcker’s credit,he is well-respected by Democrats and Republicans,as much for his skill as a economist as for the strength of his convictions:

Secondly,during his time at the Fed,Mr. Volcker showed that he was willing to do difficult —even unpalatable —things. He also showed he was unafraid to inflict pain on the very president who appointed him —in his case Jimmy Carter. As you may recall,in his effort to stop the raging inflation that was threatening the country,Mr. Volcker raised interest rates so high that he threw the country into a recession —and in so doing,doomed Mr. Carter’s re-election efforts. He faced stiff criticism,but he held his ground,and in the end,he did the right thing for the country. The long bull market that began in 1982 was a direct result of Mr. Volcker’s willingness to do what he thought was right.

In 2004,Volcker investigated corruption charges against the Oil for Food program as one of the heads of the Independent Inquiry Committee. Mr. Volcker earned his MA in political economy from Harvard in 1951. His undergraduate degree was conferred by Princeton University in 1949.

Mr. Summers

Like Mr. Volcker,Larry Summers is not afraid to say or do what he thinks is correct. However,as President of Harvard University that characteristic brought Mr. Summers considerable grief,as he found himself at the center of controversy on three occasions,which eventually brought about his resignation in 2006.

Though Summers warned of the looming recession in late 2007,he is also as responsible as anyone for the creation of this economic crisis. Speaking on Monday,Truthdig editor Richard Scheer said the following of Mr. Summers’involvement:

He was Robert Rubin’s protege in the Treasury Department,and he became Secretary of the Treasury after Rubin,who had come from Goldman Sachs to be Clinton’s Secretary of Treasury,went off to CitiGroup—which was the first company from the kind of deregulation pushed through under Clinton. Summers was the Secretary of Treasury that got Clinton to sign off onto the two most egregious pieces of legislation that permitted the financial meltdown. This was legislation carried by Phil Gramm,the Republican senator who was head of the Banking Committee,and his name is one of them—it’s called the Gramm-Leach-Bliley Act,or otherwise known as the Financial Services Modernization Act—that was in 1999. And in 2000,as a lame duck,the Clinton administration approved after Congress passed again at Graham’s insistence,something called the Commodity Futures Modernization Act. These two pieces of legislation allowed the current meltdown. They allowed the commercial banks,investment banks,stockbrokers and insurance companies to merge.

And it was Lawrence Summers who was Secretary of the Treasury,who in 1999-2000,urged Clinton successfully to sign off on those two pieces of legislation. It’s now admitted that they didn’t even known what was in them. That it had not been vetted,there had not been hearings in Congress on the Commodity Futures Modernization Act,and so Lawrence Summers has got his fingerprints all over these things. He assured the President,he assured everyone else,that this was a very good thing to do,but what in effect did,was end the regulatory regime that had been put place under Franklin Deleano Roosevelt during the Great Depression to prevent such a meltdown. So the idea that you would now reward Lawrence Summers for having gotten us into this mess by making him secretary of the treasury,and in an administration that has been elected to promise change and go back to this retread,go back to this guy who helped get us into this mess,is mind-boggling.

So,I for the life of me cannot understand why Barack Obama would now turn to Lawrence Summers who certainly among the Democrats was a leader in pushing or that legislation.

Worse still,Politico quotes Summers as heralding the Gramm-Leach-Bliley Act as “a major step forward to the 21st Century,”and dismissed the recommendation for greater regulation of derivatives (such as credit default swaps) by the chair of the Commodity Futures Trading Commission,as “highly problematic.”

TPM’s Josh Marshall calls a Summers appointment a case of “cognitive dissonance,”and I’m inclined to agree.

Mr. Rubin

One obvious stumbling block to Rubin’s appointment is his role in opposing the regulation of derivatives,which include credit default swaps,a position he shared with then-Fed Chair Alan Greenspan:

In November 1999,senior regulators — including Mr. Greenspan and Mr. Rubin — recommended that Congress permanently strip the C.F.T.C. [Commodity Futures Trading Commission] of regulatory authority over derivatives.

- The New York Times,08 Oct 2008

This position certainly complicates a potential Rubin nomination,particularly as one would hope the Senate would take a dim view of recycling anyone with direct involvement in the creation of the present economic crisis. Just days before Rubin resigned as Treasury Secretary and joined Citigroup as a top advisor,Congress passed (and President Clinton signed) the Gramm-Leach-Bliley Act,which allowed commercial and investment banks to merge and thus assisted the Travelers Group-Citicorp supermerger. Robert Scheer wrote of Rubin:

But Gramm and the Republicans couldn’t have done it [creating,in Scheer's words,"the biggest economic mess since the Great Depression"] without the support of leading Democrats. The most egregious of Gramm’s legislative favors to the financiers took the form of legislation named in part after him –the Gramm-Leach-Bliley Act,which only became law when Treasury Secretary Robert Rubin prevailed upon President Clinton to sign the bill. The bill’s immediate major effect was to legitimatize the long-sought merger between Citibank and insurance giant Travelers. Rubin’s critical support for the bill was rewarded with an appointment,within days of its passage,to a top job at Citibank (later Citigroup) paying more than $15 million a year.

When Rubin assumed a top position at Citibank after his stint at the Treasury,he was not above influencing his former employees in the government. In one notorious instance during the fall of 2001,when Enron was going down the tubes,Rubin telephoned a Treasury undersecretary and asked him to consider intervening with credit-rating agencies to hold off downgrading Enron’s ratings. Some media accounts noted the possibility of a conflict of interest when the story was leaked,because Enron owed Citibank $750 million,which it could not pay if bankrupt.

Despite his skills and his vaunted position as Citibank’s chairman,Rubin was not spared the disastrous consequences of Citibank’s own wild financial manipulations that,if anything,even exceeded those of Enron. Tens of billions in bad mortgage and credit card debt placed the bank at the forefront of the current economic crisis,and so it is weird that Obama would now turn to Rubin for advice.

Even more damning from a basic standpoint of foresight is Rubin’s statement in late January as director of Citigroup claiming that the turmoil already evident in the economy was “all part of a cycle of periodic excess leading to periodic disruption.”According to CNN Money,under Rubin Citigroup holds “$55 billion of collateralized debt obligations (CDOs) and other subprime-related securities.”

Gov. Corzine

“There’s no question he’s on their short list [for Treasury Secretary],”said Pennsylvania Governor Ed Rendell of his colleague Jon Corzine in an appearance on CNBC. In a ironic twist of fate,Illinois farmboy Jon Corzine likely wouldn’t be residing in the Governor’s Manager in New Jersey if it wasn’t for Treasury Secretary Hank Paulson. In 1998,Corzine and Paulson were co-CEOs of Goldman Sachs. Despite having overseen the proprietary trading division,which was losing $200 million a month,Corzine was elevated to the investment bank’s C-level executive suite in 1994 after nearly twenty years with the firm. Lisa Endlich,author of How Greed Changed Goldman,wrote “Some banking partners felt that rather than be elevated,Corzine should have been made to bear some of the responsibility for the firm’s troubles,many of which originated in his division.”To his credit,when Goldman was poised to go public in 1998,Corzine observed that,while an IPO would certainly enrich the firm’s partners,“Selling the firm in good times and spreading the largesse broadly,deeply,and generously would actually be less greedy.”

Corzine’s fall from grace at Goldman came during Christmas 1998. Hank Paulson and two other members of the five-man executive committee had him stripped of his position in the company when earnings sank 80 percent and Corzine steered the Goldman into collaborating in the $3.625 billion bailout of Long-Term Capital Management.

Last week Robert Teitelman,editor in chief of The Deal,wrote of Corzine:

Do we —or Obama —really want another treasury secretary from Goldman? I mean all these Treasury guys (Rubin,Paulson,Corzine) plus Jim Cramer. Second,Corzine was a trader. And in that sense he,far more than investment banker Paulson,participated professionally in the leveraged excesses of the last few decades. Now that may be good. After all,Joseph Kennedy made an excellent chairman of the new Securities and Exchange Commission in the ’30s because he knew all the tricks of the Wall Street trade. Third,it would be just too weird for Paulson to hand the reins over to Corzine,the man he effectively moved aside in the late ’90s at Goldman to seal his own ascension.

Could all that be overcome? Certainly. Corzine hasn’t traded since the ’90s and his financial ties to Goldman are far more attenuated than,say,Paulson. But pondering a name like Corzine does raise a large subject:How do you balance off culpability and expertise?

In 1969,Corzine graduated from the University of Illinois as a member of Phi Beta Kappa and enlisted in the United States Marine Corps Reserves,served in an infantry unit until 1975,eventually attaining the rank of Sergeant. He received his MBA from the University of Chicago Graduate School of Business in 1973,having attended night sessions while working as a portfolio analyst at Continental-Illinois National Bank,and in 1975 was recruited by Goldman Sachs as a bond trader. He made partner in 1980. As of 2005,Corzine had divested himself of any accumulated holdings (valued at $270 million in 2001) in Goldman Sachs.

Mr. Geithner

The first career civil servant to be appointed Under Secretary of the Treasury for International Affairs,Mr. Geithner became the head of the New York Fed in 2003 at age 42. At the time of his appointment,The New York Times described him as “a crucial player in the formulation of interest rate policy in the United States and a point man for crisis management for the domestic and international financial systems.”Geithner has served as Vice Chairman of the Federal Open Market Committee,which administers the federal funds rate,the benchmark interest rate at which banks lend one another money.

The Deal calls Geithner “a protégé of Clinton-era Treasury Secretary Robert Rubin,”which by itself should be damning enough to warn off the President-elect from appointing him. Matthew Wurtzel of The Deal said in late September that Geithner “is being pushed by [Treasury Secretary Hank] Paulson and Federal Reserve Chairman Ben Bernanke as the man.”

To Geithner’s credit,it appears he at least partially anticipated the current economic crisis. Lisa Lerer of Politico reports that “in 2005,at his urging,financial services companies established a national registry to help process and track their trades of credit derivatives,an insurance-like product bought by financial services companies to cover risky subprime mortgage investments.”

In March it was Geithner who orchestrated the deal that allowed JPMorgan Chase to buy Bear Stearns using a $29 billion loan from his bank. One week ago,Geithner’s bank hired Michael Alix,Bear Stearns’Chief Risk Officer from 2006 to 2008 and global head of credit risk management from 1996 to 2006,as a senior vice president in the bank supervision group.

Take it for what you will,but CNBC’s Jim Cramer was aghast at the suggestion of Geithner as Treasury Secretary,stating that as head of the New York Fed (which bears the responsibility of regulating the Wall Street investment banks) “the man should be facing a Senate investigation,not a Senate confirmation hearing.”Cramer elaborated his contempt by questioning Geithner’s role in the decision to allow Lehman Bros. to fail,which then snowballed into the collapse of AIG and Merrill Lynch. It could be argued that,by allowing Lehman Bros. to fail,Geithner is ultimately responsible for the taxpayer-funded $85 billion buyout of worthless AIG.

Conclusion

Given the neck-deep involvement of Rubin,Summers,and Geithner in the meltdown of the economy,and Corzine’s status as yet another Goldman Sachs executive,I’m inclined to endorse Paul Volcker. He demonstrated his ability to direct and regulate the economy as well as the determination to maintain his policies no matter the political fallout,something sorely needed in Washington.

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