By David Weidner, MarketWatch
On Wall Street and Main Street they call William Jefferson Clinton the "Comeback Kid," but it's not because of some Election Day surprise.
It's because almost everything he did regarding financial-services regulation has come back to haunt us.
If it wasn't apparent before, the former president's handiwork became clear when President Barack Obama announced his plans for sweeping financial-services reforms. Obama's efforts to bring fair dealing to the mortgage markets, rules to the derivatives marketplace and restraint to big financial companies underscore the missteps of Clinton's second term.
We had weakly regulated markets when Clinton took office, but by the time he left, they were an invitation to lawless dealing. For the ease of it, Willie Sutton would have traded his gun and mask for a briefcase and necktie.
Clinton created a fertile environment for home-lending charlatans and hiding places for Wall Street swindlers, and upset a regulatory structure that had served the financial marketplace so well for more than six decades.
3 big mistakes
Clinton bashing -- like Bush bashing -- is often a cop-out, but Clinton made critical mistakes when it came to dealing with the financial industry. Three poor decisions stand out.
The first, in 1997, was a change to the amount of taxes a homeowner had to pay on the sale of his or her home, up to $500,000. That change effectively made buying and selling a home for profit the most compelling investment in America by tax standards. It shifted our housing market from one of supply and demand to one of rampant speculation.
The second mistake was one of inaction. In 1998, Long-Term Capital Management's use of derivatives and leverage required a massive $3.6 billion hedge fund bailout organized by the New York Federal Reserve Bank. After the fiasco rocked the markets, the administration was on the spot. Would it push for tighter regulation of this new form of investment vehicle? Would it rein in the derivatives markets?
Alan Greenspan and Arthur Levitt, then the chairmen of the Federal Reserve and the Securities and Exchange Commission, respectively, and Clinton's Treasury secretary, Robert Rubin, all counseled against it to varying degrees. No action was taken.
Repeal of Glass-Steagall
But perhaps the biggest mistake of the Clinton years regarding Wall Street and the one that rings loudest today was the 1999 repeal of the Glass-Steagall Act of 1933, which effectively had split investment banking and brokerages from commercial banks.
In the years leading up to the repeal, Wall Street had been grumbling that the law had become an anachronism. Financial technology was sophisticated. We were so much smarter than they were back in 1929 that there was no way a financial-services conglomerate could pose a threat to the system, Wall Street experts said. Besides, they argued, it was a good idea for banks to handle customers' investments and savings as a hedge in the bad times.
The Clinton administration effectively had its hand forced by the merger of Citicorp and Travelers Group in 1998. The creation of Citigroup (C, news, msgs) required a lot of chutzpah by its CEO, Sandy Weill, because it was effectively prohibited under Glass-Steagall.
Enter the Gramm-Leach-Bliley Act of 1999, which not only allowed Citigroup to exist but also eliminated key barriers between bankers, who were supposed to limit risks, and investment bankers, who were supposed to take them.
The biggest argument critics have against bringing back Glass-Steagall is that it would be too chaotic. Whole companies would have to be cleaved. Relationships would have to be unwound.
Well, back in 1933, the law effectively split J.P. Morgan, the bank, from what would become Morgan Stanley, the brokerage. Both seem to have come through the disruption fairly well.
Aides who abetted
Clinton didn't do it all alone. He had a lot of help from Congress. He was under pressure from a legislature controlled by laissez-faire Republicans who were hellbent on pushing Ronald Reagan's ideology of deregulation and free markets. The repeal of Glass-Steagall passed 90-8 in the Senate and 362-57 in the House.
Greenspan, the virtually universally loved Fed chairman, gave everyone bad advice in regard to interest rates, home ownership and derivatives. Under Levitt at the SEC, Wall Street accounting reached its nadir, only to reveal itself with the WorldCom and Enron scandals after he left office.
Then, Clinton's Republican successor closed the deal. President George W. Bush took the ball into the end zone, making buying a home easier than spelling "FNMA" or "FICO" and removing the last vestiges of capital requirements at U.S. brokerage firms.
Ultimately, however, the big bang -- the wall torn down between brokers and banks -- happened on Clinton's watch. It's largely the problem that's being tackled in the current administration's 85-page white paper on reform. After all, Citigroup's banking side probably would not have loaded its balance sheet with toxic loans had it not been under pressure from the arm making all of the stuff.
Citi also wouldn't be the size it is today, a monster the government deems "too big to fail" that has required more than $300 billion in cash and guarantees to stabilize.
Citigroup's drag on the nation probably isn't what Clinton envisioned, but that's the problem with modernizing markets and making our financial system cutting-edge: Too often we get cut.
In the end Clinton enacted changes that supposedly followed basic economic laissez faire principles. Prinnciples that are as flawed as they get. That was my point at the start. The economic theory principless of deregulating and letting the market regulate itself or companies hoard money as they please are damaging for society and the economy in general.
Log in to comment