There has been, in recent days, a groundswell of support for Elizabeth Warren, one of the top candidates to head the new Consumer Financial Protection Bureau. One less-noted reason for all this outspoken fervor is that, for many liberal critics, Barack Obama’s economic team is something of an intellectual cabal. Starting with Treasury Secretary Tim Geithner and chief economic adviser Larry Summers, the senior members of this team are all people “who have Bob Rubin on their speed dial,” as one of these critics told me. They are, in other words, part of the deregulatory brigade led by then–treasury secretary Rubin in the 1990s who helped set the stage for the financial disaster by giving Wall Street most of what it wanted, whether it was Glass-Steagall repeal or reduced regulatory oversight of derivatives trading.
They are also people who tended to take one side of the great debate over the current financial-reform law. The Obama administration, along with Sen. Chris Dodd and Rep. Barney Frank—for whom the new law is named—generally adopted a “babysitter” view of reform. They wanted a lot of new rules, particularly greater capital reserves, leverage limits, and more regulatory oversight. But these were intended as rules for governing Wall Street largely as it is. On the other side of the debate were those who wanted more New Deal–style reform: change to the underlying company structure and incentive system on Wall Street. Chief among them were former Fed chairman Paul Volcker and Sen. Blanche Lincoln, who sought to, respectively, bar federally insured banks from the riskiest trading and ban banks from swaps trading. The final version of the bill is something of a compromise between the two points of view, but overall the winners are the Rubinesque minimalists. The administration, for the most part—at least until Obama’s 11th-hour embrace of “the Volcker rule”—sought to avoid fundamental changes.
Hence the enthusiasm among the losers in this debate for Elizabeth Warren, the fiery Harvard Law professor who largely sided with the Volcker-Lincoln camp and who first came up with the idea for a consumer-protection agency. Warren is most definitely not a Rubin acolyte. She’s more likely to be the sort of person who reveals to the public just how many administration speed dials Rubin occupies. Warren has long abhorred the sort of inside-the-box thinking that led a lot of smart people in Washington to conclude for more than two decades that Wall Street could be left to sort things out on its own.
And it’s real outside-the-box thinking that may be needed now. Because as “pay czar” Kenneth Feinberg’s recent report makes clear, little has changed in how Wall Street operates, and the big banks are even now finding their way through the new law’s many loopholes and continuing to award traders outrageous amounts of money for taking speculative risks. Feinberg lamented the payout of some $1.6 billion in bonuses and retention awards even as the government was bailing out the firms in 2008 and 2009; as a solution, he proposed a voluntary “brake provision” that would allow the boards of companies to reverse their contractual obligations to pay out such extras. But as Wallace C. Turbeville, a former VP at Goldman Sachs turned financial blogger, put it: Feinberg “might have more success asking the lions of the Serengeti to give the wildebeests a sporting chance of making an escape ... The government’s flaccid approach to Wall Street compensation, embodied in the Feinberg report, is appalling. These young traders are simply doing what America has told them to do. They are allowed to earn obscene amounts of money using the advantageous information, technology, and capital of their employers. Making money from less powerful counterparties is like shooting fish in a barrel.”
It’s somewhat unfair, of course, to lump all the ex-Rubinites together. Some of them, such as Gary Gensler, now chairman of the Commodity Futures Trading Commission, have since seen the light (Gensler was a key player in closing loopholes in the new financial-reform act on over-the-counter derivatives trading). Others, like Michael Barr (Geithner’s deputy), worked hard to strengthen the new consumer-protection bureau’s powers and safeguard its funding. Not surprisingly, Barr is another leading candidate to run the new agency, which will be housed in the Fed.
Nonetheless, it is undeniable that those who have been most aligned with the “progressive” side of the Wall Street reform issue and, often, most farsighted and outspoken about the dangers are still on the outside of the administration looking in. Among them: Brooksley Born, the former chairwoman of the Commodity Futures Trading Commission who famously warned of out-of-control derivatives trading in the ’90s; Nobel-winning economist Joseph Stiglitz; and Michael Greenberger, the former Born deputy who as an outside consultant helped to toughen transparency requirements for OTC derivatives in recent months. One leading “progressive” critic told me recently, “Our ruling intelligentsia in economics runs the spectrum from A to A-minus. These guys all talk to each other, and they all say the same thing.” Or as Stiglitz himself put it at one point: “America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street. Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”
It may well be that Obama can’t win on this issue no matter what he does. After all, even among some so-called New Democrats, never mind Republicans, there is a growing sense that the president is anti-business. Still, if he can’t beat ’em, maybe he should join ’em. While the president is still deliberating on the choice—he’s not expected to announce a decision until August at the earliest—in recent days Geithner and other senior members of the administration have been signaling that a Warren appointment might be just the medicine that’s needed to restore public confidence.