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Risk Management & RegulationA weblog by Chris Whalen, Institutional Risk Analytics April 28, 2008 The Subprime Three -- Rubin, Summers & GreenspanOur latest comment follows below. Use the version on the IRA web site for the live links. Chris The Subprime Three -- Rubin, Summers & Greenspan The events surrounding the financial difficulties of Long-Term Capital Management L.P. ("LTCM") raise a number of important issues relating to hedge funds and to the increasing use of OTC derivatives by those funds and other institutions in the world financial markets. The issues most directly posed by LTCM include lack of transparency, excessive leverage, insufficient prudential controls, and the need for coordination and cooperation among international regulators. I welcome the heightened awareness of these issues that the LTCM matter has engendered and believe it is critically important for all financial regulators to work together closely and cooperatively on them. Therefore, I applaud Secretary of the Treasury Robert Rubin's call for meaningful studies by the President's Working Group on Financial Markets on hedge funds and on OTC derivatives and look forward to working with him and the other members of the Working Group. Brooksley Born Kudos to Nelson Schwartz and Eric Dash of The New York Times for the Sunday business section cover-story on Robert Rubin. Their article puts into place another piece of the subprime puzzle. In addition to reporting on Rubin's seemingly conflicted behavior as a director of Citigroup (NYSE:C), the overview of Rubin's policy role in blocking federal oversight of the Over-the-Counter derivatives markets is a great contribution. Schwartz & Dash describe how former Fed Chairman Alan Greenspan, former Treasury Secretary Larry Summers and Rubin coordinated to undermine efforts by CFTC Chairperson Brooksley Born to impose greater federal oversight of OTC derivatives markets. They report: "On at least one occasion, Mr. Rubin lined up with Mr. Summers as well as Mr. Greenspan to block a 1998 proposal by the Commodity Futures Trading Commission under Ms Born that would have effectively moved many derivatives out of the shadows and made them subject to regulation." Click here to read the entire April 27, 2008 Times profile: "Where Was the Wise Man?" Note that Born's comments of a decade ago regarding the LTCM collapse highlights those very same issues which led to the collapse of Bear, Stearns (NYSE:BSC) earlier this year, namely the systemically unstable nature of an OTC market structure. Note too that over the intervening decade nothing happened in Washington to effectively address these issues. Greenspan, Summers and Rubin all acted -- or failed to act -- to enable Wall Street's quest for higher profits via the opaque OTC market structure model and did so at the expense of the public interest. Instead of a truly free and transparent securitization market where occasionally a player does fail, today's OTC jungle ensures the destruction of a significant portion of capital deployed by dealers and investors both. How does this serve the interest of investors or the marketplace? The US Congress, the major regulators and industry groups such as the President's Working Group on Financial Markets, and two presidential administrations from different political parties, all collaborated to bring the financial crisis involving subprime debt and OTC securities to fruition. While talking about "innovation" and "competitiveness," the US political elite and their clients on Wall Street authored the subprime crisis from beginning to end, specifically by allowing the OTC marketplace to grow the point where it threatens the safety and soundness of large banks. And the real irony of the past year or more is that the OTC market structure has been a catastrophe for many dealers, some of which laid out millions of dollars in lobbying fees to make the OTC markets a reality. Perhaps even scarier than the Times account of the pro-Wall Street policies openly pursued by the Subprime Three is the peculiar position taken by Rubin regarding his role at C, namely that he was somehow not responsible for the financial performance and chaotic corporate governance of this bank over the past decade -- when he served as director and, in our view, shadow CEO. Read our previous comments, ("Should Alan Schwartz Be Citigroup's Next CEO?") for background on the House that Sandy Weill built. Continue reading "The Subprime Three -- Rubin, Summers & Greenspan" Posted by Chris Whalen at 02:25 PM | Comments (0) |
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