Friday, October 31, 2008

Robert Rubin's obstruction and inaction as factors in the current credit crisis

I don’t agree with Rubin on everything, but on the genius of Fischer Black and strong dollar policy, we are unified. Timothy Noah gives us some pause in looking at Rubin’s Treasury Secretary tenure:

In 1998, Brooksley Born, chair of the Commodity Futures Trading Commission, proposed bringing derivatives under her jurisdiction. Rubin joined forces with Greenspan and Arthur Levitt Jr., then chairman of the Securities and Exchange Commission, to successfully derail the proposal in Congress. Rubin shared Born's worry about the derivative market's unregulated growth, and in his 2003 memoir, In an Uncertain World (co-authored by Jacob Weisberg, editor-in-chief of the Washington Post Co. unit that includes Slate), Rubin would later write that derivatives "should be subject to comprehensive and higher margin limits." So why did he oppose Born? Rubin doesn't discuss the episode in In an Uncertain World, but according to an Oct. 15 article by Anthony Faiola, Ellen Nakashima, and Jill Drew in the Washington Post, Rubin fought Born's plan for essentially political reasons: So "strident" a power grab by the CFTC, Rubin believed, would invite legal challenge, which in turn would create havoc in the derivatives market. Unfortunately, after killing off Born's proposal, Rubin never developed a less "strident" regulatory alternative—even after the September 1998 collapse of the Long Term Capital Management hedge fund, attributed in large part to its extensive investment in derivatives, demonstrated that concerns about these unregulated financial instruments were extremely well-founded. As a consequence of Rubin's obstruction and inaction, the market for one particular derivative—credit-default swaps—grew like a noxious weed. The credit-default swaps were unregulated insurance contracts on securities derived partly from subprime mortgages. If indiscriminate subprime mortgages were the vehicle that brought about the market meltdown, credit-default swaps were the fuel.

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