WITH former President Bill Clinton in town to stump for the Maine Dems, some are recounting the highs and lows of his administration. A booming economy, welfare reform, the Lewinsky scandal, impeachment and the like are often mentioned. What, unfortunately, is often neglected is the role the Clinton Administration played in the rise of high risk banking and the role an unregulated Wall Street played in the 2008 recession, and that the calamity of 2008 was foreshadowed a decade prior with the bailout of Long Term Capital Management.
The following excerpts are from a 2014 Pogo article which highlights how the Clinton years rode the wage of deregulated markets:
In April 1998, a decade before a historic crisis wreaked havoc on global financial markets, an obscure regulator saw a potential gap in the government’s oversight of Wall Street and tried to do something about it.
Now, newly released records show just how ardently some of the Clinton administration’s most prominent figures shot her down. The documents add to the story of how President Bill Clinton’s team took a stance, on derivatives and other issues, that shielded Wall Street from more aggressive oversight in the years leading up to the 2008 financial crisis.
At the time, Brooksley Born was head of the Commodity Futures Trading Commission (CFTC), a small agency responsible for overseeing lesser-known corners of the markets. At the April meeting, she asked other regulatory leaders if the government was doing enough to monitor trading in over-the-counter (OTC) derivatives—a type of financial tool, often used to hedge risk and place speculative bets, that would later feature prominently in the 2008 crisis.
Born’s question was not well received.
. . .
Born’s clash with other Clinton officials has been widely covered, including in reports by Frontline, The Washington Post, and The New York Times. The newly released documents add to the historical record, offering a fly-on-the-wall account of a pivotal meeting on derivatives and taking the public inside Clinton administration discussions from that period.
Shortly after the April 1998 meeting, the derivatives dispute boiled over.
On May 7, 1998, the CFTC issued a concept release—a sort of regulatory trial balloon—raising a series of broad questions about the regulation of OTC derivatives. That same day, Rubin, Greenspan, and Levitt issued a joint statement saying they had “grave concerns” about the concept release “and its possible consequences.” They questioned the “CFTC’s jurisdiction in this area” and said they were worried about “reports that the CFTC’s action may increase the legal uncertainty.”
Behind the scenes, Clinton officials lobbied to keep the CFTC on the sidelines of derivatives oversight, according to other records newly released by the Clinton Library.
. . .
In September 1998, Long-Term Capital Management, a large and opaque hedge fund that made highly leveraged bets using OTC derivatives and other tools, found itself on the brink of collapse. It was saved only when the Federal Reserve orchestrated a $3.6 billion private-sector bailout of the firm.
Rather than taking the opportunity to tighten the rules for derivatives trading, Congress and the President enacted an appropriations bill in October 1998 that included a six-month moratorium prohibiting the CFTC from taking any action. Congress explained in an accompanying report that it wanted to give the Financial Markets Working Group more time to study derivatives and hedge funds.
The following year, the Working Group issued a report on the Long-Term Capital Management episode. The report offered a few modest reforms but stopped short of calling for increased oversight of derivatives or direct regulation of hedge funds.
As the report was being drafted, Douglas Elmendorf—who was serving on the Council of Economic Advisers and is now the head of the Congressional Budget Office—recommended wording it in a way that avoided opening the administration’s regulatory record to criticism, according to a memo released by the Clinton Library.
. . .
In the wake of the crisis, President Clinton and his economic team—some of whom had been featured as “The Committee to Save the World” in an infamous 1999 Time magazine cover story—were often asked to explain the positions they took on derivatives regulation in the 1990s.
Rubin told the Financial Crisis Inquiry Commission he was “‘not opposed to the regulation of derivatives’” but explained that “‘very strongly held views in the financial services industry in opposition to regulation’ were insurmountable” during his tenure as Treasury secretary.
Summers told the commission that “while risks could not necessarily have been foreseen years ago, ‘by 2008 our regulatory framework with respect to derivatives was manifestly inadequate.’”
Clinton told ABC News in 2010 he shouldn’t have listened to officials who advised him against taking a tougher stance on derivatives. “On derivatives, yeah I think they were wrong and I think I was wrong to take [their advice],” he said. “[S]ometimes people with a lot of money make stupid decisions and make it without transparency.”