"The people who are most against market intervention wind up having to preside over the biggest market intervention"
There is no shortage of blame for the financial debacle rocking America and scaring the world. And among the names popping up in the pathology of this vicious malaise are former Fed Chairman Alan Greenspan, former Treasury Secretary Robert Rubin, former Texas Senator Phil Gramm, and former President Bill Clinton. It was on their watch that the banking strictures of the 1933 Glass-Steagall Act were dismantled. Some critics say tearing down the barriers between commercial and investment banks contributed to the current crisis because it allowed commercial banks such as Citigroup (C) to trade mortgage-backed securities. In fact, former Citi CEO Sandy Weill led the fight for deregulation. President Clinton was in New York this week for the annual meeting of his philanthropy, the Clinton Global Initiative, and I asked him about the banking crisis.
Mr. President, in 1999 you signed a bill essentially rolling back Glass-Steagall and deregulating banking. In light of what has gone on, do you regret that decision?
FORMER PRESIDENT BILL CLINTON
No, because it wasn't a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure. I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter. But I have really thought about this a lot. I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch (MER) by Bank of America (BAC), which was much smoother than it would have been if I hadn't signed that bill.
Phil Gramm, who was then the head of the Senate Banking Committee and until recently a close economic adviser of Senator McCain, was a fierce proponent of banking deregulation. Did he sell you a bill of goods?
Not on this bill I don't think he did. You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.
Bob Rubin is now a high officer of Citigroup and is advising Senator Obama. Should the senator be listening to someone who works for a firm that is deeply involved in the subprime mess?
First, he was clearly one of the two or three finest Secretaries of the Treasury this country ever had. And his policies and advice, not only as my Treasury Secretary but as the first head of my National Economic Council, were responsible for eight years in which median income went up $7,500, as opposed to a $2,000 decline in this eight-year period, and where you had 22.7 million new jobs [created] as opposed to this period, which will be at most 5 million and probably less. So I think Bob Rubin's credentials speak for themselves.
Should the government be there if financial-services firms fail and take on too much risk?
I think in this case, the [government] had no choice. And I think the longer you wait, ironically, the more you have to do and the more money you have to spend. So, in a funny way, the people who are most against market intervention wind up having to preside over the biggest market intervention that costs the most money because we all know that markets without disclosure, without capital requirements, without market requirements tend to unsustainable extremes.
But where do you stop? Should the feds have bailed out Lehman? Should they be bailing out Morgan Stanley (MS)?
I think the Bear Stearns thing was necessary. And it worked. It just didn't stem the tide because of the underlying massive amount of unsustainable debt in the real estate market, both residential and commercial. I think Fannie Mae (FNM) and Freddie Mac (FRE) had to be done because, frankly, it was never an ideal structure. They were government operations—but not. I think it looked bizarre that you [bail out] Bear Stearns, Fannie Mae, Freddie Mac, and then say no to Lehman Brothers and yes to AIG (AIG). What does that mean? Does that mean there was no principle involved? Probably. My instinct would have been to offer Lehman Brothers a line of credit at least. Something like what was offered to AIG. It's not as big. The consequences to the economy are not as great. But psychologically, it was unsettling.
Why is John McCain making the opening remarks at the Clinton Global Initiative?
Well, I've always invited President Bush, and one year Condi Rice came, and one year Laura Bush came. Last year, Secretary Paulson came. He's [chuckle] otherwise occupied right now. So I've always made this bipartisan. And I have invited Senator McCain every single year for one simple reason: He was, as far as I could tell, the first Republican senator to say global warming was real and we needed a comprehensive response to it.
If McCain wins, will Hillary be back in four years?
I don't know. I think that her focus will now be on what she can do to help deal with all those things that threw her into the Presidential race in the first place. For example, today she gave the most detailed position I've seen on what we ought to do on the finance crisis. She said we ought to follow not the Resolution Trust Corp. model for dealing with these homes and commercial properties. We ought to go back to the Home Owners' Loan Corp. that was a product of the Depression. That actually made a profit for the American people by stabilizing a disastrous run on the market for financing homes. She's out there working hard for Senator Obama. But no matter who wins, we've got to shelve the politics for a while and work on the substance.