Friday, November 7, 2008

New Boss: Same As The Old Boss?

The anti-establishment lyric of The Who's classic hit Won't Get Fooled Again came to mind when I started reading about the folks President Obama is tapping to advise him on the problems facing Americans. The new boss may look different, but is his policy really new?

The prevailing theory on the success suspected from the sitting lame-duck's successor is pretty simple: it was so bad it couldn't be worse, and you can't fall off the floor. It's got to be better.

But ... do the signs really give reason for this optimism?

During the campaing, fact-checkers discredited efforts to link Obama to Freddie Mac executives. Obama apparently wanted to offer the nation a clean slate, a team in which the public could have confidence. With the first several names appearing already for President Obama's top advisory team, we get some insight what kind of group will be contributing to the internal dialogue on how to address the nation's ills.

Top Pick
First, President Obama named Rahm Emanuel for Chief of Staff. Explaining the choice, Obama said, "I announce this appointment first because the chief of staff is central to the ability of a president and administration to accomplish an agenda, and no one I know is better at getting things done than Rahm Emanuel." The Reuters article describing the appointment also described the office: "chief of staff ... is a top White House appointee whoserves as one of the closest advisers to the president and typically can decide who gains access to the president, while also developing administration policies." So: a gatekeeper and policy advisor both. According to the Sun Times, "[w]ith Emanuel, Obama gets an enforcer, a bad cop who loves the f-word[.]" So, what might we expect from Mr. Emanuel?
Through his [Richard Daley campaign manager David] Wilhelm connection, in 1991, Emanuel joined the Clinton campaign as a fund-raiser, rewarded with the White House political director post. He flamed out in a few months, to be resurrected and end up as a senior adviser to Clinton.

After seven years in Washington, Emanuel moved to Ravenswood, making millions of dollars as an investment banker in a few deals, and making more money when tapped by Clinton for a plum spot on the Freddie Mac board.

Lyn Sweet, via Sun Times
With regard to that plum appointment to the Board of Freddie Mac -- a corporation which as described here has been chartered by Congress to facilitate confidence and liquidity in housing morgages, whose management's unrealistic predictions drove out famously "forever"-holding investor Warren Buffett, and which sits now in conservatorship as a condition of a massive taxpayer bailout -- a brief look might be warranted. Freddie's oversight agency (the Office of Federal Housing Enterprise Oversight) said the Board on which Emanuel sat "failed in its duty to follow up on matters brought to its attention." The blogger Jammie Wearing Fool suggests that if Emanuel were a Republican, everyone would be up in arms over his appointment to a key post (mentioning not only Freddie, but other issues that might make one wonder).

Emanuel, who already has a spokesman to field embarrassing questions about his past performance, is ducking Freddie Mac criticism with the claim that he was on the Board of Freddie for the "relatively short period of time" of just over a year. Well, quickly dumping plum jobs wasn't new to Emanuel by the time he dumped the Freddie gig, though it was longer than a few months. Despite stating that Emanuel "believed that Freddie Mac needed to address concernes raised by Congressional critics[,]" his spokesperson did not describe any steps taken to ensure that Freddie's bookkeeping was honest, that its guarantee pricing was rationally risk-adjusted, that the special oversight body created by Congress to keep Freddie on a leash actually received appropriate information, that Freddie's investment objectives didn't interfere with the mission to which it had been chartered .... These things would have required careful work. They would have required diligence. They would have required responsibility. They would have reflected a genuine belief in accountability.

Not seeing those things in Emanuel's hummingbird-like flit from post to post is, of course, enturely unsurprising for a politico looking to increase his juice in the District, or the nation. However, Obama didn't run on a platform of elevating good-looking young politicos in the District or the nation. Obama ran on the claim he would bring fundamental change to the District of Columbia and to the United States. Is Emanuel evidence Obama is merely a new Chicago political insider, doing Chicago political insider things, and not really changing anything substantive?

Maybe Emanuel's stick-to-it-iveness has improved and he'll keep the Chief of Staff job long enough to evaluate his contributions. And maybe those contributions will be more impactful than his contributions at Freddie Mac. On the other hand ... maybe not. Being a skeptic of professional politicos, I'm not exactly gushing with excitement about Obama's pick of Emanuel for a position that demands serius judgment: gatekeeping for the President of the United States has a serious implication for the range and quality of viewpoints that can go into top-level policy evaluation. Assuming that groupthink is a major factor in the Charlie Foxtrot we've ... ahem ... enjoyed ... heh, heh ... over the course of the outgoing administration, a gatekeeper known for loyalty and making a good guard enforcer is a serious reason for concern.

Getting Solid Financial Advice
As mentioned in interviews linked on this old post, Obama's supporters include the legendarily risk-averse and long-term investor Warren Buffett. Optimism is warranted: steady, long-term, risk-averse analysis is definitely what is called for in the job of protecting the public fisc. Waiting to see just how Buffett's pre-election confidence would prove justified won't take long: Obama has begun naming members of a financial advisory committee, called his Transitional Economic Advisory Board.

So, who's on this economic advisory committee? What track record have they got?

President Obama's economic advisors include Robert Rubin. A board member of Citigroup, Rubin's advisory services failed to stop the company from pursuing a course of business that caused the company's dividend to fall from 54¢/q to 16¢/q (a 70% decline) while the stock price dropped from the mid-fifties to the low teens ... um, lower: eleven-and-change is still double-digits, but it's not the teens; the stock dropped over 70%.

Had Rubin's oversight included comments about the propriety of lending to people who don't bother to substantiate their incomes, or the wisdom of valuing quarterly fees above long-term capital risk, we would surely have heard about it. The upside: the stock didn't go bust. On the other hand, the quietness involved in the federal purchase of $150,000,000,000 in stock of the nation's largest banks, including Citibank, means that the public can't easily determine how desperate Citibank was for the money when the government decided that the company -- and all banks -- needed their public confidence improved.

In similarly desperate fashion, Rubin's alma mater Goldman Sachs has had trouble. Rubin was an architect of the proprietary trading expantion that left Goldman holding the bag on a bunch of derivitive instruments whose counterparties were bust, plus an inventory of never-syndicated home mortgage CDOs whose liquidity has gone to zero and whose ultimate performanc may turn on the largesse of those with their hands on the faucet of the Treasury's money vat. Although Rubin's personal investment of firm capital may have been largely in arbitrage trading, he had a tremendous impact on the firm's risk exposure during his stint as the seventieth Secretary of the United States Treasury.

As Treasury Secretary, Rubin opposed regulation of derivitives when Brooksley Born at the Commodity Futures Trading Commission proposed oversight. Successfully keeping such instruments as Credit Default Swaps (CDS) unregulated, opaque, difficult to value, and illiquid was a key factor in the confidence collapse that destroyed so much value in the financial sector this year. With regulation, CDS could potentially be standardized in such a way as to be subject to trading like standard options -- a common derivative instrument which can be used in complex combinations to make risk-limited hedges against legitimate portfolio risk, and which generally have a knowable value because their regulation and standardization render their performance, liquidity, and valuation subject to everyday and mundane analysis. Instead, like health coverage through non-state-regulated employee benefit plans, the participants have rather less idea at any given time where they stand and what the contracts are worth.

As observed by The Economist, Rubin's dismantling of the Glass-Steagall legislation that had kept a firewall between banks and other financial institutions had the effect of driving financial institutions into new businesses in which they lacked prior expertise. Taking on risks they did not appreciate, while acquiring a multiplicity of regulators with no familiarity with such combined entities, did not create an environment in which the public's interest in financial stability had an effective voice. The trouble with financial behemoths wasn't that they would scoff at small customers and price them out of the marketplace in the hunt for big fish, but that they led to a regulatory mess that needed as much help as the Glass-Steagall-era financial institutions needed improvement in diversity:
But the price of financial services will surely not rise: new technology, especially online financial services, is too powerful a force in the opposite direction. There is a bigger worry, though. Why, if politicians are at last to do something about the Depression-era rules that govern financial firms, have they not tried to update America’s supervisory structure at the same time?
Meanwhile, derivatives exposure was exploding in a non-regulatory environment championed by Mr. Rubin, magnifying risk and decreasing liquidity and transparency.


Getting Rubin on-board might have been a great idea under the theory that he should offer a close-up view of how the system was augured into the ground. However, this assumes he was looking at the world about him rather than in a college textbook. Rubin's longstanding credentials as a faithful Democrat didn't lead him toward any policies that seemed calculated to help the little guy; rather, he helped endanger the financial institutions that make everything in his life affordable. Instead of playing the traditional Democratic song of increasing government regulation, or the idealistic notion that government regulation might be made more efficient, Rubin agitated to have his own field de-regulated. (And wasn't this what Obama said was wrong with his Republican opponents? Too chummy with the folks who created the mess?) Maybe Rubin was overly optimistic about the effectiveness of his colleagues and competitors in navigating a wild and woolly new combined financial environment, or didn't appreciate the purpose of insurance and bank regulation (solvency) because he was so long steeped in the culture of investment banks and their priorities (profits from fees and trading).

The Jaded Consumer isn't particularly excited with what's come to light so far. Perhaps there are some truly exciting members. If I should hit more information on them, I'll surely try to post it here.

If the nation's financial advice comes from the mouths of those who architected the collapse, confidence in an effective solution being developed might understandably wane. While the re-appearance of sound federal financial .... uh, right -- when was that? Okay; it'd be nice to feel the public fisc were in better hands, but it honestly looks like this is a point on which evidence will need to be collected before we become excited about the crew manning the tiller.

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