Odds are you've never heard of Gary Gensler, the man
President Obama has nominated to run the Commodity Futures Trading Commission
(CFTC). But it's slightly more likely you've heard of Brooksley Born, the woman
who held that position under Clinton
in the late 1990s. Amid the cascading financial crisis and cries of
"Nobody could have predicted!" from many of those who were
instrumental in bringing it about, Born has emerged as one of the rare voices
that warned of the perils ahead. In 1997 she began to sound the alarm about the
growth in the derivatives market, which, unlike traditional futures, were not
traded on a regulated exchange. Born argued that derivatives should be brought
under regulatory supervision, or they "could pose potentially serious
dangers to our economy."
She proved prescient. These instruments, specifically credit
default swaps, increased risk throughout the global financial system,
eventually bringing down AIG, the world's largest insurance conglomerate.
George Soros, economist Alan Blinder and many others now name the failure to
regulate credit default swaps as one of the prime causes of the collapse.
But in 1998 powerful voices close to the Clinton administration--Robert Rubin, Larry
Summers and Alan Greenspan--argued that the derivatives market was just fine.
They had allies among the Wall Street banks who were making money hand over
fist in the unregulated, over-the-counter market.
Then there was Phil Gramm, the mastermind behind the 2000
Commodity Futures Modernization Act, which definitively kept derivatives
unregulated. Attached to a massive omnibus bill during the lame-duck Congress
in December 2000, while the nation's attention was captivated by Bush v. Gore,
the CFMA passed overwhelmingly in both houses and was signed into law by
President Clinton. But Gramm wasn't sneaking anything past the White House,
which had hammered out the details in lengthy negotiations with the senator.
And one of the men charged with shepherding the bill through Congress was none
other than the Treasury's under secretary for domestic finance, Gary Gensler.
Gensler was well qualified to dive into the arcana, having
spent eighteen years at Goldman Sachs before taking a job at Treasury. When it
came to derivatives, he shared the prevailing deregulatory ethos. (He declined
to speak to me on the record for this column.) The New York Times editorial
board found Obama's nomination of Gensler "troubling." Iowa Senator
Tom Harkin, who chairs the Agriculture Committee, which has jurisdiction over
Gensler's nomination, released a statement saying that he is "concerned
about the deregulatory orientation in this nominee's past." And fellow
committee member Bernie Sanders issued this terse statement: "It is
imperative that we not continue the same mistaken policies that got us into
this mess in the first place. I have real concerns."
In Gensler's defense, he did do regulatory penance. He
worked for Representative Paul Sarbanes helping to craft Sarbanes-Oxley, and he
wrote a book criticizing the mutual fund industry for the ways it rips off
investors. But the fact remains: on the biggest issue of commodity futures
regulation in the past decade, he was a star player on the team that got it
It's not just Gensler, of course: many on the Obama economic
team, most notably Summers, director of the National Economic Council, facilitated
the creation of the bubble economy and the deregulatory mayhem that brought us
to this moment. Indeed, Summers, who has consolidated his power in the White
House to the point that the press refers to him as Obama's "chief economic
adviser," was a proponent of policies--from the lifting of capital
controls in developing economies to the repeal of Glass-Steagall--that proved
So one might ask: why do these people keep getting plum
jobs? Two reasons. The first is a simple rule about Washington, which is that membership in the
establishment comes with lifetime tenure. Working inside the Beltway means
never having to say you're sorry. If Henry Kissinger, international man of
mystery cum war criminal, can flit around Washington and be fondly invoked in
presidential debates as a sage of foreign relations--well then, everyone else,
no matter what they've done, can as well.
The second reason might be called the Gus Frerotte
Principle. Frerotte is a 37-year-old NFL quarterback who played most recently
for the Minnesota Vikings. For most of his career he's been a middling QB. Yet
he's managed to last fifteen years in the NFL, playing for seven different
teams. This year he landed the starting job with the Vikings. Frerotte's not
alone. There's an entire class of journeymen NFL quarterbacks who despite never
quite excelling manage to hang around the league for years getting job after
job on team after team. Though this often causes fans to throw up their hands
in frustration ("This guy again!"), the reason is fairly
straightforward. Being an NFL quarterback is an exceedingly difficult,
complicated job, with a very steep learning curve. When a coach is deciding
between a known quantity like Frerotte and some promising but untested newcomer,
the incentives all push toward Frerotte.
Which brings us to Gensler. Running a regulatory body like
the CFTC, like helming a pro football team, is complicated and difficult. So
it's not surprising, particularly during a crisis, that there's a strong bias
toward those like Gensler, Summers et al., who are "game tested." Of
course, it would be far preferable to go with someone game-tested who got it
right the first time--like Born. That said, having gotten things wrong in the
past shouldn't necessarily be disqualifying. (Though according to one Senate
aide who met with Gensler, he never offered a simple "my bad" about
his role in the derivatives debacle--even behind closed doors.) Indeed,
longtime journeyman Kerry Collins, whose career was not unlike Frerotte's, took
the starting job on the Tennessee Titans this year and led the team to thirteen
wins while making the Pro Bowl. The lesson: times change, and people sometimes
learn from their mistakes.
But as the Obama administration continues to fill thousands
of government positions, they'd do well to heed the words of a wise man who
once said that "tallying up your years in Washington is no substitute for
judgment." That was President Obama, whose primary campaign was largely
predicated on the principle that having gotten something crucial, like the Iraq
War, right when other people got it wrong was of such overwhelming importance
that voters should elevate someone who'd been a state senator just a few years
earlier to the highest office in the land over a competitor with years in
Washington under her belt.
The voters agreed, and I continue to think they got it
right. Maybe the president should go back and read some of his old speeches the
next time there's an opening in his administration.