Larry "Alfalfa" Summers

People already have strong opinions about Summers’ culpability for the financial crisis as a result of his past support of deregulation. But what goes missing is the extent to which he sought to control and undermine an independent regulator given that he disagreed with them. If the next Federal Reserve chair, who will have immense power within the regulatory community, disagrees with another financial regulators during the implementation of Dodd-Frank, will he or she go after them equally as hard?

As documented in the PBS Frontline episode The Warning, as well as the Washington Post, in May 1998 Brooksley Born, then chair of the CFTC, announced she would be drafting and circulating a concept release paper investigating the new and rapidly growing market in a special kind of derivative known as a swap.

Today, people who support or oppose Born tend to exaggerate what she and the CFTC was trying to do at the time. The concept release Born put forward was basically just a set of questions, trying to figure out information about a market that regulators had virtually no information about. (That information would have come in handy in 2008.) 

The CFTC clarified that they “no preconceived result in mind.” They were “open both to evidence in support of easing current restrictions and evidence indicating a need for additional safeguards.” The agency even welcomed “comment on the extent to which certain matters are being or can be adequately addressed through self-regulation” (see here for more details). The CFTC worked hard to reassure the market that it wasn’t trying to void any derivatives, noting that the release “in no way alters the current status of any instrument or transaction under the Commodity Exchange Act.”

Yet those reassurances didn’t stop the full-on assault from Alan Greenspan, then of the Federal Reserve, and Robert Rubin and Larry Summers of the Treasury Department. To say that the Treasury Department under Rubin went after Brooksley Born with everything they had would be an understatement. University of Maryland law professor Michael Greenberger, working at the CFTC at the time, told Frontline that Larry Summers called Born and said, ”You’re going to cause the worst financial crisis since the end of World War II.” Born’s critics demanded the concept release not be issued, putting pressure on Congress to stop her.

Their attack worked. The concept release was pulled back, Congress and the administration stopped the CFTC under Treasury’s advice, and Born resigned.
So why is this relevant? The Federal Reserve is the most important and powerful of the financial regulators, both before and after Dodd-Frank. As Marcus Stanley of Americans for Financial Reform says, “the Federal Reserve regulates all large bank holding companies at the consolidated level and all designated non-bank SIFIs at the consolidated level as well.”

[T]he Federal Reserve has broad powers on requirements, examinations and enforcement, as well as the ability to grant exemptions and waivers for rule enforcement. Not only that, but the Fed is self-funded and still has enormous respect within the Washington establishment, both things which insulates it from Congressional and even judicial pressure. The Fed also carries a lot of influence on the newly created council of financial regulators, FSOC.