Can the World Survive Any More Financial Innovation from Larry Summers

By Pam Martens: August 12, 2013 

Larry Summers Testifying Before the Senate Budget Committee, June 4, 2013

Let’s put aside for a moment the patently ridiculous question of whether Larry Summers is fit to Chair the Federal Reserve. (Summers is one of the key officials in the Clinton administration who bullied policy makers and won the repeal of the Glass-Steagall Act and prevented the regulation of derivatives, ushering in the financial collapse of 2008. That President Obama has publicly acknowledged that he is considering Summers for the highest monetary post in the U.S. underscores the administration’s serial ability to insult public sensibilities when it comes to Wall Street.) 

Even if Summers does not get the nod from the President for Fed Chair, he’s back to his dangerous tinkering with the financial infrastructure of the country. Within the past four days, the New York Times has published two articles, including one on its front page, noting Summers’ involvement with a start-up company called Lending Club, which makes consumer loans online to unsophisticated borrowers. (Put these seven words on paper: loans online, unsophisticated borrowers, Federal Reserve Chairman. Now throw out the three words that don’t make sense in that context.) 

Summers was appointed as a Director of Lending Club this past December. There are plans to take the company public next year in an Initial Public Offering that is being touted as a Facebook-style landmark for a financial-tech company. 

The heavy attention to Summers’ involvement with Lending Club by the New York Times is likely because they were swept up in the Robert Rubin-Larry Summers-Alan Greenspan-Sandy Weill financial fantasies that led to the massive deregulation of the late 1990s and early 2000s. As the saying goes, “fool me once, shame on you; fool me twice, shame on me.” 

On July 27 of last year, the New York Times editorial page editors wrote: 

“While we are on this subject, add The New York Times editorial page to the list of the converted. We forcefully advocated the repeal of the Glass-Steagall Act. ‘Few economic historians now find the logic behind Glass-Steagall persuasive,’ one editorial said in 1988. Another, in 1990, said that the notion that ‘banks and stocks were a dangerous mixture’ ‘makes little sense now.’ 

“That year, we also said that the Glass-Steagall Act was one of two laws that ‘stifle commercial banks.’  The other was the McFadden-Douglas Act, which prevented banks from opening branches across the nation. 

“Having seen the results of this sweeping deregulation, we now think we were wrong to have supported it.”  

The New York Times notes that Lending Club is not checking the income of all of its borrowers. “Of the loans Lending Club has made in 2013, it did not verify income about half of the time, according to data available on its Web site,” according to the article. Hundreds of lawsuits from the 2008 financial collapse are still playing out in courts around the country because of these so-called “liar loans” where income is inflated to make the borrower appear able to meet the loan obligation. 

The Times quotes Sarah Ludwig, the co-director of the New Economy Project, on Summers involvement in this business model: “This should be another red flag…What is a potential Fed chairman doing on the board of a company that doesn’t check if people can afford loans?” 

The business model is called P2P, or peer-to-peer lending, matching online borrowers with online investors. Loans at Lending Club range from $1,000 to $35,000. The company’s web site lists the details of the borrowers, without using their name, in order for potential investors to select those in which they would like to invest. 

One borrower whose details I looked at had received a loan of $24,000 in December 2010. He stated that his (unverified) gross income was $12,250 per month. A credit report showed he had 28 (repeat, 28) open credit lines. He was indebted to the three bad boys of Wall Street at mammoth interest rates: a 20 percent outstanding loan with Bank of America; a 29 percent outstanding loan with Citigroup; and a 16 percent loan with JPMorgan Chase as well as other loans with other lenders. Lending Club charged him the benevolent rate of 20.03 percent. 

On June 4 of this year, for unknown reasons, the Senate Budget Committee included Summers on a panel to provide testimony on the strength of the economic recovery in the U.S. As part of that testimony, Summers recounted his time in the Treasury Department under former President Bill Clinton. Summers testified: 

“Essentially, we enjoyed a virtuous circle in which reduced deficits led to lower capital costs and increased confidence, which led to more rapid growth, which further reduced deficits reinforcing the cycle. As a Treasury official in the 1990s, I was proud to support and help implement these measures. The time will come again when deficit reduction should be the immediate first priority of budget policy.” 

Summers apparently lives in the “virtuous circle” view of  himself. There was no mention of brow-beating regulators into submission on non-regulation of derivatives; no hint of repealing the most effective and vital investor protection legislation that had served the country for more than six decades; no admission of wildly misleading the country on the great things this deregulation would do for consumers and the national economy. 

At the November 12, 1999 signing of the Gramm-Leach-Bliley Act (the legislation that repealed the Glass-Steagall Act and portions of the Bank Holding Company Act of 1956), Summers had this to say: 

“Let me welcome you all here today for the signing of this historic legislation. With this bill, the American financial system takes a major step forward towards the 21st century, one that will benefit American consumers, business, and the national economy for many years to come…I believe we have all found the right framework for America’s future financial system.” 

Without apology or confession as to the arrogant, misguided role he played in setting the country up for the 2008 collapse, Summers did concede the following to the Senate Budget Committee, indicating just how long it will take for the country to get back its financial footing: 

“It is sobering to contemplate that the CBO [Congressional Budget Office] estimate of the economy’s potential capacity after full cyclical recovery in 2017 is now fully 7.2 percent or $1.2 trillion below the CBO’s 2007 estimate.” (And that may be overly optimistic.) 

Isn’t it long past the time to hear an earnest apology from Larry Summers and for him to remove himself from consideration for Fed Chair. 

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