Memo to Biden: Cut Your Ties to Larry Summers

By Pam Martens and Russ Martens: August 4, 2020 ~

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

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

David Sirota has read the collective mind of progressives when it comes to Presidential candidate Joe Biden. On August 1 Sirota Tweeted: “Give us an anti-Wall Street Treasury Secretary and AG [Attorney General], and you can have your sh*tty VP…On the other hand, give us a sh*tty Treasury Secretary and AG and try to paper it over with a good VP, and you’ve basically given everyone the big middle finger.”

There is growing concern about Biden among progressives because he has made the decidedly ill-advised move of using the infamous Larry Summers as an advisor. Summers is the man who played an outsized role in the creation of Frankenbanks on Wall Street in 1999 with his push to repeal the Glass-Steagall Act and the deregulation of derivatives in 2000 as Treasury Secretary in the Clinton administration.

Carrying on the proud tradition of failing up as a Wall Street Democrat, Summers became director of the National Economic Council under the Obama administration during the worst economic crisis since the Great Depression – brought on in no small part as a result of the Wall Street deregulation endorsed by Summers during his time in the Clinton administration.

Summers’ economic policies during the Obama administration led to the Occupy Wall Street protests and chants around the country that “Banks got bailed out; we got sold out.” This was an accurate assessment of Summers’ policies.

Not quite finished in his work at pushing the country backwards, Summers launched his misogynist attack on women’s math and science aptitude as President of Harvard in January 2005. These remarks produced world-wide notoriety for Summers and a vote of no-confidence by the Faculty of Arts and Sciences at Harvard. A year later, facing a likely second no-confidence vote from the same body, Summers resigned his post as President of Harvard. He is currently a professor there.

Clinging to his failing up policy model, Summers decided he wanted to become Chairman of the Federal Reserve in 2013 and President Obama appeared ready to accommodate Summers. That caused such an outrage among progressives that almost a third of Senate Democrats wrote to Obama telling him to nominate Janet Yellen instead. Then word leaked out that a majority of Democrats on the Senate Banking Committee, which would have to vote on Summers’ confirmation ahead of a full Senate vote, were going to give his bid a thumbs down. Faced with the prospect of yet another public humiliation, Summers withdrew his name from consideration.

Then, curiously, in 2015, Summers inserted himself back into the national debate with an OpEd in the Washington Post where he attempted to challenge Senator Bernie Sanders on critically-needed reforms to the Federal Reserve and mega banks on Wall Street. Summers wrote:

“On regulatory policy, no one is for gambling with insured deposits. But Sanders fails to recognize some of the tensions that make regulatory policy so difficult. Loans to small businesses — which he likes — are far riskier than holdings of securities that are marked-to-market on a daily basis. So if banks focused on traditional lending, they would be riskier than they are today. Indeed the majority of the world’s banking crises — over the past three centuries and over the past quarter-century — have come from traditional lending, especially against real estate. Making banks safer means reducing their dependence on traditional lending activities. Balances must be struck.”

Summers is either a dunce who knows nothing about Wall Street banks or he’s back to auditioning for Wall Street to become the Fed Chair. The two largest financial crashes in U.S. history that devastated the U.S. economy (1929 and 2008) had nothing to do with traditional lending and everything to do with using depositors’ money to make speculative, highly-leveraged bets in derivatives. There was no mark-to-market daily on derivatives because they were (and remain) largely bespoke, confidential contracts between two counterparties.

On June 30, 2010, Phil Angelides, the Chair of the Financial Crisis Inquiry Commission, had this to say at a hearing convened specifically to examine “The Role of Derivatives in the Financial Crisis.”

“I must say that despite 30 years in housing, finance, and investment — in both the public and private sectors — I had little appreciation of the tremendous leverage, risk, and speculation that was growing in the dark world of derivatives. Neither, apparently, did the captains of finance nor our leaders in Washington.

“The sheer size of the derivatives market is as stunning as its growth. The notional value of over the-counter derivatives grew from $88 trillion in 1999 to $684 trillion in 2008. That’s more than ten times the size of the Gross Domestic Product of all nations. Credit derivatives grew from less than a trillion dollars at the beginning of this decade to a peak of $58 trillion in 2007. These derivatives multiplied throughout our financial markets, unseen and unregulated. As I’ve explored this world, I feel like I have walked into a bank, opened a door, and seen a casino as big as New York, New York. Unlike Claude Rains in Casablanca we should be ‘shocked, shocked’ that gambling is going on.

“As the financial crisis came to a head in the fall of 2008, no one knew what kind of derivative related liabilities the other guys had. Our free markets work when participants have good information. When clarity mattered most, Wall Street and Washington were flying blind…”

Just two years before Summers wrote his factually-challenged OpEd for the Washington Post, the U.S. Senate’s Permanent Subcommittee on Investigations wrote the following in 2013 about JPMorgan’s “London Whale” trades:

“The JPMorgan Chase whale trades provide a startling and instructive case history of how synthetic credit derivatives have become a multi-billion dollar source of risk within the U.S. banking system. They also demonstrate how inadequate derivative valuation practices enabled traders to hide substantial losses for months at a time; lax hedging practices obscured whether derivatives were being used to offset risk or take risk; risk limit breaches were routinely disregarded; risk evaluation models were manipulated to downplay risk; inadequate regulatory oversight was too easily dodged or stonewalled; and derivative trading and financial results were misrepresented to investors, regulators, policymakers, and the taxpaying public who, when banks lose big, may be required to finance multi-billion-dollar bailouts.”

JPMorgan Chase, the largest federally-insured bank in America, used hundreds of billions of dollars of its depositors’ money to gamble in exotic derivatives in London and lost at least $6.2 billion according to a 300-page report from the Senate. Does that sound like a prudent alternative to “traditional lending” for a taxpayer-backstopped, federally-insured bank? None of that would have been possible had it not been for Summers’ push to keep derivatives unregulated in 2000.

Larry Summers’ brain is a menace to the financial system of the United States and the economy. He needs to find some obscure academic hole, where student minds are not involved, and crawl into it — perhaps researching the science and math aptitude of alpha male lab rats.

Robert Kuttner, writing on July 13 at the American Prospect, seems to have come closest to assessing what really makes Larry Summers tick. Kuttner writes:

“The last full disclosure of Summers’s earnings showed that Harvard paid him just under $600,000 as a university professor in 2008. In that same year, he was paid $5.2 million by the private equity firm D.E. Shaw, where he was a managing director, plus $2.7 million in speaking gigs. So Wall Street paid him nearly ten times what Harvard did. After leaving the Obama administration in 2011, Summers returned to Shaw as well as Harvard. Liberating Wall Street is not just in his heart, but in his wallet.”

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