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Goldman Sacked

Is Summers over now Obama has given up on giving the daddy of deregulation the top job at the Federal Reserve, asks Greg Palast

"What would Goldman think of that?"

US economist Joseph Stiglitz couldn't believe his ears. Here they were in the White House, with president Bill Clinton asking the chiefs of the US Treasury for guidance on the life or death of the economy.

And deputy Treasury secretary Larry Summers had just turned to his boss Robert Rubin and asked that question.

A shocked Stiglitz, then chairman of the president's council of economic advisers, later told me he'd turned to Summers and asked if he thought it appropriate to decide US economic policy based on "what Goldman thought."

As opposed to, say, the facts, or the needs of the US public. You know, all that stuff we heard on the West Wing.

Summers looked at Stiglitz like he was some naive fool who'd read too many civics books.

Last Sunday, facing a revolt by his own party's senators, President Barack Obama ditched Summers as a likely replacement for Ben Bernanke as chairman of the Federal Reserve board.

Until news that Summers's torch had been snuffed I'd been going to write another column about Larry, the Typhoid Mary of economics. My first column 15 years ago had warned the world that Summers was "a colony of aliens sent to Earth to turn humans into a cheap source of protein."

But the fact that even after the financial crisis Obama tried to shove Summers down the planet's throat tells us a lot about the US president and the people he works for.

Hint to the US public - it's not you.

All those cabinet discussions back in the 1990s requiring the blessing of Goldman Sachs revolved around the Rubin-Summers idea of ending regulation of the US banking system.

To free the US economy, Summers argued, all you had to do was allow commercial banks to bet government-guaranteed savings on new "derivatives products," let banks sell high-risk sub-prime mortgage securities and cut their reserves against losses.

What could possibly go wrong?

Stiglitz, who would go on to win the Nobel prize for economics, tried to tell them exactly what would go wrong. So he was replaced and exiled.

Summers did more than ask Rubin to channel the spirit of Goldman. He secretly called and met Goldman's new CEO at the time, Jon Corzine, to plan the planet's financial deregulation.

I'm not guessing. I have the confidential memo to Summers reminding him to call Corzine.

Summers, as a Treasury official, could call any banker he pleased. But secretly?

And to scheme over the details of policies that could make the bank billions? For Goldman did make billions on those plans.

Goldman and its clients pocketed $4 billion (£2.5bn) on the collapse of "synthetic collateralised debt obligations" - flim-flam feathers sold to suckers and dimwits such as Royal Bank of Scotland.

Goldman also cashed in big on the implosion of Greece's debt via secret derivatives trades permitted by Summers's decriminalisation of cross-border financial gaming.

The collapse of the eurozone and the US mortgage market caused by bankers gone wild was made possible only by Treasury secretary Summers lobbying for the Commodities Futures Modernisation Act (CMFA), which banned regulators from controlling a 100,000 per cent increase in derivatives assets, especially super-risky "naked" credit-default swaps.

The CMFA was the financial equivalent of the fire brigade banning smoke alarms.

Summers succeeded Rubin at the Treasury. Rubin had left to become director of a new financial behemoth spawned by the union of Citibank and an investment bank, Travelers.

The new bank-beast went bankrupt and required $50bn (£31bn) in bailout funds. Goldman didn't require any bailout funds, but took $10bn (£6.3bn) anyway.

Other banks-turned-casinos followed Citibank into insolvency.

Most got bailouts.

Most also got Summers, either in a "consultant" role or for gold-plated speaking gigs.

Derivatives trader DE Shaw paid Summers $5 million (£3.1m) for a couple of years of part-time work.

This, added to payments from Citigroup, Goldman and other finance houses, raised his net worth to more than $31m (£19m).

When he left the Treasury in 2000, the grateful Rubin got Summers the post of president of Harvard University.

He was later fired from that job - he'd gambled away over half a billion dollars of the university's endowment on the crazy derivatives he'd legalised.

Given his almost pathological inability to understand finance it added insult to injury when as university president he suggested that women aren't very good with numbers.

But in 2009 the daddy of the deregulation disaster returned to the cabinet in triumph. Obama crowned him the "economics tsar," allowing him to run the Treasury without the formality of having to answer questions in Congress at a formal confirmation hearing.

So, did he use his new powers to redeem himself?

In 2008 both Democrat Hillary Clinton and Republican John McCain called for using the $300bn left in the government's bailout fund for a foreclosure-blocking programme identical to the one Franklin Roosevelt had used to pull the US out of the Great Depression.

Tsar Larry would have none of it, though banks had been given $400bn from the same fund.

Indeed, on advice from Summers and then Treasury secretary Tim Geithner Obama spent only $7bn of the vast sums available on saving US homeowners.

During Obama's first term he abandoned 3.9 million families. That's how many people's homes were repossessed.


Goldman and clients pocketed billions because while these families were drowning Summers torpedoed the lifeboat. He vetoed the plan to force banks to write off the overcharges on predatory sub-prime mortgages. This saved Citibank lots of money.

But the deregulation disaster isn't finished with the US.

While not-for-profit credit unions, lenders of last resort for working people and the poor in the US, have been under legal and political attack a new kind of banking operation has bubbled out of the minds of grifters looking for a way to make loan-sharking legit.

One new outfit, called Lending Club, has worked out a way to collect fees for arranging loans which equal 29 per cent of the money lent.

Lending Club says it cannot and should not be regulated by the Federal Reserve. A recent addition to its board of directors - Larry Summers.

Why would Obama pick such a man to head the Fed? You have to ask: who picked Obama?

Ten years ago he was just a state senator from the south side of Chicago. But then he got lucky.

A local bank, Superior, was shut down by regulators for its mortgage shenanigans.

Its chairwoman Penny Pritzker was so angry at the regulators that she decided to eliminate them.

Billionaire Pritzker - now US Commerce Secretary - connected Obama to Jamie Dimon of JP Morgan, but more importantly to Rubin, the former Treasury secretary, former Goldman Sachs CEO and mentor of Larry Summers.

Without Rubin's blessing and overwhelming fundraising power, Obama would still be arguing about reclassifying the zones on Halsted Street.

And that's why Obama knows he must pick a Fed chief based on the answer to the all-important question.

What would Goldman think?


Greg Palast is the author of Vulture's Picnic: In Pursuit of Petroleum Pigs, Power Pirates and High Finance Carnivores. Special thanks to Lori Wallach of Public Citizen who helped research this


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