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Former President Clinton concedes he got it wrong on derivatives

Finance Blogger: Ian Fraser Ian Fraser

Former President Bill Clinton has admitted that he ought to have tightened up the regulation of derivatives when he was in office, but insisted he had no regrets over the decision to repeal of the Glass–Steagall Act, which separated commercial from investment banking.

A relaxed Bill Clinton told ABC’s “This Week” he should never have listened to the advice of his former Treasury Secretaries, Robert Rubin and Lawrence Summers, both of whom recommended leaving derivatives in a regulatory free-for-all. (It later emerged there was some doubt over whether it was these two, or Federal Reserve chairman Alan Greenspan, who had recommended leaving derivatives alone).

The former president said: “On derivatives, yeah I think they were wrong and I think I was wrong to take [Summers and Rubin’s advice].”

The Treasury Secretaries and/or Greenspan advised Clinton there was no need to regulate derivatives, since the products were “expensive and sophisticated and only a handful of people will buy them and they don’t need any extra protection,” Clinton recalled.

“The flaw in that argument was that first of all, sometimes people with a lot of money make stupid decisions and make it without transparency. Even if less than 1% of the total investment community is involved in derivative exchanges, so much money was involved that if they went bad, they could affect 100% of the investments,” Clinton said.

The truth in this statement emerged following the serial collapses of billions of dollars worth of collateralized debt obligations (CDOs), many of which were stuffed with worthless securitized subprime mortgages, in March 2007, which is widely believed to have sparked the credit crisis.

Tighter regulation of derivatives and greater price transparency in the market might have prevented this craziness from ever occurring.

Derivatives reform is part of the financial package that the administration of President Barack Obama is currently pushing through Congress. The reform package would also give the US government "resolution authority" to dismantle "too-big-to-fail" institutions should they get into difficulties.

Yet the industry remains vehemently opposed to Obama's proposals, which drove the president to call for greater cooperation on April 22. “I want to urge you to join us, instead of fighting us. I believe that these reforms are, in the end, not only in the best interest of America, but in the best interest of our financial sector.”

In his ABC TV interview Clinton declared he had no regrets about his administration's scrapping of the Glass–Steagall Act. He said that, before this was officially repealed, it had already been extensively breached.

"There was already a total merger practically of commercial and investment banking, and really the main thing that the [repeal] of Glass–Steagall did was to give us some power to regulate it…"

Clinton argued that if his former head of the SEC, Arthur Levitt, had remained in office, “an enormous percentage of what we’ve been through in the last eight or nine years would not have happened. I feel very strongly about it. I think it’s important to have vigorous oversight.”

Clinton accused the government of his successor, George W. Bush, of fuelling the crisis with its laissez-faire approach to the finance sector. “The SEC and the whole regulatory apparatus was just let go,” said Clinton.

Further reading on derivatives and the credit crunch

Tags: banking , Bill Clinton , derivatives , financial crisis , regulation , US
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