Brooksley Born In, Geithner Out: Opinion
When Scott Brown won Ted Kennedy's senate seat a few weeks ago, it was a shot across the bow of President Obama from independent voters. Two days later, the president responded by announcing the "Volcker Rule" which will put more restrictions on commercial banks to get out of investing activities and focus more on lending money to their customers.
The president's response showed that he's done a poor job in his first year in office of keeping the support of "independents" -- so-called because they don't permanently define themselves as Republicans or Democrats.
The president understands that, unless he starts winning back these independents and fast, he will face a 1994-style rebuke from voters at this fall's mid-term elections. From a financial reform perspective, he must show voters that he's not a toady to Wall Street -- and I expect he will replace secretary Geithner with Brooksley Born, the former head of the Commodity Futures Trading Commission who sounded the alarm on credit default swaps long before the housing crisis swallowed the economy.
Brooksley Born, former chairwoman of the Commodities Futures Trading Commission |
Why replace Geithner? Although it's now common to Monday morning quarterback the dark days of September 2008, questioning how government officials forced a shotgun marriage of Bear Stearns with
JPMorgan Chase
(JPM) - Get Report
, let Lehman Brothers go under, swooped in to rescue
AIG
(AIG) - Get Report
, and then forced through
Bank of America's
(BAC) - Get Report
purchase of Merrill Lynch, the fact is -- at that time -- the financial world was careening out of control. I don't fault Geithner's crisis decisions (although they certainly were not all perfect).
I also don't fault Geithner for his views during the first year of the Obama administration. He's been an unapologetic supporter of the financial system. We had no confidence a year ago that the system would continue to hold up. It was a five-alarm firm and the government did what it thought necessary to keep the banks going -- and we're all still here to tell the tale.
But Geithner should go because the system does need reform and he is not the person to oversee that reform, given that he's spent his career defending the system that broke down.
We're still at 10% unemployment with signs that we will be living with a weak economy, struggling to overcome this credit hang-over, for years to come. Voters are justifiably asking how we got ourselves in this predicament to begin with. The independent voters associate Geithner as a junior member of the "Committee to Save the World."
This group consisted of former
Fed
Chairman Alan Greenspan, former Treasury Secretary Robert Rubin and former Treasury Secretary Larry Summers. During the Clinton presidency, these men banded together in an unswerving view that they had to do everything necessary to let markets operate without government interference.
This group -- with the chutzpah to give them such a pompous-sounding title -- was the driving force behind the repeal of Glass-Steagall. They banded together when the little known head of a little known agency called the CFTC started complaining about the risk to the financial system of credit default swaps.
Born was a brilliant lawyer who considered a favorite to become Clinton's first attorney general. Instead, she was passed over for Janet Reno and given the much less prestigious job of leading the CFTC in 1994.
She immediately became concerned with the growing size of the over-the-counter swap market (including credit default swaps) which lacked any transparency, except to the two parties involved in the arrangement. As these instruments fell under her agency's purview, and fearing a future calamitous financial event that might cause these instruments to amplify large market losses, she proposed new regulations to see into these private transactions.
The Committee to Save the World declared Born's move an attack on free markets. What happens between two parties in a private transaction is their business, they said. SEC Chair Arthur Levitt sided with this committee in opposition to Born, something he has since said he regrets.
In 1998, the group succeeded in quashing Born's efforts to bring greater transparency to these instruments. They successfully convinced others that bringing regulation to these swaps would stifle financial innovation and drive more financial transactions outside the US. Ten years later, AIG blew up.
Born would be an ideal pick to replace Geithner as treasury secretary at this time. She knows how to run a government agency and will have the support of both parties because she will have the support of independents. (It would certainly be helpful if she could fill the role of under-secretary and other key administrative positions, which is something that Geithner hasn't been able to do in over a year on the job.)
She would signal the Obama administration's pivot from stabilizing the financial system in year one to now reforming the financial system in year two. She would complement Volcker's push to ensure banks and financial institutions are no longer too big to fail.
No doubt she would be fiercely opposed by Wall Street lobbyists. They would paint Born as wanting to greatly reduce these banks' profitability and push regulation for regulation's sake at a time when the economy is still fragile.
She would be the right woman for this moment. Her track record suggests she can help identify when government regulation allows for clearer "rules of the game" -- ironically allowing free markets to better operate. How free is a free market if it implodes on itself?
Obama needs a team that supports that idea that he's not in Wall Street's pocket. With Bernanke back in charge of the Fed, Geithner is the logical jockey for Obama to change.
Born could be the new face of financial reform -- if she could be persuaded to take the job. For Born, this would be the final chapter of her career. Besides helping insulate the economy from future catastrophes, she wouldn't be human if she didn't take some satisfaction in a triumphant return to Washington, just as the Committee to Save the World is packing up to leave.
-- Written by Eric Jackson in Naples, Fla.
At the time of publication, Eric Jackson was not long on any stock mentioned.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson