The Deal: Rules and Derivatives Moves Helped Do In Summers

NEW YORK (The Deal) -- Critics of Lawrence Summers raised lots of issues with his candidacy to lead the Federal Reserve.

However, noise from the liberal wing of the Democratic Party about his role in a series of deregulatory efforts during the Clinton Administration's waning days were a key factor in pushing the former Treasury secretary to pull his name from consideration to run the central bank Sunday. Republican reservations didn't help Summers' cause either.

Summers appeared to be President Barack Obama's main choice for the job. However, repeated criticism of his actions in the late 1990s, first as deputy Treasury secretary and then later as Treasury secretary, all contributed to the end of his candidacy.

"The enemy of Larry Summers was Larry Summers," said Cornelius Hurley, professor at Boston University's School of Law. "While he had the progressive passionately against him over deregulation during the Clinton administration, he didn't have a lot of fans on the right either."

Opponents on the left repeatedly pointed with disdain to his support for a statute approved in 1999 that eliminated the 1933 Depression-era Glass-Steagall Act, which for more than 60 years kept commercial banks out of the investment banking business. Sen. Elizabeth Warren, D-Mass., an opponent of Summers on the key Senate Banking Committee, is pushing bipartisan legislation she introduced recently to reinstate the measure, which would force some big banks, such as Citigroup ( C) and JPMorgan Chase ( JPM) to break in two.

The bill is unlikely to be approved anytime soon, barring another major bank meltdown. Her public support for Glass-Steagall in conferences and on Capitol Hill, however, helped fuel resistance to Summers.

Critics on the left also point to concerns over Summers' role in squashing an effort by the Commodity Futures Trading Commission in the late 1990s to regulate derivatives. The CFTC eventually lost that battle and instead Congress and the Clinton administration approved the Commodity Futures Modernization Act, which was later criticized for contributing to the 2008 financial crisis.

"If you believe that repeal of Glass-Steagall was a great idea, and if you believe the Commodity Futures Modernization Act was a great idea ... then Larry Summers is your guy," former Democratic Delaware Sen. Ted Kaufman said at a conference last week at George Washington University Law School that was co-hosted by left-leaning advocacy group Better Markets. The conference featured a keynote address by Warren and a few high-profile Summers opponents. "The fact that there aren't riots in the streets over the idea of Larry Summers being head of the Fed is an indication of how deep our problem is," Kaufman added.

More recently, opponents on the left have raised concern with Summers' role as director of the Obama administration's National Economic Council in the period immediately after the height of the financial crisis. Donald Lamson, partner at Shearman & Sterling LLP in Washington, said Summers' "perceived friendliness" to banks during the crisis contributed to criticism about him.

As the prospect of the Obama administration nominating Summers increased in recent weeks, opposition on Capitol Hill surged as well. At least four Democrats on the all-important Senate Banking Committee indicated they would oppose him. Summers would have had to survive a contentious nomination hearing and vote of the Senate Banking Committee. Had he survived that, the next step would have been to obtain the filibuster-proof 60 votes needed to be approved by the full Senate, a prospect that also required some Republican support, especially with a handful of Democrats in opposition.

Sen. Jon Tester, a moderate Democrat on the banking panel, indicated that he was opposed late last week, adding his name to three other more left-leaning Democratic opponents. The opposition by Tester may have been a tipping point, Boston University's Hurley noted. "That had to hurt," he added.

Another key factor in Summers unraveling was the backing by a number of Democratic lawmakers of Janet Yellen, the Fed's current vice chairman, for the top Fed job. A group of senators, including Sen. Jack Reed, Democrat of Rhode Island and a member of banking panel, recently signed a letter pushing for Yellen to take the job, according to a person familiar with the letter.

Nevertheless, it is unclear whether Obama will ultimately pick Yellen. Many believe that she will likely be nominated. Brian Gardner, an analyst at Keefe, Bruyette & Woods Inc., notes that many of the activist groups that opposed Summers support Yellen, indicating to him that she "is the likely nominee."

However, some observers contend that Obama may not want to appear as if he has caved in to congressional Democrats and therefore he will try to find someone else.

Other possible candidates include former Treasury Secretary Timothy Geithner; Donald Kohn, who was the central bank's vice chairman until 2010; and Roger Ferguson, also a former Fed vice chairman and now chief executive of the public pension fund TIAA-Cref. Other names bandied about include former White House adviser Christina Romer and Stanley Fischer, who previously was chief of the Bank of Israel. Current Fed chairman Ben Bernanke could also stay on for another term.

-- Written by Ronald D. Orol in Washington

More from Mergers and Acquisitions

Could Spotify Be Next on Amazon's Wish List?

Could Spotify Be Next on Amazon's Wish List?

Sprint, T-Mobile Might Have to Do More Than Make Promises to Get Deal Approved

Sprint, T-Mobile Might Have to Do More Than Make Promises to Get Deal Approved

Xerox Received Interest From HPQ Before Fuji Deal: Sources

Xerox Received Interest From HPQ Before Fuji Deal: Sources

Divestitures at Newell Expected in Weeks: Wells Fargo

Divestitures at Newell Expected in Weeks: Wells Fargo

In Biopharma M&A, 'Where There's Real Innovation There's Someone Willing to Pay'

In Biopharma M&A, 'Where There's Real Innovation There's Someone Willing to Pay'