The inner circle and Glass-Steagall

I’ll remind you that no less a person than Paul Krugman explained to me that Clinton was backed into a corner over Glass-Steagall by the unauthorized merger of Citicorps and Travelers Insurance:

Wall Street deregulation, blamed for deepening the banking crisis, was aggressively pushed by advisers to Bill Clinton who have also been at the heart of current White House policy-making, according to newly disclosed documents from his presidential library.

The previously restricted papers reveal two separate attempts, in 1995 and 1997, to hurry Clinton into supporting a repeal of the Depression-era Glass Steagall Act and allow investment banks, insurers and retail banks to merge.

A Financial Services Modernization Act was passed by Congress in 1999, giving retrospective clearance to the 1998 merger of Citigroup and Travelers Group and unleashing a wave of Wall Street consolidation that was later blamed for forcing taxpayers to spend billions bailing out the enlarged banks after the sub-prime mortgage crisis.

The White House papers show only limited discussion of the risks of such deregulation, but include a private note which reveals that details of a deal with Citigroup to clear its merger in advance of the legislation were deleted from official documents, for fear of it leaking out.

“Please eat this paper after you have read this,” jokes the hand-written 1998 note addressed to Gene Sperling, then director of Clinton’s National Economic Council.

Earlier, in February 1995, newly-appointed Treasury secretary Robert Rubin, his deputy Bo Cutter and senior advisers including John Podesta gave the president three days to decide whether to back a repeal of Glass-Steagall.

In what Cutter described as “an action forcing event”, he wrote to Clinton on 21 February, telling him Rubin wanted to announce the policy before it was raised by the House banking committee on 1 March.

“In order to position Secretary Rubin – rather than any of the regulators – as the Administration’s chief spokesman on this issue, the Secretary intends to discuss the Administration’s position at a speech which will be covered by the press in New York on 27 February,” wrote Cutter on 21 February.

“It is therefore necessary to have an agreed-upon Administration position by the end of the day on Friday, 24 February.”

Podesta, who was then staff secretary but went on to become Clinton’s chief of staff, wrote a covering note telling the president that all his senior advisers backed the plan, although he noted the danger that “allowing banks to engage in riskier activities like securities or insurance could subject the deposit insurance fund to added risk”.

But Clinton’s advisers repeatedly reassured him that the decision to let Wall Street dismantle regulatory barriers designed to protect the public after the Great Depression simply represented inevitable modernisation.

“The argument for reform is that the separation between banking and other financial services mandated by Glass-Steagall is out of date in a world where banks, securities firms and insurance companies offer similar products and where firms outside the US do not face such restrictions,” wrote Podesta.

Podesta currently works at the White House as special adviser to President Barack Obama. Sperling stood down as director of Obama’s National Economic Council last month.

Along with Cutter, who worked on Obama’s transition committee, all three men were close allies of Rubin, who spearheaded the deregulation of Wall Street before joining the board of Citigroup in 1999. In 2007, he briefly became its chairman.

The closeness of Obama’s team to the deregulation policies of the late 1990s is well known and has been criticised by campaigners as a reason for the current administration’s reluctance to institute more aggressive Wall Street reforms after the banking crash.

But the new documents cast fresh light on the way the White House was first ushered toward deregulation by the tight group of Rubin allies.

A similar apparent attempt to rush president Clinton’s decision-making occurred later in the process, in 1997.

In a letter received by the president on 19 May, Clinton is again given just three days to decide whether to proceed with the deregulation agenda.

Thanks to Kush Arora.