FOXES IN THE CHICKEN COOP
Heidi Przybyla, Bloomberg - During the height of the financial crisis in late September, some of Barack Obama's campaign advisers pushed him in a conference call to distance himself from Treasury Secretary Henry Paulson. The former Goldman Sachs Group Inc. chief executive officer, they warned, was too close to President George W. Bush and Wall Street. Obama, 47, rejected the idea. At one point, he talked to Paulson every day for two weeks. . .
Some of Obama's fellow Democrats and investor groups are urging him to bring sweeping changes to banks, hedge funds and executive pay. His closest economic advisers, men like Robert Rubin, Lawrence Summers and Paul Volcker, may recommend otherwise: go slow. If Obama takes their counsel, the 44th president, who succeeds Bush on Jan. 20, may not clamp down all that hard on a financial industry whose excesses have pushed the nation -- and much of the world -- into a recession. . .
A light touch by Obama in rewriting the rules for Wall Street would likely lead to a showdown with his own party. The Democrats strengthened their majorities in the November election by at least 20 seats in the House and at least six in the Senate -- backed by voters outraged over the $5.8 trillion plunge in the stock market from Jan. 1 through Nov. 4. . .
The president-elect has monitored Wall Street's meltdown with the help of industry insiders in New York. During the campaign he regularly traded text messages with Robert Wolf, CEO of UBS Americas, a subsidiary of UBS AG; Timothy C. Collins, head of buyout firm Ripplewood Holdings LLC; and Mark Gallogly, managing partner of Centerbridge Partners LP, a private equity shop. . .
Public Citizen, a consumer advocacy group in Washington, says Wall Street has gained a disproportionate influence over the new administration's regulatory agenda because its employees contributed so much to the Obama campaign -- a record $12.7 million compared with $8 million for McCain, according to the Center for Responsive Politics in Washington.
Individuals working in securities and investment companies were the third-biggest contributor to Obama by industry, after the education and legal fields. Goldman Sachs employees gave $874,207 to him, the second-highest amount for any organization, behind the University of California.
Rubin, one of Obama's closest economic advisers, was a proponent of deregulation as President Bill Clinton's Treasury secretary from 1995 to '99. Summers, a Harvard economist who worked under Rubin in the Treasury before replacing him as secretary, joined his boss in defeating an effort to rein in over- the-counter derivatives in 1998.
Brooksley Born, then commissioner of the Commodity Futures Trading Commission, wanted to examine regulating the derivatives, including credit-default swaps, saying they posed "grave dangers'' to the economy. Federal Reserve Chairman Alan Greenspan and Rubin issued a rebuke, saying in a statement that they seriously questioned the scope of the CFTC's jurisdiction in this area.
Summers called Born and said he was with bank representatives in his office and they believed that the regulation would lead to an economic crisis, according to a person familiar with the situation who asked to remain anonymous. Summers declined to be interviewed for this article.
Summers and Rubin also helped secure passage of the 1999 Gramm-Leach-Bliley Act, aimed at spurring competition in banking. The law repealed the 1933 Glass-Steagall Act, which had prohibited commercial banks from offering investment and insurance services. Summers, 54, helped craft the legislation, and Rubin urged Congress to pass it and Clinton to sign it. . .
"Rubin's fingerprints are all over this collapse,'' says Leo Gerard, president of the United Steelworkers. . .
The most far-reaching idea to gain support from Obama advisers, Frank and Paulson is the creation of a super regulator to control risk -- although the form it will take is a matter of debate. The regulator might set requirements for holding capital in banks, hedge funds and private equity firms and try to prevent financial implosions that would disrupt global markets.
Volcker, who served as Fed chairman from 1979 to '87, testified at a congressional hearing in May that the central bank would probably be the place to put a chief supervising regulator. . .
The Consumer Federation of America says consolidating power in the Fed, which isn't accountable to Congress, is a recipe for lax oversight. Barbara Roper, head of investor protection at the federation, says the proposal is a spinoff of a blueprint that Paulson released in March.
"The Paulson plan was conceived of as a way to 'streamline,' which is code for 'reduced regulation,''' Roper says. "You can't just assume that because Barack Obama is a Democrat that he's going to come in and fundamentally change that approach.''. . .
On Nov. 13, five billionaire hedge fund managers including John Paulson, James Simons and George Soros made an unprecedented appearance before Congress to defend their industry's practices.
Thomas Davis of Virginia, the top Republican on the House oversight committee, said regulation was needed because institutional funds and public pensions now have a huge stake in hedge funds. "That means public employees and middle-income senior citizens, not just Tom Wolfe's 'masters of the universe,' lose money when hedge funds decline or collapse,'' he said. . .