Podesta said that lack of regulation of derivatives “led to these extremely complicated instruments that even bankers didn’t understand, and led to some of what was really disastrous in the financial industry.”
Podesta’s statement is consistent with the assessments of many finance experts that poorly regulated derivatives such as Credit Default Swaps allowed banks to sell debt that had little or no value at cheap rates. Then, when the housing bubble burst and those debts were revealed to be worthless, there was a run on confidence in the bonds and the insurers holding them that jeopardized the entire financial system. It was just such a crisis of confidence and subsequent financial loss that prompted the US government to provide American International Group (AIG), the largest commercial & industrial insurer in the country, with an $85 billion bailout.
Podesta explained that in deciding not to regulate derivatives, the Clinton Administration ignored the advice of then Commodity Futures Trading Commission (CFTC) Brooskley Born in favor of the anti-regulatory views of Federal Reserve Chairman Alan Greenspan, among others. “Brooksley Born was arguing that there needed to be more regulation of the futures market and of the derivatives market in particular,” Podesta noted. “And I think that, most of the other economic advisers to the President, Alan Greenspan and others said, we really didn’t need—the market was self-correcting—we didn’t need the regulation of the derivatives market.”
The Clinton Administration did not just refuse to increase regulation of derivatives, however; it also presided over their deregulation. On December 21, 2000, during the last weeks of the Clinton Administration, President Clinton signed the Commodity Futures Modernization Act into law, which forbade the CFTC from regulating so-called over-the-counter derivatives, including the Credit Default Swaps that brought down AIG. “That was of course reversed by Dodd-Frank,” Podesta said. “But I think that, if I look back at the financial crisis and what we”—the Clinton Administration—“got wrong, I would say it was in that zone.”
Matt Stoller, a Fellow at the Roosevelt Institute, agreed with Podesta, saying that the AIG bailout, in particular, could have been avoided had the Commodity Futures Trading Commission regulated Credit Default Swaps and other over-the-counter derivatives.
“Had these derivatives been regulated, AIG would have had to keep enough money to pay out the insurance policies, which would have driven up their price,” Stoller said. More expensive derivatives would in turn have limited how much companies could conceal the value of financial products on their balance sheets.act
Watch the video of the interview with John Podesta and the Take Action News team from the 2012 DNC:
About the Author (Author Profile)
Daniel Marans is Executive PRoducer of Take Action News with David Shuster.