The Wall Street Fix
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Alan Blinder is a professor of economics at Princeton University. He served as vice chairman of the Federal Reserve Board from 1994 to 1996 and was a member of President Bill Clinton's original Council of Economic Advisors from January 1993 to June 1994. In this interview, he offers his perspective on the Federal Reserve Board's rationale for loosening the restrictions on banking activities in the 1990s -- allowing the merger that created Citigroup and led to the repeal of the Glass-Steagall Act -- and contends that the joining of commercial and investment banking has not been responsible for the latest Wall Street abuses. Rather, he says, such abuses existed before and will continue to exist, and the best we can hope for is to mitigate them and learn from them. This interview was conducted by FRONTLINE correspondent Hedrick Smith on Feb. 13, 2003.

Dr. Blinder, take me back to the late 1980s and early 1990s, and explain to me about the steps that were being taken by the Federal Reserve Board to relax, to liberalize, the provisions of the Glass-Steagall Act.

In the late 1980s, after some agitation before that, banks started getting even more serious about getting into securities, from which they had been more or less banned since the Glass-Steagall Act in the 1930s. There were, first, some legal cases. Then there was a ruling by the Federal Reserve Board, allowing a greater participation by banks in, for example, underwriting security stocks. The amount by which they were allowed to do that gradually went up in a couple of stages -- the biggest stage happening in 1996, when it was raised to a degree that, except in some extraordinary cases, it was probably enough for almost any bank to do almost any amount of security underwriting that they'd actually want to do.

To think that we're going to make financial markets free of excesses is an illusion. You'd like to think that something like this will not happen again for 35 years. People forget faster than that.

In other words, it was very close to repeal of Glass-Steagall, although not literally repealing Glass-Steagall. Glass-Steagall was still on the books.

Tacit repeal of Glass-Steagall?

Tacit repeal.

You were on the Federal Reserve Board at this time. What was the thinking? Why did you do this?

The thinking was manifold. One was that the market had practically repealed Glass-Steagall, anyway. The lines among insurance, securities and banking had been becoming successively blurred. Securities companies like Merrill Lynch were into things that looked a lot like banking. Banks like J.P. Morgan were looking a lot like securities houses, and so on -- all under the current legal framework. So the market had almost done away with it.

Secondly, there was a belief that you could enhance competition in all of these domains, if the banks could compete in the domains of the securities houses, and the securities houses could compete in the domains of the banks, and so on. You'd have a more competitive and, therefore, more efficient financial system.

That was an argument that was made. I, myself, was not that enamored of that argument. I think it was true, but my view was that there was plenty of competition in both domains already, and while I think it was a valid argument, I didn't think it was a powerful argument.

You can hardly argue that the market is already repealing Glass-Steagall, and then say you've got to change the regulations so [there will be more competition in the market].

It was to make it easier. It would just make the organizational structure easier. For those few organizations that couldn't do what they'd like to do under the existing regulatory framework, repeal of Glass-Steagall would make it possible. Citigroup was the most prominent example, because of the scale of the insurance company. With Travelers, an immense insurance company, and an immense bank [Citibank], and a pretty immense brokerage [Salomon Smith Barney], coming together under Citigroup, they really needed repeal of Glass-Steagall or even greater liberalization of the regulations -- more than was likely.

What was Chairman Alan Greenspan's role in this? What was his thinking? Was he for this? Was he an advocate? What did he do?

He was certainly for it. The Federal Reserve Board, in fact, had been for repeal repeatedly through the 1990s. I can't answer completely what he did, because some of what he did, I probably didn't see.

Well, no, but in terms of what you're describing, how big a role did Alan Greenspan play in the watering down and tacit repeal of Glass-Steagall?

I think he played a substantial role, in the sense that were he against it, it could not have happened. He could not have stopped the market from encroaching over boundaries. Those were sort of natural market events. But he could've stopped -- at least slowed down and, I think, probably stopped -- the friendlier regulatory environment, the raising of the ceilings on how much of the activities of a bank could be in securities, for example, if he were of a mind to.

He wasn't. The kind of arguments I was just giving you resonated very strongly in Greenspan's mind.

I might add one other, which, to me, was also a very powerful argument, which was freedom of enterprise. I mean, we have a free enterprise system, and unless the movement of one business into some particular area is going to be harmful -- harmful to the environment, harmful to competition, harmful to safety and soundness, or something -- I think you should stop and ask yourself, "Why should the government ban it?"

People at the Fed were asking that, and not coming up with very good answers. That led you to the conclusion, "OK. We should let them."

You've sort of described Alan Greenspan as somebody who didn't put the brakes on when he could have. Others have talked to us about Greenspan, going back to his days as a director of J.P. Morgan, helping to produce a pamphlet in 1984, I believe, called "Rethinking Glass-Steagall." They picture Greenspan as being a sort of a vigorous advocate of a stronger free market and taking away regulatory barriers. Is that accurate?

I think that's partly accurate. ... I think it's accurate in terms of how Alan Greenspan basically viewed the world, in a philosophical mindset. ... He believes in free markets, and the government shouldn't put up too many fetters and blockages for free markets.

However, between 1984 and 1987 -- I didn't read that pamphlet -- something changed. He put on the hat of the nation's leading bank regulator, and that changes you. There's a paradox here that's been pointed out by a number of people -- that Alan Greenspan, a putative follower of Ayn Rand, is one of the greatest regulators in the world. But that's his responsibility when he walked in that office and put on that hat. ...

But he was a regulator who believed in loosening restraints.

He did, in general, except ... if he'd thought that this threatened the safety and soundness of the banking system -- which he didn't -- but had he thought that, I think he would've had a rather different view. I certainly would have, and I think he would have, too.

In the internal arguments for increasing the liberalization of the banking regulations, was he a proponent? Was he an advocate? Was he a leader?

Yes, I would say he was definitely a proponent. I don't think in any sense -- at least from my knowledge -- was he driving the political process that led eventually to repeal. But he was definitely an advocate. He was called to testify on this many times in front of the Congress over many years, and was always in favor of repealing Glass-Steagall.

I'm sure he had many private conversations with senators and congressmen to which I wasn't privy, in which he also would've advocated. That's not inconsistent; it's just the same thing he was saying in public. I'm sure he had many such conversations.

The 25 percent exemption, which let commercial banks do 25 percent of their business in the securities industry, this pretty well killed Glass-Steagall, de facto. Is that right?

Yes, I think so, with a very, very few exceptions. Somebody whose business plan might have led to 33 percent being securities would be constrained. But very few, if any, banks would've fallen in that category. So for the most part, I think the bankers had very nearly all that they needed under the 25 percent ceiling. They got some legal simplicity by the repeal and a few other things like that. But in terms of actually doing business, I think they could do most of what they wanted before.

During this whole period of the late 1980s to the late 1990s, Congress, one way or another, is considering legislation to repeal Glass-Steagall. So the issue's up there, and it repeatedly gets blocked, stopped. Was there any sort of misgiving or restraint on the part of the Fed, saying, "Well, Congress is looking at this law, and we ought not really to step in. This is going beyond applying the laws. This is really venturing into rewriting legislation." After all, this is before Congress, it's not as if it was a forgotten issue. Was there any restraint?

I think the answer to that is yes -- that, for example, the movement to the 25 percent ceiling could've happened much earlier, and didn't. There was some hesitation in doing that. I can't answer your question as well as I'd like to, because I was already off the Board when the vote for the 25 percent happened.

But you were there during the discussions?

I was there during the discussion. I can tell you I had misgivings about going to 25 percent for exactly that reason -- not because I thought it was bad public policy. I had some misgivings because I thought such a large liberalization of the powers and extent of banking ought to be explicitly allowed for by Congress. Not that I thought it was a bad idea, I thought Congress probably should do that, rather than the Fed unilaterally.

What about, then, the decision [by the Fed] to approve the merger of Citibank and Travelers -- which goes well beyond the 25 percent rule?

I think, actually, they had very little choice about that. There are merger guidelines. The guidelines were met, including the possibility that if the repeal of Glass-Steagall didn't come through -- which it did -- Citigroup would've had to divest itself of at least a large part of Travelers; probably not the whole thing, but a large part. Probably, in fact, it would've meant the whole thing.

So Citi was prepared, if they had to, if the law wasn't changed, to make the proper divestitures that would've kept them legal. So the Fed had really no grounds to oppose it.

So it was an open-and-shut case for the Fed to approve the Citibank-Travelers merger?

That's probably only a little too strong. Anything that large gets some serious consideration, and so on. But I think the arguments were overwhelmingly on the side of approval. It was Citi that took the big risk, because if they didn't get the change in the law -- which they did wind up getting -- they would've had to change their business very substantially by, for example, divesting the insurance company. ...

One of the things that's interesting is the degree to which that seems to have been checked out in advance. I mean, Sandy Weill [of Travelers] goes down with John Reed [of Citibank], and he sees Alan Greenspan on March 26, 10 days before they announce the merger; stops by, sees [Treasury Secretary] Bob Rubin; goes and sees the president of the United States. Is this typical? Is this just something that very powerful, strong institutions can do, and the rest of us can't quite do that?

It's something in between. The strong, powerful institutions can do it a lot better than the rest of us can. But it's pretty common in the heavy regulated industries that, if you're going to do anything large -- it doesn't have to be a merger, even a new product that's going to make a big splash or something like that -- you, as a courtesy, go in and talk to your regulator, make sure that they're not going to get up in arms about it. Because if they are, it can cause a tremendous amount of trouble.

What we've heard from other people is that for the lawyers of Citibank to go in and talk to Virgil Mattingly [the Fed's general counsel], or people in the general counsel's office -- or, perhaps, the specific regulators in the area of banking or insurance that's affected -- that that would be fairly routine.

Very routine.

But doesn't Sandy Weill have rather special access if he's talking directly to Alan Greenspan and to Bob Rubin at Treasury and to the president of the United States?

Absolutely, he does, and not every country banker in America can get that kind of access. That's why I said the bigger institutions can do this more easily than others.

But you've got to remember this deal that Sandy Weill was coming to talk to these people about was not opening a new branch in Texas or something. This was a very big deal. They were creating the biggest financial company on the face of the earth. I think it's very, very appropriate.

It would've been foolish as a pure business matter -- never mind politics, which, of course, gets involved -- as a pure business matter, it would've been foolish to just bull ahead with that without informing Alan Greenspan, Bob Rubin, and so on, even if it's just as a courtesy.

You say, "Never mind politics," but politics does get involved. What do you mean, "politics?"

Politics gets involved, because they knew at the time that they did it, they were going to need a change in the law to hold this enterprise together ... and that was going to come out of the political system. Alan Greenspan couldn't do it for them. Bob Rubin couldn't do it for them -- though both of them can help, of course, by saying that they like the idea. The Congress had to do it.

But the Fed could have said at that point, "Well, Congress is considering the legislation. You've got the 25 percent. We've already given you that rule. Go ahead and do that part. Hold back on the rest. Why don't you let Congress go ahead?" To a certain extent, isn't the Fed, by approving that merger with all those elements together, forcing the hand of Congress?

I don't think so. I don't think so, because you've got to remember that the basic mindset at the Fed -- and other agencies that are called upon to approve or disapprove mergers -- is that the presumption is if it meets the various guidelines, and sometimes that involves divesting assets in particular areas, one ought to approve it unless you've got a good reason to oppose it. It can't be just, for example, "I'm not so sure this is a great business idea." That's not the business of the regulators to decide.

I remember being on the Fed, seeing merger applications come to us. Many times I thought, "I don't think this is a very smart business that they're doing." But that's not my business, as long as it was legal, or was not going to create a monopoly, and so on. ...

It looks like there was a very friendly handling of this. You're quite right in saying that as long as there was a 25 percent rule, as long as there was a provision of the Bank Holding Company Act that said you divest in two years, they met the legal requirements. But it didn't look like anybody was leaning on them very hard, and it sure looked like people were assuming that the law was going to be repealed in Congress.

I can't speak to the friendly reception. I just wasn't there, and I don't know. On the latter, I think there had been a presumption for some years that the Glass-Steagall was going to be repealed. Each year, starting in 1990-something, they'd say, "OK. We're going to do it this year." Then the insurance lobby would kill it. "OK, we're going to do it next year," and then something else would kill it.

So there was this constant presumption that the death of Glass-Steagall was going to be the next legislative step. That didn't originate in 1999.

Other people have said to us that the death of Glass-Steagall was the 25 percent rule by the Fed and the approval of the Citibank-Traveler's merger, and all Congress did was to bury it.

Well, Congress could have refused. If Congress was swayed by the arguments made in 1933 and 1934, that this was going to be a terrible thing, and it was going to cause all kinds of conflicts of interest, they could've -- as they had many years in a row, going up to 1999 -- refused to pass what became Gramm-Leach-Bliley [the Financial Services Modernization Act of 1999]. And then Citi would've had to change its structure.

But in the years before Citigroup had been formed, the merger had been undertaken, they were always talking about what would happen. In 1998 and 1999, [after the merger had taken place], Congress was talking about, "Do you want to unscramble the eggs? Do you want to break up a merger that's already been done?" So didn't that merger put a lot of pressure on Congress to pass the bill?

If that's your point, yes. I think I agree with that. The fact that you had facts on the ground -- you had this large financial institution which, without passage of the act, would've been thrown into some kind of turmoil -- I mean, it could've been managed, but it would certainly have caused some kind of turmoil -- I'm sure that was one of the factors that pushed Congress in that direction.

But remember, this is a direction in which [Congress] had been inching over the years. ...

So did the Fed's approval of the Citibank-Travelers merger push Congress finally to go ahead and repeal Glass-Steagall?

I think it helped. Yes. I do think it helped that Congress was moving that way anyway. This was another factor sort of changing the cost-benefit calculus of saying yes, versus saying no.

They knew that the Fed was quite copasetic about repeal of Glass-Steagall. They had known that for a while. So it was all of a piece. It wasn't like they were getting very inconsistent signals.

No, but you have somebody like Sandy Weill in the banking industry -- call Sandy Weill, for a moment, the point man of the banking industry -- going to the Hill, pushing as far as he can. Leadership takes the bill down, runs to the Fed, gets a decision, goes back to the Hill. So Sandy Weill and the banking industry are working Washington pretty cleverly at this point.

I imagine. I have no firsthand knowledge but, sure, I imagine that they were. ...

I'm simply asking you how politics works. From the outside, it looks as though a big financial institution, and a group of them together, want to get something done. They work the Hill, they work the Fed, the work the president to get where they want to get.

Absolutely, and being able to say that Alan Greenspan thinks this is fine, or even good public policy, helps. We're seeing it right now on tax policy, on a completely different issue. There's no doubt about that. ...

From your experience in Washington, and also observing Washington, don't big events often drive policy when the policy debate itself gets stuck? An event has a triggering effect?

Absolutely. I think your point that the Citi application and then the merger helped push this along is absolutely right. It did sort of have a catalytic effect, because things do get stuck in congressional committees and on the floor and in every place.

As I said, this had been in Congress in 1995, 1996, 1997. It didn't move. Something stopped it every time. Something was needed to give it a little bit more oomph. I don't doubt that the formation of Citigroup helped provide that oomph.

Had you still been sitting on the Fed in 1998, when the Citigroup merger came up, would you have had enough misgivings about it to have opposed it? You said you were somewhat reluctant in going along with the 25 percent. Was there enough added on here so that there would've been bigger questions in your mind?

There'd have been some, but I doubt that they would've been that large. Frankly, whatever I had raised, the staff would've come up with six reasons why I shouldn't worry about this.

The principal one would've been -- I'm sure I would've raised -- "Well, under the current law, won't this be illegal in two years?" They would've said, "Sure. And if it is, Citi will divest itself." That's a legitimate answer, and Citi would've had to agree to do that. They did agree to do that. So that's a perfectly legitimate answer to the question that I'm sure I would've raised.

What about the bigger the institution, the broader the spread, the greater potential conflict of interest -- whether you get into bank tying, with commercial loans being given, tied to investment banking -- were any of those issues salient in your mind? Concern about conflicts of interest in a superbank?

I don't think too much, because there had been a fair amount of what some people would call "revisionist history" -- but I could call "history" -- of what went on in the 1930s. That's, of course, the cauldron that gave birth to Glass-Steagall. I think a fair reading of that would've been there were many, many misdeeds, many things went on that should never have been allowed to go on -- plenty of crookedness -- but very little, nearly zero of it, had its roots in the joining of banking and securities underwriting.

That is, look what's just happened in the last few years, with the scandals in the securities industry. This hasn't really had to do with the conjoining of banking and securities. It had to do with shenanigans going on in companies I won't name here, with analysts and others, that should never have happened. But the fact that some of them might've been associated with banks was pretty much irrelevant to them.

You think Sandy Weill would've cared about which nursery school Jack Grubman's kids got into if there hadn't been a superbank that included Citibank and Salomon?

No, of course not. My point is that if Sandy Weill was just the head of Salomon and had nothing to do with Citi, that would've played out the same way, I think.

But he wasn't.

No, I know. But my point is, it's not inherent in the combination.

Well, let's take a look at another party. Would Travelers have loaned $100 million out of $500 million to Bernie Ebbers personally if Citigroup, as a group, had not been interested in Bernie Ebbers' business?

I don't know. You're suggesting the answer is no, and that may well be right.

I don't see how you can say that you've got a bank that is doing commercial banking, that is doing investment banking, that's doing insurance -- the whole argument that Sandy Weill made was, "We're going to cross-market. We're going to offer all these services in a package to guys like Bernie Ebbers and companies like World Com," or Enron, or any of the others -- and then turn around and say that the fact that they could do all those things didn't mean that somebody in the business wasn't influenced by somebody else in the business to do things they shouldn't have done?

A couple of points. A lot of us were skeptical about the cross-marketing argument, and I don't think that the secret of Citi's success -- and it has been a successful agglomeration -- has actually been cross-marketing. That's not to say there hasn't been any cross-marketing. But I think it had to do with greater efficiencies, with cost cutting, with a bunch of things like that. They have good business management. Sandy Weill is a good business manager, for example. I'm not sure cross- marketing played that big a role; which is not to say you can't find any cases where something might've gone wrong.

But we're looking at a situation where [10] Wall Street banks have just had to get into an agreement with Eliot Spitzer and with the SEC to change their practices. ... Are you saying that none of the abuses that we see on Wall Street were a product of this merger of all these different services?

Yes, very nearly. That is right. There were abuses. Some of them needed to be legislated against; some of them need to be penalized in the legal system; but I think precious little, if any, have to do with Gramm-Leach-Bliley. ...

The whole rationale of the superbank, as it's laid out in quarterly reports as well as in testimony to Congress and so forth, is that, "We can offer all these things to the client in one place." So Citigroup has WorldCom as an investment banking customer, has them as a commercial banking customer. It's got Bernie Ebbers as an individual client. It's giving him hot IPOs through the investment bank, and its Travelers insurance arm is loaning to him. The whole philosophy and strategy of the bank is to do this. Now that they've done it and it wound up with abuses, how can you say that the fact that they could do it all, and they had it all under one umbrella, isn't it at least part of the causation of the problem?

All I'm saying -- without speaking to that case -- is that you'll be able to find cases of abusive lending and whatever you want in any one of these taken by itself. Just take pure banking, take pure insurance, take pure securities.

I think the case that you make this substantially worse by allowing poaching across the line is not zero; there's a little bit to it. But I think it's underwhelming, rather than overwhelming. I think that's true now, and I think that's what a reading of the history of the 1930s also suggests -- which is not to say there weren't crooks running around in the 1930s, or there weren't crooks running around in the 1990s. There surely were. ...

There are some people who would contend that some of these abuses -- I'm not saying all, because as you point out, there are abuses that could've occurred had there been no merger -- but that at least some of these abuses were either created or exacerbated by the fact that you had all these services under one umbrella at Citigroup. What's your response to people like that?

Well, I think it's possible, and you need to keep working at -- I don't want to say "eliminating," because there's no such thing as perfection in this world -- but making the potential conflicts of interest minimal, rather than maximal. And every time one happens, the institutions and the regulators learn something about how to do it better.

But isn't it the nature of the culture that [Sandy Weill's] put together to make these deals -- to do precisely this? It isn't just a matter of regulators standing back and saying, "We've learned something." This is a whole culture which is designed to do precisely what it did. ...

Right. You can argue, people did argue in the long-standing debate over Glass-Steagall, that there was a cultural difference between, say, the securities business and banking, and the bad side of that is that the more the securities culture "infected" banking, the worse banking would be.

There was another way to run the argument, which was the more the banking relationship culture, quote, "infected" -- or, I should say "affected" -- securities, the better the securities industry would be. So this can go both ways.

But what happened in the late 1990s? In the late 1990s, what was driving things was investment banking. ...

But I point out to you that through this whole financial mess -- this destruction of $8 trillion, $9 trillion, $10 trillion of wealth, this complete bursting of the Internet bubble -- not one large bank in America got into serious trouble. We had a few small bank failures, there was one just the other day. But it had nothing to do with dot coms -- not one single bank. ...

From the point of view of a bank regulator looking at whether this is a good idea, the thing you care about first and foremost is the safety and soundness of the banking system. Even given what happened -- which was a very cataclysmic event in the securities industry -- even given that, it is, to me, virtually impossible to make the case that this has done damage to the banking system. It just doesn't look that way.

What about damage to the banking system's customers? Eighty-five million investors--

Not to the banking system's customers. To the securities industry's customers, yes. Sure. A lot of people lost a lot of money.

Then I guess that raises the question as to whether or not, if you create superbanks -- and necessarily, they have huge ranges of customers -- that by focusing on the big corporate clients who deliver a lot of money and have a huge payoff, that the people who get hurt in that kind of an institution are almost necessarily going to be the little guys.

Well, I'm sure that's right, but I'm also reading in the paper -- I'm not there, involved in the enterprise -- that in Citigroup, which is what you've been talking about, they're now learning that the money to be made is in retail.

Yes, but if people have lost $7 trillion, Dr. Blinder, and they're still $7 trillion out, it's not a helluva lot of comfort to find out that the bank is now interested in you after you've lost all that money, because the bank can make more. What you've said is it's worked out fine for the banking system. It's worked out fine for the banks. What about 85 million investors and small customers?

The point is that I'm not at all convinced -- it would take a lot to convince me of this -- I just don't see the evidence that that difficulty, that bubble, was made worse, not to mention immeasurably worse, by the conjoining of some banks and some securities companies. ... Citi happened to be combined with a very big bank. But lots of the same things -- as bad or worse -- were going on where there was no such agglomeration.

See, if you want to make the case that a lot of shady things were happening in this period and a lot of bad judgment was exercised, I'm with you 100 percent. But if you want to make the case that it was in large measure because of the tearing down of the barriers among insurance, banking and securities, I just don't see that. ...

A very wise economist, now deceased -- much wiser than and older than I -- once said that in a country as large as the United States, you can find 50 examples of anything. So I'm sure you can find examples. I don't doubt that for a second.

The settlement between the securities industry and the regulators. From what you know of Wall Street, do you think the problems of the abuses we saw in the 1990s have been solved by this settlement?

No, I don't think it's solved. You'll never solve it, I think. What you try to do is mitigate it. My view of this, and many things in the regulatory and legal realm, is that you see a problem, you try to make a patch or repair. You fix the exact problem -- or you mostly fix it -- but then right next to it, there'll be some other kind of a problem that arises. ...

I think the way you want to think about this is, in the lexicon there's supposed to be a kind of a "Chinese wall" between the analysts on the one side and the investment bankers on the other side. To put it crudely, the analysts are not supposed to act as shills for the investment bankers. The accusation is that, to much too great an extent, they were acting as shills. So what do you do about that?

An idealist might say you put up a perfectly, completely impregnable Chinese wall between the two. I don't think that's possible. I think what you do is thicken the wall, and you make it higher. You make it harder to either go through it or around it and, therefore, quantitatively you reduce the amount of abuse. You never can reduce it to zero, I don't think.

To me, the most amazing thing was that anybody was listening to the Wall Street analysts to begin with. I know some people were; it's still amazing to me. I think there are fewer such people now.

There are those who say that all the rules that have been put forward as part of the Wall Street settlement were essentially on the books before, and that you're simply going back and saying to people, "You've really got to live by the rules that have been there before"; and that, absent public confessionals acknowledging what was done wrong by the participants and the senior CEOs, absent criminal indictments, that in fact the culture of Wall Street isn't going to change. As soon as this has blown over in few years, we'll be back in the same mess again. What do you say to that?

I think there's probably some truth to that, but I think we'll be back in some kind of a different mess. It changes things, and it moves things. I'm not a good enough lawyer -- I'm not a lawyer at all -- to opine on the question. They've signed a legal agreement. They're going to be in specific sorts of hot water, being in breach -- I might say "material breach" -- of those agreements, if they violate them. That's a little bit of a change from the status quo ante, before they had signed that agreement.

But if what you're basically saying is these kinds of blatant conflicts of interest were against the rules before, and they're still against the rules, that's basically right.

Self-policing, which this heavily depends on -- can that work?

Well, only so far. I believe you have to have policemen. You rely to some extent on self-policing, and then you have to have policemen. ...

But if the securities cop doesn't send anybody to jail, the way Rudy Giuliani sent Michael Milken and Ivan Boesky to jail [in the 1980s], then what's the message? "Lay low for a while, but it's OK"?

The message, I guess, is, you can lose in many, many ways, but probably not go to jail.

How would you do it? If you had a chance to try to fix the problems that we saw on Wall Street in the last five or 10 years, what do you think are the most essential things that need to be done?

I don't have a simple answer to that, because I think the real root cause in this is something that we can't get rid of -- which is that there have been manias and speculative fevers since the beginning of markets. We're never going to get rid of them.

When those things happen, there are going to be con men and con women of various sorts. They're going to take advantage of people. So what you can do is try to tighten the rules every time you see someone's figured out a way to get around the rules. Make sure you have cops on the beat. Try to give people warning. Have lots of disclosure.

I'm a big believer in transparency, and disclosure, including disclosing if your pay is coming from the investment bank. If you're an analyst and that's where it's coming from, that should be clearly and prominently disclosed. First of all, it shouldn't be. But to the extent it is, it needs to be disclosed.

But I think that to think that we're going to make financial markets free of excesses is an illusion. It's never going to happen. People have amazingly short memories. You'd like to think this is a searing memory, that something like this will now not happen again for 35 years.

I don't believe that. People forget faster than that. ...

Given the human nature you just described, does it make sense to liberalize the banking rules the way you all did?

I think it did. As I said, to the extent liberalizing the banking rules played any role in that, it was really tiny -- almost to the point of being negligible.

So what I think it says is you try to put in consumer protections every place you can -- transparency, rules, laws and otherwise -- that limit conflicts of interest where you can find them. Then you hope for the best, and then you come in and clean up the mess after the mess happens. And you learn, so that the next time, the mess is at least different. You don't screw up the same way twice.


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published may 8, 2003

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