Larry Summers, former Obama economic adviser and a leading candidate for World Bank president, neatly sums up the problem of regulatory capture in Washington, reflecting on his time at the Clinton Treasury:
It was the practice of the Treasury to take advice from investment banks on bond market issues from others with a stake in development of those markets. It was common for the Treasury to listen to advice on currency intervention from those with undisclosed positions in currency markets. It was commonplace in our cooperation with financial markets, for example, to speak with members of the board of the New York Stock Exchange about market integrity, all of whom had a variety of positional interests with respect to different aspects of the market functioning.
So without judging what would or would not be a conflict of interest, what would or would not constitute a conflict of interest, it certainly would be my view and I think would have been the view of other US financial officials that there was no per-se disqualifying of the validity or morality of advice based on the holding of financial positions in the entity, area, place, type of investment, or anything else with which the advice was given.
How conflict-of-interest issues were to be addressed in any particular context was an issue that was left to the lawyers. And it was our practice to ourselves follow the guidelines or contracts which we signed. But there was no aura of wrongness of any kind that would be associated with providing advice on a financial issue in which one had an interest. (emphasis mine)
That’s from testimony Summers gave during the Andrei Shleifer case. In Mr. Summers’ Washington, conflicts of interest were normal, accepted – a sign of expertise, even. There were no ethical problems with following the lead of banks you were regulating, or taking policy recommendations from speculators. And if there were conflicts of interest that posed moral problems – well, that’s for the lawyers to parse.
This apparent lack of an ethical compass eventually led to Summers’ downfall at Harvard, where he lost the presidency in large part due to his role in protecting Shleifer, his protege. Shleifer had been involved in a scheme to defraud the US and Russian governments. The groundbreaking Institutional Investor article by David McClintick on the scandal is here. In the words of Aaron Swartz, as a USAID-funded adviser to Russia during the 1990s, Shleifer “privatized Russia right into his pocket” – he, his wife, and his associates invested in newly-privatized Russian companies that they were helping to create and manage. Tennis, no-show jobs, navel-gazing documentaries and other hilarity ensued under Shleifer’s watch. The abuses eventually came to light, ending Shleifer’s project and giving way to years of litigation.
McClintick writes that as Shleifer’s longtime colleague/mentor, “Summers was positioned uniquely to influence Shleifer’s career path, to shape U.S. aid to Russia and Shleifer’s role in it and even to shield Shleifer after the scandal broke.” Summers, then Treasury Secretary, was in contact with him throughout, and when he became president of Harvard he helped protect Shleifer from punishment.
As mathbabe notes, Summers demonstrated an extremely foggy understanding of conflicts of interest during his testimony. His quotes would be hilarious if they did not carry such terrible implications for the US and global economy. Another quote from the II article:
Summers said conflict-of-interest “issues,” in his Washington experience, were “left to the lawyers.” He said he was sensitive to “ethics rules,” but testified that “in Washington I wasn’t ever smart enough to predict them . . . things that seemed very ethical to me were thought of as problematic and things that seemed quite problematic to me were thought of as perfectly fine. . . .”
Summers apparently did not take Shleifer’s ethical transgressions very seriously, pressuring Harvard administrators to go easy on him, commiserating with Shleifer and his wife about how Jeffrey Sachs (notably, another leading candidate for World Bank president) and other Harvard leadership were out to get him, and remembering what bathing suit he wore the day he discussed Russia with Shleifer on a Cape Cod beach, but forgetting most details of that conversation:
Q. Have you told us now everything you can recall about the conversation that you had with Andrei Shleifer?
A. I could probably expand on the bathing suits and so forth, but I suspect that I have probably told you everything that I recall that seems to me to be proximally germane to this matter.
Notably, Summers continued to consult with Shleifer’s wife, Nancy Zimmerman during his time at the Obama White House.
Summers’ bid for World Bank president has inspired a great deal of opposition: a petition that has garnered tens of thousands of signatures, a website with sections devoted to Larry’s crimes, like “Math is Hard” and “Let Them Eat Waste,” and plenty of befuddled blogging.
We’ve written extensively about other aspects of Summers’ career here at LittleSis, as he offers irrefutable Evidence of an American Plutocracy, to borrow from the title of a piece we published last year following his departure from the White House. We’ve also charted his calendar of appointments in the White House, dug into his disastrous management of Harvard’s finances, and reported on his role in derivatives deregulation.
A little known fact from that piece: Ken Lay offered Summers a seat on the board of Enron in early 2001, but he turned it down because he had just become Harvard president. Had he accepted, Enron would have been another strike against Summers. Unfortunately, according to Summers’ Law – the law of elite immunity from accountability – his association with that epic corporate blow-up probably would have had little effect on his career.