Summers’s role questioned as US economic policy shifts

Obama adviser fights talk of waning power

By Michael Kranish
Globe Staff / February 4, 2010

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WASHINGTON - As President Obama and his team have rolled out a fresh set of strategies to fix the economy, one item on the list - curbing the ability of big banks to gamble in the stock market - has been viewed by some as a repudiation of Lawrence H. Summers, the former Harvard president who is the White House’s chief economic adviser.

Summers, who favored bank deregulation when he was secretary of the treasury for President Clinton, had counseled Obama for much of last year to take a less sweeping approach to overhauling bank rules. But that point of view publicly fell out of favor last month as the White House adopted a more red meat, populist tone after angry Massachusetts voters sent Republican Scott Brown to fill the US Senate seat that was held by the late Edward M. Kennedy.

Taking on big banks, the president said, “is a fight I’m ready to have.’’ This week, Paul Volcker, a chief White House adviser and former Federal Reserve chairman who favors pushing tighter restrictions on banks, appeared before a Senate committee to press the administration’s case.

Despite the shift, Summers and White House officials insisted in interviews last week that Summers continues to play his powerful, behind-the-scenes role as key architect of the administration’s economic strategy. Summers said suggestions in the media that he disagreed with the president’s decision to get tougher on banks are false and that he supported major new steps to reduce financial risk-taking. Obama had privately sought advice on stronger action beginning in October, according to an administration official, and Summers was a full participant.

“The president gets advice from many different quarters and forms the best judgments he can. Certainly he doesn’t always take my advice,’’ Summers said before leaving Washington for the World Economic Forum in Davos, Switzerland. The bottom line, Summers said, is that he is a full-team player. “I support all of the president’s policies,’’ he stressed.

As a White House official, Summers gets to avoid the public grillings in Congress that Treasury Secretary Timothy Geithner has been subjected to, over such explosive controversies as Wall Street bonuses and the banking and investment firm bailouts that began in 2008.

But he nonetheless has been the subject of public criticism during his first year as captain of Obama’s economic team.

As Treasury secretary during the Clinton administration, he favored deregulatory moves - in particular, repealing the Glass-Steagall Act, which prevented banks from owning investment companies - that some believe helped stoke the financial crisis. He also has close ties to Wall Street, working at a New York hedge fund from 2006 to 2008 and earning speaking fees from major banks in the months before his White House appointment, including from banks that taxpayers bailed out.

Summers “is the fundamental problem,’’ said a former federal bank regulator, William Black, now an associate professor of economics and law at the University of Missouri-Kansas City, citing Summers’s close ties to the banking industry and past support of deregulation.

When Obama announced last month that he was embracing the proposal to limit the size and investment activities of banks, an idea pushed by Volcker, the economic world was abuzz about whether Summers’s influence was on the wane.

Summers declined to answer directly when asked whether Volcker was ascendant and he was descendant, saying, “I don’t comment on Washington up-down stories.’’

White House officials went to lengths in interviews to squelch any idea that Summers is losing influence in the aftermath of the adoption of the Volcker proposal.

“There is no economic policy or international economic policy that Larry is not a part of,’’ Rahm Emanuel, White House chief of staff, said in an interview. “He is the president’s principal economic adviser.’’

That does not mean that Summers doesn’t fight for his view and that administration officials do not engage in internal policy disagreements. Emanuel said Summers and Geithner would sometimes remain at White House meetings until 9 p.m. on Sundays to discuss “shades’’ of differences in their views, although he would not provide specifics.

Although Summers’s official title is chairman of the White House National Economic Council, the former Harvard president’s job is to speak as bluntly and privately as possible to Obama, a graduate of Harvard Law School.

Summers often does the briefing with other top administration officials, but overall only a handful of people spend as much time with the president as Summers.

Asked whether he made mistakes during the Clinton administration by urging bank deregulation, Summers declined to respond directly.

“Hindsight is 20/20,’’ Summers said. “It is very, very clear in current context that we need much, much stronger regulation and one of the crucial areas of regulation is derivatives. There are enough crucial issues facing us today. I’m not focused on debating past controversies.

“What’s very clear is the need for stronger regulation today,’’ he said. “That’s something I have expressed forcefully in the years before I went into government.’’

Summers, who still maintains his home in Brookline, became president of Harvard in 2001 and left under pressure in 2006 amid controversy about his comment that innate gender differences could explain why fewer women succeed in math and science professions. During his leadership at Harvard, Summers continued a practice of aggressively investing the university’s cash, despite warnings from two heads of the endowment to take fewer risks with the funds. Two years after Summers left, Harvard lost $1.8 billion in cash as a result of the financial meltdown.

After leaving Harvard, Summers went to work for a New York City hedge fund, D. E. Shaw & Co., which paid him about $5.2 million from 2006 to 2008.

In addition, he earned $2.7 million in speaking fees, mostly from financial firms, including several that received money under the government’s bank bailout, such as Citigroup and JP Morgan Chase. For example, he picked up $135,000 for speaking to Goldman Sachs on April 16, 2008, and $67,500 for speaking to Lehman Brothers on July 30, 2008, according to his financial disclosure report. The Lehman speech was given six weeks before the investment banking firm filed for bankruptcy.

In his interview with the Globe, Summers was asked what he would say to unemployed Americans who might have concerns about the way he collected so many large speaking fees from financial institutions just before joining the Obama administration to help shape economic policy.

“I’d tell them that the president asked me to come help him and advise him as he took on enormous economic challenges,’’ Summers responded. “Because of the magnitude of the economic challenges, because of my enormous respect for the president and for others on the economic team, I gave up a very wide range of opportunities at the university and in the private sector to come work in government because I thought this was a crucial moment for our economy.’’

Speaking before Friday’s announcement that the economy grew at a better-than-expected rate of 5.7 percent during the fourth quarter of 2009, Summers said he understood that many people don’t believe the recession has ended, particularly because the unemployment rate has remained high.

“Nobody can be satisfied with where the economy is right now, but I think the president and all of us on the economic team are relieved that the depression, which looked like a very real possibility a year ago, has not been realized,’’ Summers said.

Still, asked to grade his first year in the administration, the former professor said, “It’s always incomplete.’’