Two Cheers for Sheryl Sandberg, Who Helped Give Us the Financial Crisis

Matthew Cooper

Sheryl Sandberg’s book, Lean In, that’s getting so much attention sounds swell, but it raises important points about women in the workplace. From 60 Minutes to the Today Show, it’s hard to avoid seeing her or hearing the praise heaped on her.

But in all of the hagiography of Sandberg, it’s worth remembering something. Her big gig in the federal government was as chief of staff from 1996 to 2001 to then Secretary of the Treasury Larry Summers, her Harvard mentor when she was a star in the economics department and he was … well, a force of nature.

It was on the Summers-Sandberg watch that the Clinton Administration promoted and Congress passed the Gramm-Leach-Bliley Act, which essentially repealed the Depression-era Glass-Steagall Act that had separated investment banking from the commercial, insured kind. This was, in retrospect, a huge mistake.

To be fair, it was a piece of legislation that was widely applauded — and the folks most responsible for the mess were far more wizened than Sandberg, who was 30 at the time the bill passed. It represented the conventional, although not universal, wisdom that deregulation would only be a boon to the go-go economy of the 1990s. That the head of Citigroup, Sandy Weil, had a giant hunk of wood in his office with a plaque that read, “Smasher of Glass-Steagall” seemed typical of the heady times.

In retrospect, the law had at least a couple of major effects that contributed to the crisis. First, it spread out the regulatory burden of financial institutions, replacing stricter oversight with what came to be known as “Fed Lite.” The Federal Reserve was compelled by the law to rely on the oversight of myriad regulatory agencies like the Securities and Exchange Commission and the Office of Thrift Supervision, all of which led to a failure of any single agency in Washington to see the systemic risk that was being built into the system. As the Financial Crisis Inquiry Commission (where I served as a senior adviser) concluded in its 2011 final report:

“Both Fed and OCC officials cited the Gramm-Leach-Bliley Act of  as an obstacle that prevented each from obtaining a complete understanding of the risks assumed by large financial firms such as Citigroup. The act made it more difficult — though not impossible — for regulators to look beyond the legal entities under their direct purview into other areas of a large firm. Citigroup, for example, had many regulators across the world; even the securitization businesses were dispersed across subsidiaries with differeferent supervisors — including those from the Fed, OCC, SEC, OTS, and state agencies.”

Under the law, big banks snatched up many of the mortgage factories that led to the crash.

The Sandberg era at Treasury also coincided with the big interagency fight in the Clinton administration over derivatives. Brooksley Born, the chair of the Commodity Futures Trading Commission (CFTC), wanted her agency to take a stronger hand in regulating the market for derivatives — complex financial instruments that would contribute to the financial crisis. When Born issued a paper saying that the CFTC would merely look into a greater regulatory role in 1998, the others fought back.

“On the day that the CFTC issued a concept release, Treasury Secretary Robert Rubin, [then-Federal Reserve Chairman Alan] Greenspan, and SEC Chairman Arthur Levitt issued a joint statement denouncing the CFTC’s move,” according to the financial-crisis report, which quotes them as saying: “We have grave concerns about this action and its possible consequences.… We are very concerned about reports that the CFTC’s action may increase the legal uncertainty concerning certain types of OTC [Over-the-Counter] derivatives.”

The following year — after Born’s resignation — the President’s Working Group on Financial Markets, a committee made up of the heads of the Treasury, Federal Reserve, SEC, and CTFC  charged with tracking the financial system, essentially adopted Greenspan’s view. The group, chaired by then-Treasury Secretary Larry Summers, issued a report urging Congress to deregulate over-the-counter (OTC) derivatives broadly and to reduce CFTC regulation of exchange-traded derivatives as well.

In 2000 , in response, Congress passed and President Clinton signed the Commodity Futures Modernization Act, which in essence deregulated the OTC derivatives market and eliminated oversight by both the CFTC and the SEC.

Again, these were heady times, and lots and lots of smart people were wrong about the financial crisis. And the bad policies that allowed the crisis to form were global and widespread and not just confined to the Treasury Department. But some of the worst came across the desk of Sheryl Sandberg. None of this diminishes her later accomplishments at Google or Facebook or addresses the merits of her writings about motherhood, feminism, and the workplace.

But it illustrates a larger point. One of the oddities of the financial crisis how little opprobrium has attached itself to those intimately involved. There’s no social sanction attached to those who were in the vortex.

This week, the former CFO of Lehman Brothers, Erin Callan, wrote a piece about how work had taken a toll on her personal life. Fair enough. But Lehman’s out-of-control, leveraged-to-the-hilt financing took a toll on the rest of us. Its implosion brought us to the brink of the abyss. But there was little sense of shame or embarrassment in Callan’s piece, datelined from Sanibel Island, Fla. She just mentions in the passive voice that there was “public humiliation,” which is like saying “mistakes were made.”

In the 1930s, former stockbrokers faced a bigger social sanction. We can forgive those who got us into this mess and still value their advice, but no hagiography, please. Three cheers for Sheryl Sandberg? Two is plenty.