The Warning: The Incredible Story of Brooksley Born. How the Financial Crisis Might Have Been Averted.
One week ago Tuesday I sat in front of my Television spellbound watching PBS Frontline’s profile of Brooksley Born, a former Clinton Administration agency head who has since been termed the “Credit Crisis Cassandra” by the media. As the show ended all of my questions regarding the ineptitude of Obama’s economic team were answered and then some. Before we get to the answers we must first explore how Ms Born, as head of a sleepy federal agency in the Commodity Futures Trading Commission, tried to rein in and regulate over the counter derivatives of the same kind that imploded our financial system back in late 90′s. Lets begin with a story the Washington Post ran on the subject last May for the background:
A little more than a decade ago, Born foresaw a financial cataclysm, accurately predicting that exotic investments known as over-the-counter derivatives could play a crucial role in a crisis much like the one now convulsing America. Her efforts to stop that from happening ran afoul of some of the most influential men in Washington, men with names like Greenspan and Levitt and Rubin and Summers — the same Larry Summers who is now a key economic adviser to President Obama.
She was the head of a tiny government agency who wanted to regulate the derivatives. They were the men who stopped her.
The same class of derivatives that preoccupied Born — including the now-infamous “credit-default swaps” — have been blamed for accelerating last fall’s financial implosion. But from 1996 to 1999, when Born was the chairman of the Commodity Futures Trading Commission, the U.S. economy was roaring and she was getting nowhere with predictions of doom.
So, upstairs in the big house in Kalorama, Born tossed and turned. She woke repeatedly “in a cold sweat,” agonizing that a financial calamity was coming, she recalled one recent afternoon.
“I was really terribly worried,” she said.
Before taking office, Born had been a high-octane attorney, an American Bar Association power player, a noted advocate of feminist causes and co-founder of the National Women’s Law Center. But none of that carried much weight when she crossed over into government; for all her legal experience, she was a woman who wasn’t adept at playing the game. She could be unyielding and coldly analytical, with a litigator’s absolute assertions of right and wrong. And she was taking on Beltway pros, masters of nuance and palace politics. She marched into congressional hearing after congressional hearing — pin neat, always with a handbag — but no one really wanted to listen.
The Wall Street Journal declared that “the nation’s top financial regulators wish Brooksley Born would just shut up.” The Bond Buyer newspaper compared her to a salmon “swimming against raging currents.”
To the list of those that stopped Ms Born I’ll add one more name the Wa Po left out per the Frontline show. Current Treasury Secretary Tim Geithner as we continue:
Born’s baptism as a new agency head in 1996 came in the form of an invitation. Federal Reserve Chairman Alan Greenspan — routinely hailed as a “genius,” the “maestro,” the “Oracle” — wanted her to come over for lunch.
Greenspan had an unusual take on market fraud, Born recounted: “He explained there wasn’t a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him.”
This made no sense to her. She’d spent much of the 1980s defending clients caught up in a vast conspiracy by two wealthy brothers, Nelson and William Hunt, who duped investors while trying to corner the world silver market.
“After all,” Born said, looking back, “I’m a lawyer, and I think the existence of fraud prohibitions is critically important.”
But Greenspan was insistent, she said.
Finally, he said, “Well, Brooksley, I guess you and I will never agree about fraud.” (Greenspan did not respond to requests for comment. Daniel Waldman and Michael Greenberger, both top aides of Born’s, were briefed on the lunch at the time and independently confirmed Born’s recollection of the conversation.)
That was just the beginning. By early 1998, Born had also tangled with Treasury Secretary Robert Rubin, his deputy, Summers, and Securities and Exchange Commission head Arthur Levitt, not to mention members of Congress, financial industry heavyweights and business columnists. She wanted to release a “concept paper” — essentially a set of questions — that explored whether there should be regulation of over-the-counter derivatives. (Derivatives are so-named because they derive their value from something else, such as currency or bond rates.)
They warned that if she did so, the market would implode and predicted tidal waves of lawsuits. On top of that, Rubin told her, she didn’t have legal authority to regulate the derivatives anyway.
She wasn’t buying any of it, and she wasn’t backing down.
History will no doubt Judge Greenspan harshly as his attitude toward financial fraud exhibits the exact kind of Wall Street disconnect from the realities of Main Street that we have blogged on extensively here at Slabbed. Simply put this bunch of free market knot-heads used their massive egos to cover a complete lack of common sense as we continue:
In early 1998, Born’s plan to release her concept paper was turning into a showdown. Financial industry executives howled, streaming into her office to try to talk her out of it. Summers, then the deputy Treasury secretary, mounted a campaign against it, CFTC officials recalled.
“Larry Summers expressed himself several times, very strongly, that this was something we should back down from,” Waldman recalled.
In one call, Summers said, “I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II,” recounted Greenberger, a University of Maryland law school professor who was Born’s director of the Division of Trading and Markets. Summers declined to comment for this article.
The discordant notes crescendoed in April 1998 during a tension-filled meeting of the President’s Working Group, a gathering of top financial regulators that periodically met behind closed doors at the Treasury Department. At that meeting, Greenspan and Rubin forcefully opposed Born’s plans, Waldman said.
“Greenspan was saying we shouldn’t do it,” Waldman recalled. “Rubin was saying we couldn’t do it.”
The next month, Born released her concept paper anyway.
Within weeks, she was under attack. Lauch Faircloth, then a Republican senator from North Carolina, took to the Senate floor to call her “a rogue regulator.” A Boston Herald column accused her of a “power grab. . . . She reached for that brass ring and in doing so cast a pall of legal uncertainty.” Greenspan, Rubin and Levitt jointly urged Congress to pass a moratorium on the CFTC regulating over-the-counter derivatives.
With emotions running high, Born was summoned to the office of House Banking Chairman Jim Leach, a Republican from Iowa, to meet with top officials from the Fed and the Treasury. Born raced to Capitol Hill from the bedside of her daughter, Ariel Landau, then 27, who was about to undergo knee surgery.
“The feelings in the room were very tense,” recalled Leach, who said he felt the CFTC was too small to govern over-the-counter derivatives and wanted derivatives moved to clearinghouses regulated by the Fed or the Treasury. “In my time in public life, I have never seen the executive branch so bifurcated. You had a feeling that the Fed and the Treasury didn’t have a great deal of respect for what the CFTC was made of.”
Also, “There were some very profound personality clashes between Rubin and [Born], and Greenspan and her,” Leach said. “They felt, I think, that they understood finance better than she did.”
The political backlash directed to Ms Born was so predictable as to be laughable and is the reason so many American’s simply tune out of the political process. Unable to shut Ms Born up on the merits of her ideas the attacks turned personal and of course there was no shortage of unabashed free market koolaid drinkers such as Senator Faircloth there to do Wall Street’s dirty work. Then something happened that should have shocked all these idiots back to reality, the implosion of the “can’t miss” hedge fund Long Term Capital Management which in turn almost imploded our financial system in 1998. The only problem is the Wall Street crowd and their free market koolaid drinker adherents had their heads so firmly inserted up their anuses that denial ruled the day as we continue:
But then, in September 1998, a huge hedge fund that had bet heavily on derivatives — Long-Term Capital Management — nearly failed and had to be bailed out by a group of banks. Here was a living example of Born’s prophecy. Even Leach, who supported the moratorium on CFTC regulatory action, introduced Born at a hearing by saying, “You’re welcome to claim some vindication, if you want.”
Born responded: “I certainly will not do so.” But she went on to tell the committee that the Long-Term Capital debacle “should serve as a wake-up call about the unknown risks in the over-the-counter derivatives market.”
No one woke up. That same month, Congress passed the moratorium. Born says they were “muzzling an independent agency.” Two months later, Born announced that she would not seek reappointment to a second term. She left office in April 1999.
She has never said she resigned because her regulatory efforts were thwarted; she says even today that she merely wanted to return to practicing law. Either way, she was finished as a government regulator and so was any hope that light would come to the Dark Markets.
The problem today of course, is that many of the same idiots that worked tirelessly to silence Ms Born now populate President Obama’s economic team as Senator Cantwell recognized as we continue:
At a recent hearing, Democratic Sen. Maria Cantwell, of Washington state, pointed out that Summers had opposed Born’s effort to regulate over-the-counter derivatives.
“There’s a few people in the administration who still can’t say that it was a mistake, and those are the same people, I think, who are slow-walking, thinking we’re all going to forget about this regulatory reform that is needed,” Cantwell said recently. “I can assure you that we’re not going to forget . . . my patience is running out with the administration.”
Those dots connected for me as well as the “bail them out now and maybe we’ll regulate them later” attitude of Team Obama mystified me for quite some time last spring. Simply put these are the same folks that brought us the disaster and make vast sums of money from the current setup when they pass through the revolving door from government to the private sector when their political party is out of favor with the voters. Private life was particularly profitable for former Clinton Treasury Secretary turned Citibank Chairman Robert Rubin who pocketed over $100 million in salary and bennies at Citibank while running the business into the ground to the tune of over $100 billion it took in TARP money to bail them out. Once hailed by President Clinton as the greatest Treasury secretary since Hamilton Rubin’s reputation is now shattered as he has since been labeled (accurately so IMHO) as one of the 10 most unethical people in business.
Alan Greenspan is now a broken man who realized too late that his blind faith in unfettered free markets was a huge mistake. I suspect the feeling of having one’s life work repudiated is a heavy burden though one he well deserves to bear.
Meanwhile the ornery one, Lawrence Summers, remains unrepentant and despite being run out of Harvard University on a rail in 2006 resurfaces, like a fly on shit, back in government as the Director of the White House’s National Economic Council where he is no doubt leading the charge against regulating our financial system.
And then finally we have current Treasury Secretary Tiny Tim Geithner of AIG bonus fame who is having a hard time keeping his lies straight these days as he is continually exposed as both a lightweight and a charlatan. Turns out he was the idiot who ordered AIG to pay full price to wind up their derivative exposure despite the fact their value was greatly impaired leaving the taxpayers on the hook for billions of dollars more in bailout money than was necessary. The subsequent rationalizing of those terrible decisions which appeared in yesterday’s Wa Po are disingenuous to the point of being insulting. Geithner, as a free market true believer evidently must think bankruptcy is only for the schmucks because the results of that decision to bail out the house that Hank built led ultimately to Ed Liddy and his ridiculous contract sanctity remarks he used to defend paying bonuses to the same AIG employees who bankrupted the company. I don’t think even Franz Kafka could have made up such a story in his most creative moments.
Unlike Team Obama I interact with the unwashed masses on a regular basis and the anger I see still burns as brightly as ever. One of my clients, a retired 70-year-old US Marine vet of the Vietnam conflict told me last week, “Doug I can’t believe I even think this but for the sake of your son and my grandchildren we may have to bear arms.” Never in my wildest imagination would I have conceived as such just over 1 year ago but with the debt clock running on overdrive and our government intent on aiding those who are draining the treasury dry and bleeding all of us white more people are thinking what was once the unthinkable. Obama better extract his head from his ass before it is too late.