"The Great Bush Depression" -- Maybe The Men Should've Listened To BROOKSLEY BORN!
PeterPrince
shown signs of danger in the preceding years, such as the bankruptcy
of Orange County, Calif., which lost heavily investing in
derivatives."
---------------------
"Credit Crisis Cassandra"
"Brooksley Born's Unheeded Warning Is a Rueful Echo 10 Years On"
By Manuel Roig-Franzia
Washington Post Staff Writer
Tuesday, May 26, 2009
Friends nudge the woman who saw the catastrophe coming.
They want Brooksley Born to say four words, four simple words: "I told
you so."
Ah, but she won't -- not at legal conferences or dinner parties. Not
even in a quiet moment in her living room, giving her first interview
with a major news organization since last fall's economic collapse.
She just smiles, perched ever so properly in an upholstered armchair
at her Kalorama home.
"More coffee?" she asks daintily, changing the subject.
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."
That last one cracks her up.
"Maybe not an inappropriate analogy!" she says.
Now that she is retired and far from a position of influence, Born,
68, may be closer than ever to vindication. No longer an outlier, she
attended a small, private dinner at the Treasury Department last week
with current and former regulators at the invitation of Secretary Tim
Geithner, according to two sources. And the Obama administration has
unveiled a plan to regulate some of the derivatives she warned about,
though the proposal must still get through Congress and falls short of
regulating the entire over-the-counter market that kept her awake all
those years ago.
Still, maybe -- just maybe -- her old friends say, the people in
charge are beginning to realize what they thought all along: "the lady
with the handbag was right."
The Maestro Balks
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.
Arguing with the Big Boys, as it turns out, is exactly what she'd been
doing her whole life.
'The Little Girl Has It!'
Born's father, a San Francisco welfare agency director, wanted a son.
The boy would be named after his best friend, Brooks. He got a girl
instead, and came up with Brooksley in "a last-minute attempt to
feminize" the name, Born said.
Born was "awful" at junior high school home-economics class, she said,
and "a bit of a nerd." As an undergraduate at Stanford University
(1957-1961), she scored high as a doctor on an aptitude test and low
as a nurse. The guidance counselor chided her, she said, accusing her
of only wanting to be a doctor because it paid well.
"It certainly was a reflection of the society we were living in," Born
recalled. "To aspire to be a doctor or a lawyer was thought to be
arrogant and somewhat inappropriate."
The summer after she graduated, Born was a bridesmaid in two weddings.
Some of Born's girlfriends in her Stanford graduating class were going
off to be stewardesses, dental hygienists, nurses, teachers. She
headed for Stanford Law School.
Not long after she started law school, a male classmate confronted
her.
"He told me I was taking up space in the class for a man who
undoubtedly was being drafted to go to Vietnam," she recalled.
One law professor tried to trip her up by making her answer questions
for an hour; another refused to call on her or any other women in the
class. After watching the professor skip over female students on a
question that had stumped all the men, she shouted out an answer.
"The little girl has it!" Born remembers the professor saying.
She became the first female president of the Stanford Law Review and
the first to finish at the top of a Stanford Law School class. Still,
a dean told her that "the faculty stood ready to take over the law
review if I ever faltered," she said. "I told him I didn't intend to
falter."
Traditionally, Stanford's top law student was essentially guaranteed a
U.S. Supreme Court clerkship. But the law school's selection committee
recommended two male students instead. She flew to Washington anyway,
and had tea with Justice Potter Stewart, who told her he "wasn't
ready" to have a female law clerk, Born said. Justice Arthur Goldberg,
whom she'd met previously at a reception, didn't extend an offer
either, but gave her a note to help her get a federal court clerkship.
"It said something like, 'Of course, I can't have a woman law clerk,
but she seems well qualified,' " Born recalled.
Consolation Prize
Born got her clerkship, but at the 9th U.S. Circuit Court instead of
the Supreme Court, then signed on at the prestigious Arnold & Porter
law firm. Marriage -- to Jack C. Landau, an attorney and journalist
who was one of the founders of the influential Reporters Committee for
Freedom of the Press -- followed, and a son, Nicholas, was born during
a year leave for her husband's Nieman Fellowship at Harvard. Sarah
Hughes, the pioneering federal judge who swore in Lyndon B. Johnson as
president on Air Force One after the Kennedy assassination, had once
told her that if she wanted to be a success, she "needed to give up
everything in terms of a family life and dedicate myself exclusively
to the law."
But, back in Washington, she had other plans. Ahead of her time, she
found a solution to the work/family conundrum: She went part time at
the law firm and still managed to make partner. She also became the
first female head of the ABA's federal judiciary committee, which at
that time played a make-or-break role in the confirmation of Supreme
Court justices. In 1981, she conducted a review of President Reagan's
nominee, Sandra Day O'Connor. The lawyer who couldn't get a Supreme
Court clerkship because she was a woman was about to help usher in the
country's first female justice and she "was thrilled."
Born was seriously considered for attorney general in 1992, but
eventually lost out. Four years later, she got her consolation prize:
the chairmanship of the Commodity Futures Trading Commission, an
afterthought in the Washington power game that Waldman, Born's
eventual general counsel there, called "a sleepy little agency."
The CFTC had been created in the 1970s, primarily to regulate futures
contracts purchased by farmers to hedge against price fluctuations.
But by the time Born took office in 1996, futures were a much more
sophisticated game.
Four years earlier, the CFTC had created a giant opening for sharp
market players, exempting most privately negotiated over-the-counter
derivatives contracts from regulation. Waldman calls the decision "the
seed" of the current financial crisis because bad bets on unregulated
derivatives crippled large firms such as Bear Stearns and AIG last
fall.
In the late 1990s, the seed had sprouted into a $25 trillion
derivatives market and Born saw trouble coming. The mostly unregulated
"dark markets" had shown signs of danger in the preceding years, such
as the bankruptcy of Orange County, Calif., which lost heavily
investing in derivatives. Born's agency set its sights on a highly
caffeinated market.
"I was very concerned about the dark nature of these markets," Born
said. "I didn't think we knew enough about them. I was concerned about
the lack of transparency and the lack of any tools for enforcement and
the lack of prohibitions against fraud and manipulation."
Based on her lunch with Greenspan, Born knew she would run into heavy
resistance.
"Brooksley's view was that he didn't believe in regulation," Waldman
recounted.
But Born did, and she was about to demonstrate it.
Deaf Ears
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."
Barbara Holum, who was a CFTC commissioner at time, said Born
irreparably damaged the agency's reputation by releasing the concept
paper without achieving a consensus.
"They didn't trust her anymore; it was a matter of style, not the
regulatory approach," Holum, now retired, said recently. "When she
left the CFTC, the agency was back in good graces."
Born's supporters, though, said she was only exercising her agency's
independence and that the other regulators simply dismissed her.
"She was not a charming, motherlike figure, which may have been what
they were looking for," Greenberger said. "Her professionalism, and
maybe, her lack of bonhomie had been interpreted as stridency."
"If you could fault her for anything, it's not recognizing the
politics," Waldman said. "She assumed the force of her ideas were
going to be sufficient."
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.
Belated Respect
Born, who retired in 2003, is now more likely to fixate on the weather
report -- ever looking for good sailing conditions -- as the financial
world. She and her second husband -- a retired Arnold & Porter partner
named Alexander Bennett -- split time between Washington and a summer
home on Squirrel Island, Maine, and keep a 32-foot Morris sailboat and
a 28-foot powerboat in Galesville, Md.
She maintains a little office at Arnold & Porter, where she tinkers
with ABA projects, such as a sprawling oral history of women in the
law. Almost every week, it seems, someone is giving her props on
Capitol Hill.
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."
Born keeps informed, but she has other concerns, bird-watching jaunts
and trips to Antarctica to plan, mystery novels to read, four
grandchildren to dote on. "I'm very happily retired," she says. "I've
really enjoyed getting older. You don't have ambition. You know who
you are."
Sometimes this woman -- whose mother always made her wear white gloves
when they went downtown -- doesn't bother dyeing her hair, letting it
go gray.
"I go through phases," she said one afternoon, smiling and drawing a
thin, small finger across her head. "I was just looking in the mirror
this morning and thinking, 'Maybe it's time.' "
Last week, with her hair colored and the gray gone, she traveled to
Boston to receive the John F. Kennedy Profiles in Courage award.
Finally, though perhaps too late, everyone wanted to listen to
Brooksley Born. She once again warned about the danger of Dark
Markets, now grown to $680 trillion of notional value, according to
the Bank for International Settlements -- "more than 10 times the
amount of the gross national product of all the countries in the
world.
"If we fail now to take the remedial steps needed to close the
regulatory gap," Born said, "we will be haunted by our failure for
years to come."
All during her spotlight turn at the John F. Kennedy Library, of
course, she clutched a handbag.
[Staff researcher Alice Crites contributed this report.]
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/25/AR2009052502108.html
Vid...@tcq.net
great article, thank you so very much.
here is why you cannot let libertarians, and conservatives make
policy, they should be kept as shoe salesmen, janitors, and other jobs
that keep them away from policy.
they are completely incapable of understnading reality, facts, logic,
and reason, its beyond them. this statement, is the statement of a
crank,
"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."
and of course, only a person who is functionally insane would say
that. in the modern world, con artists populate finance, they are so
good at stealing, that by the time you figure out you have been
robbed, the paper trail is long dead, and your money is in the
caymans.
and i never liked clinton either, he was did just as much, or perhaps
more damage to the world economy, than even the other three whack
jobs, reagan, bush one, and two.
com...@webtv.net
tanked....bush and the rupublicans had the economy doing qute well after
the 9-11 attacks and the democrats destroyed it...and they still are
hurting the economy..
if the democrats win congress during the next elections,they will cause
a worse depression than the 29 crash ever did.. their communist policies
could plunge america and the world into another "dark ages".........
" Book of DANIEL Chapter 12; Verse 1 "
com...@webtv.net
i confess this is true..since bush and the rupublicans ruined the
economy, we are doomed...
and GOD has cursed america ! ! 1 !
"Book of LAMENTATIONS Chapter 1; Verse 5"
"Her foes have become her masters; her enemies are at ease.
The LORD has brought her grief because of her many sins"
.
BuffetHater
Nonsense. Pig man comix continues to think these useless, rambling
"rules" - drawn up by desert pig herds are applicable today?
Separate what is worthwhile from heritage, and reject the poisonous,
superstitious, barbaric, and harmful.
Hey comix, why did god allow the 9-11 attacks, america's defeats in
iraq
and afghanistan, the market crash and election of an arab moslem?
Comie, the pig you fucked back in 2000 musta been His fave and you
pissed
him off big time.
com...@webtv.net
warned the congress to quit spening so much...
Doobie Keebler
You have much to lament, oh Comical one!