Oct
23
You can expect to read a lot about Brooksley Born in coming days.
She is, we are beginning to hear, the Cassandra who sounded warnings a decade ago that if heeded would have prevented the Wall Street meltdown.
She was shouted down and hounded out of her job by more senior economic officials led by then-Fed chairman Alan Greenspan, who Thursday told a House committee that he was mistaken in his belief at the time that the giant financial houses would regulate themselves out of concern for their reputations.
I was working in Washington, D.C., at the time of Born’s warning, but I have no recollection of this woman. She sounded her warning before Congress, so one presumes it was reported somewhere at the time. But such big names said she was wrong that I guess none of us took it seriously.
Born said Wall Street had gotten really into sophisticated financial instruments for hedging risk, and she predicted dire consequences if these futures contracts got out of hand. She said it would hurt the whole economy. She proposed reporting requirements — so whatever was going on would no longer be “opaque” — and required financial cushions against loss. In brief, she proposed that the giant financial houses that were doing these things be held to a standard similar to that for regular banks.
Others also warned that derivatives and other futures could screw up Wall Street. Warren Buffett was one of them. But Brooksley Born was, from 1996 to 1999, the chairman of the Commodities Futures Trading Commission.
This was one regulator who was not asleep at the switch.
This was the oracle whose prediction was doomed not to be heeded because Alan Greenspan, who ironically had the nickname “The Oracle,” couldn’t find the future with both hands.
The New York Times recently published an article about this, and as soon as I read it I knew this was a really important story. Sure enough, within days the report had been matched by articles in the Washington Post, The Nation, and many other news organizations.
In each one, Born is shown to be the one regulator who saw clearly what could go wrong with the increasing sale of credit swaps and other fancy deals in a giant shell game of risk spreading, away from the light of regulated trading floors.
In fact, Born is piled so high with laurels for seeing the future, speaking the truth, and refusing to knuckle under to the old boy network that I had just formed the opinion that there would soon be a round of op-ed pieces attacking her and fixing blame and credit at new azimuths.
Greenspan may have nipped that in the bud with with his mea culpa, which I have to say seems quite heartfelt. He didn’t just say he was mistaken. He conceded he had had a fundamental misunderstanding of how the world works.
Having interviewed him many times in his pre-Fed days when he seemed like just another economist and not especially trenchant in his analysis, I always thought him overrated. But it was big of him to tell some congressmen straight that he had screwed this one up.
Here’s what happened, according to the various reports published over the past week or so.
Born told Congress that credit swaps were risky and should be brought into regulated trade. Wall Street hated the idea because nobody likes regulation except when it’s the other guy being regulated. Fair enough. But Alan Greenspan was the guy Congress listened to, and he actively lobbied against Born’s proposal while also, according to the reports, meeting with Born to pressure her to back down.
Greenspan, it turns out, is a fan of that overpraised author Ayn Rand and considers most regulation bad. Because I think Ayn Rand was an awful novelist, I only read a couple of her novels, so my understanding of her work may be limited, but it was my impression that she admired entrepreneurs and tough-minded business executives, not weasels hedging risk in derivative financial instruments. But let that pass. The point is that some of these stories implicitly accused Greenspan of opposing Born due to a knee-jerk dislike of regulatory interference in free markets, not because he had considered all sorts of arcane stuff that members of Congress could never hope to understand.
This is important if true because it is also clear from the stories that some senators and representatives heeded Greenspan’s advice as a substitute for trying to actually understand financial markets themselves, precisely because they thought Greenspan was wonking all the stuff the lawmakers had no time to study.
Treasury Secretaries Robert Rubin and Lawrence Summers and SEC Chairman Arthur Levitt all disagreed with Born. So, while it’s fun to bash Congress, it’s understandable that Congress accepted the line that Born was a loose cannon who should be stopped. Greenspan, Rubin and Levitt all objected to Born even making public the details of her proposal. They actually got Congress to remove Born’s authority to act.
Where are they now? Brooksley Born, now in her late sixties, returned to private law practice, later retired, and hasn’t commented on the resurrected debate. Robert Rubin is a director of Citigroup. Lawrence Summers resigned as president of Harvard after making a series of damn-fool remarks but returned as a professor later. Alan Greenspan is in the business of apologizing for not being an oracle after all.
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2 Responses to “Brooksley Born and the Free Market of Doom”
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You neglected to include in your analysis that there was one member of Congress who warned about the derivatives running amok-Ed Markey of Massachusetts. And you omitted the fact that Mr. Obama is now including Mr. Sumners in his transition team. So much for the candidate of change or did the donations from Wall Street have influence going forward?
Why isn’t Mrs. Born name being vetting for an economic post position in the Obama camp, and Larry Summers is being considered for economic council. I thought Obama was the change agent. The more he decides his cabinet, the more I support…I can’t say that because of Palin. But, I am pissed that nobody is held accountable for any of their actions in the financial hegemony. I can’t find a job and Obama circulates the same people for the same jobs! I am really disappointed and Obama is not even in office nyet.