By
Katrina vanden Heuvel,
TheNation.com. Posted
October 11, 2008.
A sad tale emerges of willfully arrogant behavior designed to undermine
a wise woman's good judgment.
"Break the Glass" was the code-name high-level Treasury Department
figures gave the $700 billion bailout; it was to be used only as a
last-resort measure.
Now millions have been sprayed and damaged by broken glass.
But more than a decade ago, a woman you're likely never to have heard
of, Brooksley Born, head of the Commodity Futures Trading Commission -- a
federal agency that regulates options and futures trading -- was the
oracle whose warnings about the dangerous boom in derivatives trading just
might have averted the calamitous bust now engulfing the US and global
markets. Instead she was met with scorn, condescension and outright anger
by former Federal Reserve Chair Alan Greenspan, former Treasury Secretary
Robert Rubin and his deputy Lawrence Summers. In fact, Greenspan, the man
some affectionately called "The Oracle," spent his political capital
cheerleading these disastrous financial instruments.
On Thursday, the New York Times
ran a masterful and revealing front page article exposing the
culpability of Greenspan, Rubin and Summers for the era of dangerous
turbulence we live in.
What these "three marketeers" -- as they were called in a 1999 Time
magazine cover story -- were adept at was peddling the timebombs at the
heart of this complex crisis: exotic and opaque financial instruments
known as derivatives -- contracts intended to hedge against risk and whose
values are derived from underlying assets. To cut to the quick, Greenspan,
Rubin and Summers opposed regulating them. "Proposals to bring even
minimalist regulation were basically rebuffed by Greenspan and various
people in the Treasury," recalls Alan Blinder, a former Federal Reserve
board member and economist at Princeton University, in the Times article.
In 1997, Brooksley Born warned in congressional testimony that
unregulated trading in derivatives could "threaten our regulated markets
or, indeed, our economy without any federal agency knowing about it." Born
called for greater transparency -- disclosure of trades and reserves as a
buffer against losses.
Instead of heeding this oracle's warnings, Greenspan, Rubin & Summers
rushed to silence her. As the Times story reveals, Born's wise warnings
"incited fierce opposition" from Greenspan and Rubin who "concluded that
merely discussing new rules threatened the derivatives market." Greenspan
deployed condescension and told Born she didn't know what she doing and
she'd cause a financial crisis. (A senior Commission director who worked
with Born suggests that Greenspan and the guys didn't like her
independence. " Brooksley was this woman who was not playing tennis with
these guys and not having lunch with these guys. There was a little bit of
the feeling that this woman was not of Wall Street.")
In early 1998, according to the Times story, one of the guys, Larry
Summers, called Born to "chastise her for taking steps he said would lead
to a financial crisis. But Born kept at it, unwilling to let arrogant men
undermine her good judgment. But it got tougher out there. In June 1998,
Greenspan, Rubin and the then head of the SEC, Arthur Levitt, Jr., called
on Congress "to prevent Ms. Born from acting until more senior regulators
developed their own recommendations." (Levitt now says he regrets that
decision.) Months later, the huge hedge fund Long Term Capital Management
nearly collapsed -- confirming some of Born's warnings. (Bets on
derivatives were a key reason.)
"Despite that event," the Times reports, " Congress (apparently
as a result of Greenspan & Summer's urging, influence-peddling and
pressure) "froze" Born's Commissions' regulatory authority. The next year,
Born left as head of the Commission. Born did not talk to the Times
for their article.
What emerges is a story of reckless, willful and arrogant action and
behavior designed to undermine a wise woman's good judgment. The three
marketeers' disdain for modest regulation of new and risky financial
instruments reveals a faith-based fundamentalist approach to the
management of markets and risk. If there is any accountability left in our
system, Greenspan, Rubin and Summers should not be telling anyone how to
run anything. Instead, Barack Obama might do well to bring back Brooksley
Born and promote to his team economists who haven't contributed to the
ugly mess we're in.
In accordance with Title 17
U.S.C. Section 107, this material is distributed without profit to those who
have expressed a prior interest in receiving the included information for
research and educational purposes.
History of Banking Fraud:
The Coming Battle
By M. W. WALBERT
