Spooky Economy

   Transparency and Knowledge Dispel Fear

Permanence, perseverance and persistence in spite of all obstacles, discouragements, and impossibilities: It is this, that in all things distinguishes the strong soul from the weak. —Thomas Carlyle

After briefly being considered for Attorney General under the Clinton Administration, Born, a highly respected lawyer, was chosen to lead the Commodity Futures Trading Commission. The CFTC, a government agency, is responsible for regulating agriculture contracts (called “futures”) and a type of financial instrument called “derivatives”, a sort of insurance policy that is purchased privately between banks and companies. Born's law practice was in the derivatives area and she had 20 years experience in the field.

Current Economic Crisis

After taking her post at the CFTC in 1996, Born grew concerned when she saw how big the “over-the-counter derivatives” market was and how little information was known about it. [1@18:11] Major financial players had been cross-insuring each other against risk, and since they were private contracts, nothing was known about them. This was because there was no requirement that they be reported to anyone. It could not be known if the bets they were making were proper or safe.

The problem became clear when Proctor & Gamble sued Banker's Trust for having been fraudulently sold a derivatives contract that they did not understand and that had become very costly. [1@19:44] Most troubling to Born was the fact that her agency would not have known about the fraud if it hadn't been for the suit. [1@21:30] The federal government had no information on this private $27 trillion dollar market. The largest financial institutions in the world were operating a risky, complex and non-transparent ("hidden") market. [1@19:25]

Through the agency that she headed, she considered regulating derivatives and sent out documents for discussion. She immediately encountered hard resistance. [1@24:48] A co-worker recalls that he had “walk[ed] into Brooksley's office one day, the blood has drained from her face, she's hanging up the telephone, she says to me 'That was Larry Summers'”. Summers had told her that she was going to cause the worst crisis since the end of World War II and that there were 13 bankers in his office explaining that to him. He demanded that she stop. [1@25:02]

Born said “They were totally opposed to [possible regulation]. That puzzled me. What was it that was in this market that had to be hidden? Why did it have to be a completely dark market?” She was troubled, but pursued the issue. She answered only to the President. [1@26:12]

With the economy still doing well, there was increasing pressure for her to stop her investigation. This eventually led to Senate hearings. [1@33:18] Behind the scenes, she was being painted as a loose canon, as stubborn, difficult to work with and as a person who could not be trusted. [1@32:35]

Then, in 1998, a company named Long Term Management Capital with large positions in the derivatives markets began to melt down. There was a realization that Born's concerns had been confirmed. [1@36:17] Those who had wanted her to keep quiet were now struggling to stop a problem that now endangered the U.S. economy. [1@40:13]

That event led to open discussions about how regulation may have been necessary after all. [1@42:13] But after initial calls for action, those testifying before Congress made a convincing argument that the LTMC meltdown just was a fluke and that it wasn't likely to happen again. [1@43:19] Born's opponents had prevailed. Congress froze her agency's authority over the matter, making it powerless. [1@44:07] Born resigned.

By 2007, the derivatives market had grown from $27 trillion to $595 trillion (over one-half quadrillion dollars). [1@45:31] Derivatives were insuring derivatives. [1@45:45] Born said it was her worst nightmare come true.

Ten years after Born's warnings, in late 2008, the Lehman bankruptcy caused widespread concern that the economy was unraveling. Many of the problems were tied to the derivatives she had warned about. [1@46:35]

Later, Arthur Levitt, the SEC chairman who worked with the principals that wanted Born out, expressed a change of heart about her. “I've come to know her as one of the most capable, dedicated, intelligent and committed public servants that I have ever come to know. I wish I knew her better in Washington. I could have done much better. I could have made a difference.” [1@48:19]

One of the other principals in the story says he now supports regulation of these instruments. [1@52:00]

In 2009 Born, was awarded the John F. Kennedy Profiles in Courage Award for her courage in speaking out for the good of the country and, ulimately the detriment of her career in government.[2]

Quotes

"We're trying to protect the money of the American public which is at risk in these markets." - in response to Congressional questioning[1@35:00]
"I felt as if though... I had done what I could to help protect the public and there wasn't much left for me to do.” - on her resignation[1@44:42]
It was my worst nightmare coming true. Nobody really knew what was going on in the market. The toxic assets of many of our biggest banks are over-the-counter derivatives and caused the economic downturn that made us lose our savings, lose our jobs, lose our homes. It was very frightening.[1@47:09]
[We] will have repeats of the financial crisis – it may differ in details – but there will be significant financial downturns and disasters attributed to this gap, over and over, until we learn from experience.[1@53:02]

Personal Concerns

Her character was brought into question. [1@1:05][1@32:35]

The authority she needed to perform her work was withdrawn which left her no choice but to resign.[1@44:07]

Proposed Solutions

I could not find where Brooksley Born had made clear recommendations, but the following items are drawn from her quotes

Must-see Resources

  1. Video: "The Warning" - PBS Special
    URL: http://www.pbs.org/wgbh/pages/frontline/warning/view/
  2. Document: 2009 Profile in Courage Award Recipients Announced, JFK Presidential Library [March 25, 2009]
    URL: http://www.jfklibrary.org/JFK+Library+and+Museum/News+and+Press/2009+Profile+in+Courage+Award+Recipients+Announced.htm

Added October 28, 2009 Posted December 4, 2010 Revised December 15, 2010

This is my opinion. It's a work in progress. I hope it's helpful.

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