SENSE AND NONSENSE—HEROINES, HEROES, AND BAD PENNIES
From the editor: Brooksley Born, former head of the Commodities Futures Trading Commission (CFTC), Elizabeth Warren, current chair of the Congressional Oversight Panel, and Judge Richard Goldstone, chief investigator for the UN Human Rights Council (HRC), should receive the Presidential Medal of Freedom for outstanding public service. Their medals should be ripped off the necks of George Tenet, Paul Bremer, and retired Gen. Tommy Franks recognized by Bush back in 2004.
The bad pennies have populated both Democratic and Republican administrations. The latest examples are Treasury Secretary Timothy Geithner and Larry Summers of the Obama administration. Both men continue to reside in the pockets of Wall Street investment firms without providing effective leadership to regulate an out-of-control financial and banking community. Geithner and Summers are literally fulfilling the roles of two foxes guarding the treasury’s proverbial hen house.
As troublesome as both Geithner and Summers are for Obama’s credibility as a problem solver, recent interviews with Born, Warren, and Goldstone have provided substantial and notable examples of honor, integrity, accountability, and credibility. Each of the next three issues of The Compass will feature excerpts from these interviews, which deal with the major problems threatening our ability to recover from the disastrous legacy of the last three decades of political impotence and incompetence:
- Deregulation of the financial investment and banking industry
- Disappearance of the Middle Class in America
- Extremism and Abuse of Power in the Israeli/Palestinian Conflict
Following are excerpts from the interview with Brooksley Born, aired on a special episode of Frontline on Oct. 20, 2009, titled “The Warning.” The entire interview was conducted Aug. 28, 2009, and is available on www.PBS.org.
As you read the following excerpts, please try to avoid “eye glaze-over.” Her words and subject matter are extremely important and vital if we are interested in actually solving problems rather than papering over them (with blind adherence to fiscal responsibility without taking the responsibility to know what one is talking about). The Alan Greenspan era of Ayn Rand discipleship and allegiance to the concept of no government oversight of business in America must end. Without re-regulation of important financial markets such as over-the-counter derivatives, abuses of the profit motive will continue.
Interview with Brooksley Born
Q: “…How did [the economic meltdown] happen?”
A: “I think it happened because there was no oversight of a very, very big, dynamic, growing market. Market participants don’t look out for the public interest. Traditionally, government has had to protect the public interest by overseeing the marketplace and keeping the extreme behavior under some check.”
Q: “…This was something that you discovered, heard about, came across, back in the mid-1990s?”
A: “Yes. When I was chair of the Commodity Futures Trading Commission (CFTC), I became aware of how quickly the over-the-counter derivatives market was growing, how little federal regulators knew about it….I became very concerned. This market had been under the jurisdiction of my agency and had been expanding for about three years when I came into office because one of my predecessors had led an effort to exempt these transactions from a requirement of exchange trading. So, by an exemption, the commission had permitted the over-the-counter market to grow. And in the few years, three years, it had grown to something like $25 or $30 trillion in notional value….”
Q: “What was the danger to the public that you were concerned about in the over-the-counter derivatives market?”
A: “First of all, we didn’t truly know the dangers in the market because it was a dark market. There was no transparency. But generally, in any financial market, if there is not government oversight to control abuses like fraud and manipulation, to limit speculation, to make sure that a major default won’t cause a domino effect throughout the economy, the public interest is exposed and in danger.”
Q: “…Did you know it was a territory you needed to get into to exercise your responsibilities as a public official?”
A: “I realized there was no record-keeping requirement imposed on participants in the market. There was no reporting. We had no information.
“….So our Division of Trading and Markets, under Michael Greenberger, began, at my request, to prepare a list of questions that we needed answers to about the nature of the market….We called this paper the ‘concept release’ (a report released to the public outlining a proposed rule change). And eventually in May 1998, we published that in the Federal Register, asking the market participants and the over-the-counter derivatives dealers for their input voluntarily to tell us about the market.”
Q: “(….What was the response?)”
A: “I wasn’t too surprised at the reaction of the over-the-counter derivatives dealers, because they believed in no regulation. Their position was that markets were self-regulatory, that this market was taking care of itself, there were no risks in the market, and they thought there was no need for any government oversight or regulation. I was more surprised at the other financial regulators who also were quite ignorant about this market, because I would have thought they would have welcomed information.”
Q: [Comment] “….But my reading of the times was there was no impulse to regulate; there was impulse to deregulate…”
A: “Well that’s true. We had had 15 years of deregulation up until then, really, and there was a great belief in the ability of the market to police itself without government intervention…I was concerned about it because it seemed to me it overlooked the fact that market participants, obviously and quite rightly, would pursue their own interests rather than a broader public interest. And if systemic risk was being built up in the system, no individual participant would have any interest particularly in blowing a whistle or changing its behavior.”
Q: “….As to the other regulators, the other people in the President’s Working Group, was it your sense that they understood derivatives, how it was working? ...” [Editor’s Note: This is a reference to President Clinton’s Working Group of financial advisers which included Alan Greenspan, Treasury Secretary Robert Rubin, and SEC Chair Arthur Levitt.]
A: “….I was not sure how much understanding there was of the derivatives markets by other regulators. And in fact, one of the things we tried to do in the President’s Working Group meetings was to explain our markets and what the concerns were.”
Q: “But it fell on deaf ears?”
A: “Yes, there was very little interest in doing this. The markets were doing well; the country was very prosperous. There was a lot of financial innovation in this area. In fact, I know (former Federal Reserve Board Chairman) Alan Greenspan at one point in the late ‘90s said that the most important development in the financial markets in the ‘90s was the development of over-the-counter derivatives.”
Q: “You think he understood what that meant?”
A: “Well, he has said recently that there was a flaw in his understanding.”
Q: “When you proposed the concept release, there’s an extraordinary statement from Greenspan, Rubin and (former SEC head Arthur) Levitt that says Congress should pass legislation that prevents CFTC from oversight….What did you think?”
A: “I was very surprised, because of course we were an independent federal agency, and we were acting within our jurisdiction….But obviously, the other financial regulators thought that this was terribly important for them to step in and condemn.”
Q: “Why?”
A: “I think the reasons varied from department or agency. But one of the reasons was that some of the people involved really were purists in terms of belief in free markets and were absolutely, from a doctrinal point of view, opposed to regulation. I think others were concerned with keeping the big banks and the investment banks happy….One thing we have to remember is that the financial services industry was the largest campaign contributor then -- and perhaps even now, I’m not sure -- and it was very effective in lobbying both the executive branch and Congress.”
Q: “….In the summer after the concept release, the summer of ’98, Long-Term Capital Management (LTCM) has a problem. How do you hear about the problem?”
A: “Yes, I got a call from the Treasury Department probably the weekend that it nearly collapsed. This was in actually September ’98. And I was told that the very large hedge fund was almost collapsing, that it had $1.25 trillion in notional value of over-the-counter derivatives, and it only had $4 billion in capital to support that enormous investment….And I was told that the Federal Reserve Bank of New York was trying to facilitate an arrangement whereby the large over-the-counter derivatives dealers took over LTCM by buying it out.”
Q: “What did you think when you heard that?”
A: “I thought it was exactly what I had been worried about.”
Q: “….Meltdown?”
A: “Yes, A mini-2008, in effect.”
Q: “One decade before?”
A: “Exactly…”
Q: “So much for the argument that the market will somehow take care of itself and we don’t need regulation, I guess?”
A: “It disproved it to me. I had never believed that. I think anybody who has been a lawyer practicing in areas involving business regulation realizes that the public interest is not fully protected by the marketplace and the participants in the marketplace.”
Q: “So LTCM happens, and for a brief period there is this eagerness to regulate….But it very quickly evaporates. Why?”
A: “Because everything was all right. Because all of the big banks did step in and solve the problem by taking over LTCM and incurring losses themselves….And Congress was told by the over-the-counter derivatives dealers, by some of the other regulators, that this was an anomaly, this was not indicative of dangers in the market. And I think any consideration of regulation probably came and went within a few days, because it was less than a month later that Congress passed a statute saying that the CFTC could take no regulatory action in the over-the-counter derivatives market for the next six months.”
Q: “….You really thought something bad could happen, would happen?”
A: “Yes. LTCM was the sort of thing that I was concerned about. I did not foresee then the kind of pervasive and enormous collapse that we’ve experienced in the last year, partly because the market wasn’t that big yet, partly because I didn’t realize until LTCM happened how pervasive the contagion could be.”
Q: “And how pervasive could it be?”
A: “I think it could include thousands of financial services industry participants and other large institutions all over the world. And I think that’s what happened. As the market continued to grow, with even less oversight and regulation, until it reached more than $680 trillion in notional value, an enormous potential for disaster had grown. What happened after I left the agency in June 1999 was the President’s Working Group did come out with an over-the-counter derivates report to Congress that strongly suggested that…there was no need for regulation. And as a result of that report, a statute was passed in 2000 called the Commodity Futures Modernization Act (CFMA) that took away all jurisdiction over over-the-counter derivatives from the CFTC. It also took away any potential jurisdiction on the part of the SEC, and in fact, forbids state regulators from interfering with the over-the-counter derivatives markets. In other words, it exempted it from all government oversight, all oversight on behalf of the public interest. And that’s been the situation since 2000.”
Editor’s Final Comment: When the right-wing nut jobs like Limbaugh, O’Reilly, and Hannity as well as so-called news pundits and commentators get on public airwaves and complain about the $1 trillion cost of health care reform (which can easily be paid for by asking everyone making over $1 million annually to pay their fair share of taxes), please remind them that deregulation of the derivatives market has created a problem 680 times greater than the cost of health care reform. The cost of H.R. 3962 that was just passed by the House of Representatives pales by comparison to the cost of Congress’ systematic effort to deregulate the financial industry with passage of the Commodity Futures Modernization Act of 2000 and passage of the Gramm-Leach-Bliley Act of 1999. The latter repealed the Banking Act of 1933 (known as “Glass-Steagall”) and the Bank Holding Company Act of 1956, which had kept commercial banking separate from highly speculative investment banking since the great depression.
Maynard Chapman, Editor
The Compass
Copyright © 2009, The Compass Society
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