Dear Friends, the war has been over ridden by the collapsing economy. You may have missed this.
The Woman Who Could Have Prevented This Financial Mess Was
Silenced by Greenspan, Rubin and Summers
By Katrina vanden Heuvel
The Nation
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 <http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?_r=1&em&oref=slogin> 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.
|