Print

 Email

Brooksley Born: Responsible, Accountable, American

Politics has a way of reminding us that the conventional wisdom, while widely held, is not always wise.

David Carr
New York Times

Washington

The Making Of An American Legend

As a nation, we’ve strayed from the values of our ancestors.  Shared interests have been supplanted by private interests. Being responsible for what we do and say has been outshouted by declarative slogans  and dismissive behavior toward those with whom we disagree. Being accountable for what we do and say is avoided by most Americans today — but not all.

Thinking for ourselves is no longer in style. Going along to get along is in. Thus a nation of disestablishmentarians has turned away from doing what is right in favor of doing what’s popular. We have become a people of consent and willing to do the bidding of those who transgress on our values, beliefs and social fabric. We have thus become a nation of ignorance and conventional wisdom.

Well, not all of us. You’re very likely an exception.

Ignorance Equates To Loss Of Freedom

“History already has shown that Greenspan was wrong about virtually everything, and Brooksley was right . . .

I think she has been entirely vindicated. . . . If there is one person we should have listened to, it was Brooksley.”

Frank Partnoy University of San Diego Law School

Chances are that you’ve noticed that many of our banking and finance institutions are criminally negligent, our big media condescending and irresponsible, our colleges and universities mercurial, and our congress overrun by those who pay the most to keep incumbents incumbent.

Our immense national ignorance, our willingness to go along as long as we materially benefit, our devotion to conventional wisdom, has become an unwelcome reality. Worse, our fascination with manufactured cable or satellite news content, and obedience to some destructive political ideology, in lieu of critical thinking on our part, are evidence of lost innocence and dying freedoms.

To the degree that the  above failures ate true — which they all are at least part of the time — the reality is that there are millions of Americans who feel uncertain about expressing their values, knowledge, insight and wisdom in the face of manufactured conflict or ridicule.

The dismissiveness of the good-old boy network, the screaming admonitions of political zealots, and the widespread put-downs delivered by means of declaratives delivered by media as if the equal of clear thinking, makes expressing other views daunting, or even professionally damaging.

Most of us avoid conflict — choosing instead to keep our ideas to ourselves. Who are we to have opinions? We don’t hold office, possess immense wealth, or bask in the media spotlight. Well, maybe some of us are willing to go along, but sure as hell not all of us.

Responsible Americans All

Responsible Americans make a difference. Some serve the greater good in their profession, commerce, calling, or communities. Others, the most able among us, those men and women who accept challenging and difficult roles as their personal contribution to nation, set out to make a difference, to be responsible, to be accountable and to serve nation above all other interests.

Some succeed, most don’t. The problem for nearly all who enter government, politics or public service is overcoming the immense weight of the existing establishment. While some are daunted by the mindlessness of bureaucracy, or cowed by those with big reputation, outsized ego, or cushy political connections, others rise to the occasion.

One of them was a remarkable San Francisco-raised lawyer chosen by Bill Clinton to serve as the 7th Chair of the Commodity Futures Trading Commission. The year was 1996 — a time when the American economy and markets were flying high. Yet to come were the dot-com bubble, the 911 attacks, and the explosion of the finance sector.

Then Came Brooksley

“Brooksley had the advantage of knowing the law and understanding the fragility of the system if it weren’t regulated.

She could see that the data points, by lack of regulation, were heading the country into a serious set of calamities, each calamity worse than the one before.”

Michael Greenberger

Brooksley Born was raised in  wartime San Francisco [ b. 1940 ]. When she was 13 she enrolled at Abraham Lincoln high school from which she graduated at 16 to pursue medicine at nearby Stanford. When she arrived in Palo Alto, her guidance counselor thought her unsuitable for a career in medicine — unless she wanted to attend nursing school. She demurred — a sign of self-confidence and her unwillingness to be stigmatized by having been born female.

By the time she enrolled in Stanford Law, Brooksley Born knew she was the equal of all the men around her. She made of herself the first female in American history to serve as Editor at a major Law Review.  She was neither rude nor arrogant, but she knew the law — and how to make it work for her.

Ms. Born’s personal story — and her experiences at the CFTC are detailed in the March/April edition of Stanford Magazine in an article authored by Rick Schmitt.

Being Responsible Vs. A Team Player

Brooksley Born was originally appointed to the CFTC in April of 1994 by President Bill Clinton  She became interested in financial instruments known as swaps and derivatives, for in them she saw risk others failed to see, or were unwilling to acknowledge. When President Clinton named her chair of the CFTC in 1996, she set out to identify the risks associated with trading derivatives.

The Establishment: Robert Rubin, Alan Greenspan, Larry Summers

When the CFTC invited comments on proposed regulation of derivatives, a first step in developing governmental regulations,  Wall Street, banks seeking to expand their profit-making opportunities, and  even other governmental agencies, took notice.

While the age of deregulation had been initiated by the Reagan administration, it was  the Clinton administration — and a Republican Congress — that joined together to expand deregulation of finance, banking, transportation, broadcasting and even trucking.

Had it been only the rush to deregulate working against her, Brooksley Born might well have had an easier time. But she had another difficult and powerful adversary — an Old Boys network [ Treasury Secretary Robert Rubin, Assistant Treasury Secretary Larry Summers and Federal Reserve Chairman Alan Greenspan ].

No matter that Born’s concerns were legitimate, or that regulation of derivatives might be warranted, she was expected to be a team player — to go along with the rich and powerful. The establishment, at least those in charge of the Treasury and Federal Reserve, demanded that she stand down.

Such was not her nature.

Wall Street-Treasury Complex

Collateral Materials

US Treasury Controlled by Wall Street

By Bob Chapman

Wall Street Treasury Complex is the Problem

By Diane Francis

Geithner Makes Time To Talk To Wall Street Bankers

By Matt Apuzzo & Daniel Wagner
Associated Press

If chairman Born thought regulating derivatives might be routine, the reality was otherwise. No matter the immense risk inherent in trading pseudo-securities based on essentially anything one could imagine, they were immensely profitable to Wall Street firms, some banks and even a few insurance companies. When there’s big money on the line, Bob Chapman wrote recently, the interests of those working in the financial services sector are often at odds with the interests of the United States government, millions of businesses and ordinary citizens.

Unfortunately, citizen interests are not well served at the top levels at the Treasury, Federal Reserve — and most regulatory bodies. The heart of the problem has been described by Diane Francis as the Wall Street Treasury Complex — a term that only alludes to the reality that there is an ongoing revolving door between the big financial services firms and top management at the U.S. Treasury. As reported by the AP, in an article written by Matt Apuzzo and Daniel Wagner, even Obama administration Treasury Secretary Timothy Geithner coordinates treasury policy and plans with the major Wall Street firms.

The Wall Street -Treasury Complex did not come about by sinister action, however, for there is good reason for having knowledgeable and experienced people running the U.S. Treasury. The problem is that in the last century there has been a revolving door that has effectively made the Treasury Department an extension of Wall Street. Thus, the regulator and the regulated became as if one.

Narrow View Obscures Reality

When in doubt, the Treasury Department in any administration, always does what’s in the best interest of the financial sector businesses from which treasury officials come and to which they return. It was this reality that put Brooksley Born at odds with Clinton administration treasury officials — as well as then Federal Reserve Chairman Alan Greenspan.

When Rubin, Summers and Greenspan made it known they were against, and would go to most any length to kill any regulation of swaps and derivatives, the battle was over before it started. Anyone with an ounce of political savvy would simply back away and find something else to fill their time in Washington.

Such was not the nature of Brooksley Born. Not only was she determined to do the responsible thing, she was willing to be personally accountable for her actions.

Derivative Regulation Rejected Out Of Hand

“A little more than a decade ago, Born foresaw a financial cataclysm, accurately predicting that exotic investments known as over-the-counter derivatives could play a crucial role in a crisis much like the one now convulsing America.”

Manuel Roig-Franzia
Washington Post

The CFTC’s regulatory proposals were opposed by nearly everyone in and out of government. But, some voices are more powerful than others, so when Federal Reserve Chairman Alan Greenspan and  Treasury Secretary Robert Rubin joined with Lawrence Summers to oppose any regulation of derivatives, Brooksley Born and her small agency immediately felt the heat. We don’t know if Born considered their rejection on their  technical and policy merits, or if she realized she had collided with an Old Boys network that had been entrenched in finance and governance for over two centuries.

The technical merits of rejection were based on deeply entrenched, but flawed, economic theory and  immense political capital predicated on notions of self-regulating markets. The flawed economic theory, one that became central to conservative political beliefs, had been popularized by one of this nation’s best known and most respected economists, Milton Friedman.

Economic Theory Vs. Legal Experience

The power triumvirate against which Brooksley Born was facing was so convinced of Milton Friedman’s economic theory that there was no evidence, absent a collapse of the financial markets themselves, that would shake their belief that derivatives and swaps did not pose any risks to the financial markets.

Thus, shortly after becoming CFTC chair, Brooksley Born was challenged by  the Wall Street-Treasury Complex. It began when Arthur Levitt, a former chairman at the SEC ( Securities and Exchange Commission ) joined with Treasury Secretary Robert Rubin, his Deputy Secretary, Lawrence Summers, and Federal Reserve Board Chairman Alan Greenspan to block any regulation of derivatives.

Legal Uncertainty Wins Out Over Human Certainty

The arguments proffered by Rubin, Greenspan and Summers argued that regulation of [ CDOs ], and OTC traded derivative instruments might introduce a degree of legal uncertainty concerning the safety of  all derivatives. There were also concerns at Treasury that regulation might force derivative dealing offshore — and beyond reach of U.S. regulators as well as Wall Street investment banking firms.

Brooksley Born was not daunted — for she had first discussed the issues with Alan Greenspan shortly after becoming Chairman at CFTC in 1996. She was quoted on these issues in an interview that appeared in DC/BAR in October, 2003. In part she said,

“OTC derivatives had been legally permitted for the first time in 1993 by a regulatory exemption that Wendy Gramm had adopted as virtually her last act as CFTC chair. This allowed the growth of a business that is now estimated at over a hundred trillion dollars annually in terms of the notional value of contracts worldwide. Alan Greenspan had said that the growth of this market was the most significant development in the financial markets of the 1990s. The market was virtually unregulated and many, many times as big as the trading on the futures exchanges.”

Brooksley Born

Issues Joined, Reality Ignored

The issues were joined when Born received an invitation from Greenspan to visit his palatial accommodations at the stately Federal Reserve for what he described as lunch. She knew it was to be a meeting intended to explain how things were done and that major policy decisions were not made by small, one might even say, inconsequential governmental agencies. Greenspan was far better known, far more respected, and worshiped by those in the financial sector and the congress. He was considered a genius by some, but she knew she was every-bit as competent to discuss markets and regulatory issues as the Chairman of the Federal Reserve.

She is widely quoted as saying that, “He explained there wasn’t a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him.” If she thought his floor broker example a bit simplistic, we don’t know, but prior to her luncheon at the FED, Born had made a career, both in private law practice and government, delving into conspiracies, corruption, malfeasance and fraud.

“After all,” Born is reported to have said, looking back on that luncheon, “I’m a lawyer, and I think the existence of fraud prohibitions is critically important.”

Power Wins

With Treasury and the FED dead-set against looking into regulating the derivatives market, the CFTC’s efforts were squashed. Some argue that regulation was avoided solely by Wall Street influence, but it’s now clear that there was no meaningful political support for Brooksley Born’s efforts to reign in the immense speculation on derivatives that brought down the credit markets just one year ago.

In Washington, power wins — every time. Brooksley Born lost her battle, and at the end of the Clinton administration she returned to practice law — wiser, but undaunted.

Being Responsible Matters

Today’s Brooksley Born is widely regarded as something of a hero — and for good reason — for when push came to shove, when the odds were against her, when the power establishment blocked her every move, she did the responsible thing.

She was held accountable for doing so — by those whose arrogance would eventually bring the world financial markets to their knees.

David Carr, writing  for The New York Times, summed up a lesson best not forgotten.

Politics has a way of reminding us that the conventional wisdom, while widely held, is not always wise.