“In the mids of the 1990s bull market, one lone regulator warned about derivatives’ dangers — and overnight became the enemy of some of the most power in Washington …“
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 derivatives report (PDF) 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.
Q: When the CFMA is passed, how do you feel? … The end?
A: Of course it’s never the end, because I hope we can have regulation now. But at the time, I certainly strongly disagreed with the decision to do it. I mean, it was a terrible mistake. And I felt as though we as a society were much more vulnerable than we should have been.
“Well, Brooksley, I guess you and I will never agree about fraud,” Born, in a recent interview, remembers Greenspan saying.
“What is there not to agree on?” Born says she replied.
“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” she recalls. Greenspan, Born says, believed the market would take care of itself.
And her 2009 John F. Kennedy Profile in Courage Award citation,
In 1998, as chair of the Commodity Futures Trading Commission, Brooksley Born unsuccessfully tried to bring over-the-counter derivatives under the regulatory control of the CFTC. She warned that unregulated financial contracts, such as credit default swaps, could pose grave dangers to our economy. The government’s failure to regulate such financial deals has been widely criticized as one of the causes of the current financial crisis.
I wonder how many public servants have the courage to resign like Ms. Born when they’ve done all they can.