In almost every scandal like the derivatives meltdown, there is one person who spotted the dangers inherent in a financial extravaganza like this one years before everyone else. In this case, our unsung heroine was a brilliant lawyer named Brooksley Born, who was Bill Clinton’s first chief of the Commodity Futures Trading Commission. As detailed by Rick Schmitt in a startling article published by the Stanford Alumni Magazine, Born fought fiercely to expand her agency’s regulatory powers over the burgeoning derivatives market at the end of the 1990s.
Her efforts were defeated by Alan Greenspan, Arthur Levitt Jr., Robert Rubin, and Larry Summers. The mindset she was up against was best summarized by a conversation Born recalled having with Greenspan:
“Well, Brooksley, I guess you and I will never agree about fraud,” said Greenspan.
“What is there not to agree on?” Born 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.”
Greenspan disputed Born’s recollection; the former regulator stands by her story.
Here is one of the key passages from Schmitt’s piece:
“I was told by the Secretary of the Treasury that the CFTC had no jurisdiction, and for that reason and that reason alone, we should not go forward,” Born says. “I told him…that I had never heard anyone assert that we didn’t have statutory jurisdiction…and I would be happy to see the legal analysis he was basing his position on.”
She says she was never supplied one. “They didn’t have one because it was not a legitimate legal position,” she says.
Greenspan followed. “He maintained that merely inquiring about the field would drive important and expanding and creative financial business offshore,” she says. CFTC economists later checked for any signs of that, and came up with no evidence, Born says.
“It seemed totally inexplicable to me,” Born says of the seeming disinterest her counterparts showed in how the markets were operating. “It was as though the other financial regulators were saying, ‘We don’t want to know.’”
She formally launched the proposal on May 7, and within hours, Greenspan, Rubin and Levitt issued a joint statement condemning Born and the CFTC, expressing “grave concern about this action and its possible consequences.” They announced a plan to ask for legislation to stop the CFTC in its tracks.
When Born refused to back down in her efforts to regulate the derivatives market, her opponents got Congress to pass a law preventing her from carrying out what she regarded as her duties. That temporary measure was replaced by the permanent, and much more sweeping, Commodity Futures Modernization Act, which Bill Clinton signed into law at the end of 2000. At the end of the first Clinton administration, Born gave up and resigned from her post.
William Black concluded his interview with Moyers by calling on the Obama administration to appoint people “who have records of success, instead of records of failure.… And by the way, the folks who are the better regulators, they paid their taxes. So, you can get them through the vetting process a lot quicker.”
A good place to begin would be the appointment of Brooksley Born to oversee a complete overhaul of the way the financial markets are regulated—so that there might be some small chance that some day, fifty years from now, we won’t repeat every one of these mistakes again.