As origens da presente crise.
No final dos anos 90 Brooksley Born, então presidente da CFTC avisou firmemente contra os perigos dos "Swaps" ... foi totalmente aniquilada pelo sistema financeiro e pela Reserva Federal sobre a liderança de Greenspan ... o principal discipulo da herança ideológica de Ayn Rand ...
Não ... não se trata de "Direita" ou de "Esquerda" ... mas simplesmente de Ética/ Bom Senso versus Ganância/ Arrogância.
Num momento em que devido ao desaparecimento de António Borges, a discussào se desenvolve sobre as consequências de uma Ideologia Económica para o Sistema Económico/Financeiro e consequentemente para as Pessoas, de forma tào polarizada e subjectiva, convém relembrar que as ideologias trazem consequências, que podiam ter sido evitadas ...
António Sérgio Rosa de Carvalho
No final dos anos 90 Brooksley Born, então presidente da CFTC avisou firmemente contra os perigos dos "Swaps" ... foi totalmente aniquilada pelo sistema financeiro e pela Reserva Federal sobre a liderança de Greenspan ... o principal discipulo da herança ideológica de Ayn Rand ...
Não ... não se trata de "Direita" ou de "Esquerda" ... mas simplesmente de Ética/ Bom Senso versus Ganância/ Arrogância.
Num momento em que devido ao desaparecimento de António Borges, a discussào se desenvolve sobre as consequências de uma Ideologia Económica para o Sistema Económico/Financeiro e consequentemente para as Pessoas, de forma tào polarizada e subjectiva, convém relembrar que as ideologias trazem consequências, que podiam ter sido evitadas ...
António Sérgio Rosa de Carvalho
Prophet and Loss
Brooksley Born warned that unchecked trading in the credit
market could lead to disaster, but power brokers in Washington ignored her. Now
we're all paying the price.
By Rick Schmitt / http://alumni.stanford.edu/get/page/magazine/article/?article_id=30885
Shortly after she was named to head the Commodity Futures
Trading Commission in 1996, Brooksley E. Born was invited to lunch by Federal
Reserve chairman Alan Greenspan.
The influential Greenspan was an ardent proponent of
unfettered markets. Born was a powerful Washington lawyer with a track record
for activist causes. Over lunch, in his private dining room at the stately
headquarters of the Fed in Washington, Greenspan probed their differences.
“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.
For the incoming regulator, the meeting was a wake-up call.
“That underscored to me how absolutist Alan was in his opposition to any
regulation,” she said in the interview.
Over the next three years, Born, ’61, JD ’64, would learn
first-hand the potency of those absolutist views, confronting Greenspan and
other powerful figures in the capital over how to regulate Wall Street.
More recently, as analysts sort out the origins of what has
become the worst financial crisis since the Great Depression, Born has emerged
as a sort of modern-day Cassandra. Some people believe the debacle could have
been averted or muted had Greenspan and others followed her advice.
As chairperson of the CFTC, Born advocated reining in the
huge and growing market for financial derivatives. Derivatives get their name
because the value is derived from fluctuations in, for example, interest rates
or foreign exchange. They started out as ways for big corporations and banks to
manage their risk across a range of investments. One type of derivative—known
as a credit-default swap—has been a key contributor to the economy’s recent
unraveling.
The swaps were sold as a kind of insurance—the insured paid
a “premium” as protection in case the creditor defaulted on the loan, and the
insurer agreed to cover the losses in exchange for that premium. The
credit-default swap market—estimated at more than $45 trillion—helped fuel the
mortgage boom, allowing lenders to spread their risk further and further, thus
generating more and more loans. But because the swaps are not regulated, no one
ensured that the parties were able to pay what they promised. When housing
prices crashed, the loans also went south, and the massive debt obligations in
the derivatives contracts wiped out banks unable to cover them.
Back in the 1990s, however, Born’s proposal stirred an
almost visceral response from other regulators in the Clinton administration,
as well as members of Congress and lobbyists. The economy was sailing along,
and the growth of derivatives was considered a sign of American innovation and
a symbol of the virtues of deregulation. The instruments were also a growing
cash cow for the Wall Street firms that peddled them to eager takers.
Ultimately, Greenspan and the other regulators foiled Born’s
efforts, and Congress took the extraordinary step of enacting legislation that
prohibited her agency from taking any action. Born left government and returned
to her private law practice in Washington.
“History already has shown that Greenspan was wrong about
virtually everything, and Brooksley was right,” says Frank Partnoy, a former
Wall Street investment banker who is now a professor at the University of San
Diego law school. “I think she has been entirely vindicated. . . . If there is
one person we should have listened to, it was Brooksley.”
Speaking out for the first time, Born says she takes no
pleasure from the turn of events. She says she was just doing her job based on
the evidence in front of her. Looking back, she laments what she says was the
outsized influence of Wall Street lobbyists on the process, and the refusal of
her fellow regulators, especially Greenspan, to discuss even modest reforms.
“Recognizing the dangers . . . was not rocket science, but it was contrary to
the conventional wisdom and certainly contrary to the economic interests of
Wall Street at the moment,” she says.
“I certainly am not pleased with the results,” she adds. “I
think the market grew so enormously, with so little oversight and regulation,
that it made the financial crisis much deeper and more pervasive than it
otherwise would have been.”
Greenspan, who retired from the Fed in 2006, acknowledged in
congressional testimony last October that the financial crisis, which he
described as a “once in-a-century credit tsunami,” had exposed a “flaw” in his
market-based ideology.
He says Born’s characterization of the lunch conversation
she recounted does not accurately describe his position on addressing fraud.
“This alleged conversation is wholly at variance with my decades-long held
view,” he said in an e-mail, citing an excerpt from his 2007 book The Age of
Turbulence, in which he wrote that more government involvement was needed to
root out fraud. Born stands by her story.
Robert Rubin, who was treasury secretary when Born headed
the CFTC, has said that he supported closer scrutiny of financial derivatives
but did not believe it politically feasible at the time.
A third regulator opposing Born, Arthur Levitt, who was
chairman of the Securities Exchange Commission, says he also now wishes more
had been done. “I think it is fair to say that regulators should have
considered the implications . . . of the exploding derivatives market,” Levitt
told STANFORD.
In a way, the battle had the look and feel of a classic
Washington turf war.
The CFTC was created in the ’70s to regulate agricultural
commodities markets. By the ’90s, its main business had become overseeing
financial products such as stock index futures and currency options, but some
in Washington thought it should stick to pork bellies and soybeans. Born’s push
for regulation posed a threat to the authority of more established cops on the
beat.
“She certainly was not in their league in terms of
prominence and stature,” says a lawyer who has known Born for years and
requested anonymity to avoid appearing critical of her. “They probably thought,
‘Here is a little person from one of these agencies trying to assertively
expand her jurisdiction.’”
Some of the other regulators have said they had problems
with Born’s personal style and found her hard to work with. “I thought it was
counterproductive. If you want to move forward . . . you engage with parties in
a constructive way,” Rubin told the Washington Post. “My recollection was . . .
this was done in a more strident way.” Levitt says Born was “characterized as
being abrasive.”
Her supporters, while acknowledging that Born can be
uncompromising when she believes she is right, say those are excuses of people
who simply did not want to hear what she had to say.
“She was serious, professional, and she held her ground
against those who were not sympathetic to her position,” says Michael
Greenberger, a Washington lawyer who was a top aide to Born at the CFTC. “I
don’t think that the failure to be ‘charming’ should be translated into a
depiction of stridency.”
Others find a whiff of sexism in the pushback. “The
messenger wore a skirt,” says Marna Tucker, a Washington lawyer and a longtime
friend of Born. “Could Alan Greenspan take that?”
Greenspan dismisses the notion that he had problems with
Born because she is a woman. He points out that when he took a leave from his
consulting firm in the 1970s to accept a job in the Ford administration, he
placed an all-female executive team in charge.
It was not the first time that Born, 68, had pushed back
against convention.
Her doggedness over a career spanning more than 40 years
propelled her into the halls of power in Washington. She was a top commercial
lawyer at a major firm, as well as a towering figure in the area of women’s
rights, and a role model for women lawyers. She was on Bill Clinton’s short
list for attorney general.
One of seven women in the Class of 1964 at Stanford Law
School, she graduated at the top of her class, and was elected president of the
law review, the first woman to hold either distinction. She is credited with
being the first woman to edit a major American law review.
In the early 1970s, at a time when women had few role models
at major law firms, she became a partner at the Washington, D.C., firm of
Arnold & Porter, despite working part time while raising her children.
She helped establish some of the first public-interest firms
in the country focused on issues of gender discrimination. She helped rewrite
American Bar Association rules that made it possible for more women and
minorities to sit on the federal bench, and she prodded the group into taking
stands against private clubs that discriminated against women or blacks.
She was used to people trying to push her around, or being
perceived as a potential troublemaker. She remembers being shouted down during
an ABA meeting in the 1970s when she proposed that the organization take a
position supporting equal rights for gay and lesbian workers. A former ABA
president stood up and said, “that the subject was so unsavory that it should
not be discussed . . . and was not germane to the purposes of the ABA,” she
recalls. She lost that fight, although the group reversed its stand years
later.
“She looks at things not just from a technical perspective
or the perspective of an insider. She looks at the perspective of outsiders and
how people without power are going to be affected,” says Esther Lardent, a
Washington lawyer who worked with Born on various ABA matters. “That is a theme
constantly running through her life and career.”
“She is a very polite and low-key person but she is never
somebody who steps back from a disagreement or a fight if it is a matter of
importance to her,” Lardent adds. “Did that make people uncomfortable? Did that
make the men who dominated the leadership fail to take her seriously enough? I
am sure that was the case.”
She was born in San Francisco. Her mother, an English
teacher, and her father, the head of the city’s public welfare department, were
both Stanford graduates.
An early mentor was her mother’s best friend from Stanford,
Miriam E. Wolff, JD ’40, who became a deputy state attorney general and judge
and the first woman to ever head a major port.
Born entered Stanford with the thought of being a doctor,
but switched majors after a career counselor interpreted her answers on a
series of vocational tests. In those days, women were assessed for their
interest in nursing or teaching, men for the professional jobs, including law
and medicine. The tests were even color coded—pink for women, blue for men.
Born says she insisted on taking both. Her mother, who had a
master’s degree in psychology, felt that was the only way her daughter’s
professional interests could be evaluated properly.
She scored high on being a doctor—and low on being a nurse.
But rather than suggest she pursue a career as a physician, the counselor said
the test proved that her interest in medicine was not genuine and that she was
really only interested in making a lot of money. Born quit premed and majored
in English.
“It was a turning point. What can I say? I was 18 years old.
I didn’t know any better,” Born says. “Unfortunately, I was, you know, a member
of the society as it was then. I was hurt by the advice, and kind of believed
in it. I don’t believe in it now. It is ridiculous in retrospect.”
A decade later, one of the public-interest firms she founded
challenged the tests as discriminatory.
Law school was welcoming and intellectually stimulating,
even if some people were still getting used to the idea of having women around.
Male law students got their own dormitory; women were left to make their own
housing arrangements in off-campus boarding houses or apartments. “I also had .
. . one student in my class tell me I was taking the place of a man who had to
go to Vietnam and was risking his life because of me, which was sobering to say
the least,” she recalls.
Making a mark in the classroom could also be a challenge.
Some professors refused to call on women, thinking it rude or unbecoming. She
remembers an episode in her first year when her professor appeared to have the
class stumped after quizzing several men about a problem. “The little girl has
it!” she recalls the professor declaring, after she blurted out the right
answer.
“I was very worried that I would not do well and that I
would disgrace myself, and women,” Born says. “I worked very hard during my
first year because I was afraid I would flunk out.” In those Darwinian times in
law schools, that was not an idle concern: professors tried to weed out all but
the most qualified students, and about a third were dismissed from school after
the first year. That would not be her fate.
“She was off the charts,” says Pamela Ann Rymer, JD ’64, a
judge on the federal appeals court in Pasadena. “Brooksley never wore it on her
sleeve. She is not quiet, but she is a very unpretentious kind of person, just
plainly and obviously with a brilliant mind.”
Despite her grades, Born was passed over for a clerkship on
the U.S. Supreme Court, the most coveted opportunity for a young lawyer.
Stanford’s top students were good candidates for the clerkships, but a faculty
committee decided to recommend two men for the positions even though Born had a
superior academic record. It was a bitter introduction to a gender-biased legal
culture. “They were sure I would understand that it would be unseemly for women
to be clerks on the Supreme Court,” she says of the committee members. “I felt
very disappointed and angry.”
Undaunted, she headed to Washington, and arranged an
interview on her own with Arthur Goldberg, then one of the most liberal members
of the high court. Goldberg would not hire her either but recommended her to a
judge on the federal appeals court in Washington. Henry Edgerton, who wrote an
opinion that became a basis for the landmark Supreme Court decision in the
Brown v. Board of Education school desegregation case, gave her a clerkship.
(Law school professor emerita Barbara Babcock also clerked for Edgerton.)
A year later, taken with the Washington scene and its place
on the front lines of the civil rights movement, Born scrapped plans to return
to San Francisco. “I wanted in,” she says. Arnold & Porter, a firm with a
liberal tradition of public service, offered her a job, and she started work
the same day that a former name partner of the firm, Abe Fortas, was sworn in
as a justice of the Supreme Court.
The firm was one of a few that were beginning to hire women
and treat them on par with men. But there were challenges, especially for those
interested in a career and a family. Many firms up to that point refused to
hire women who were married or who were interested in children.
The lone woman partner at Arnold & Porter at the time
was married to Fortas and was renowned for her “misanthropic toughness,”
including a preference for “thick cigars,” according to Charles Halpern, an
associate with Born at the firm in the 1960s. “Our swimming pool has two deep
ends,” Halpern recalls her once saying, “so that people aren’t tempted to drop
by with their small children for a swim on a hot summer day.”
Born soon faced a difficult choice. She took a one-year
leave when her then-husband got a Nieman fellowship at Harvard, where her first
child was born. Returning to Washington, she tried to juggle full-time work and
child rearing but it quickly became apparent that the arrangement didn’t work.
“I went to the partner I was working with the most and said
I just didn’t think I could do this,” she says. “I thought I had to resign.” To
her surprise, the partner suggested she work three days a week with the
understanding she would not be considered for partner until she returned full
time.
In 1974, when she had a 4-year-old and a 2-year-old, she was
still working part time. The firm promoted her anyway. The family-friendly
development was a stunning breakthrough at a time when law firms were focused
on billable hours and the bottom line, and little else. It further raised her
profile.
“When I met her I was in awe of her because the idea that
she could be a partner in that firm was just unbelievable,” says Tucker, her
longtime friend. The women bonded after being asked to teach a course on women
and the law at two Washington-area law schools, and being horrified at what
they found during their research. “We were surprised to find the degree to
which discrimination was embodied in the law,” Born says. “It was a real
consciousness-raising experience.”
Lawyer Marcia Greenberger sought out Born in the 1970s when
she was named to start a new women’s rights project in Washington. Born agreed
to chair an advisory board for the project, and became a guiding force, mentor
and opener of doors, leveraging her contacts and credibility, Greenberger says.
One of the first broad-based challenges to how universities were implementing
Title IX—the 1972 law requiring equal programs and activities for women and
men—was brought after Born passed along the name of a colleague who was
incensed at the poor athletic facilities his daughter was forced to use at her
school. Born also helped win Ford Foundation grants that enabled the project to
hire its second lawyer. What is now called the National Women’s Law Center
today has a staff approaching 60 and a budget of almost $10 million. Born
remains chair of its board of directors.
Clinton named her to head the CFTC in 1996. She was not
without experience: at Arnold & Porter she had represented the London
Futures Exchange in rule making and other matters before the commodities
agency.
She also knew how markets could be manipulated, having
represented a major Swiss bank in litigation stemming from an attempt by the
Hunt family of Dallas to corner the silver market in the 1980s.
“Brooksley had the advantage of knowing the law and
understanding the fragility of the system if it weren’t regulated,” says
Michael Greenberger, her former adviser at the CFTC. “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.”
Under a Republican predecessor, the CFTC had in 1993 largely
exempted from regulation more exotic derivatives that involved just two
parties. The thinking was that sophisticated entities negotiating individually
tailored derivatives could look out for themselves. More generic derivatives
still had to be traded on exchanges, which were subject to regulation.
By 1997, the over-the-counter derivatives market had more
than doubled in size, by one measure, reaching an estimated $28 trillion, based
on the value of the instruments underlying the contracts. (It has now reached
an estimated $600 trillion.)
And some cracks were already surfacing in the landscape.
Several customers of Bankers Trust, including Procter & Gamble, sued for
fraud and racketeering in connection with several OTC derivative deals. Orange
County, Calif., had gone bankrupt in part because of an OTC derivative-trading
scheme gone awry.
What is more, all the growth had taken place at a time of
economic prosperity. Some people were beginning to ask what would happen if the
market suffered a major reversal.
“The exposures were very, very big and if it was your job to
worry about things that could go wrong, and I think it was, this is one of the
things you couldn’t help but notice,” says Daniel Waldman, a Washington lawyer
who was the CFTC general counsel under Born. “It was only your blind faith in
the participants that could give you much comfort because you really did not
know much about the real risks.”
‘There was no transparency of these markets at all. No
market oversight. No regulator knew what was happening,” Born says. “There was
no reporting to anybody.’
She chose what she thought was a middle ground, circulating
a draft “concept release,” to regulators and trade associations, which was
intended to gather information about how the markets operated. She and her
staff suspected the industry was trying to exploit the earlier regulatory
exemption.
But even the modest proposal got a vituperative response.
The dozen or so large banks that wrote most of the OTC derivative contracts saw
the move as a threat to a major profit center. Greenspan and his deregulation-minded
brain trust saw no need to upset the status quo. The sheer act of contemplating
regulation, they maintained, would cause widespread chaos in markets around the
world.
“We would go to conferences and it would be viciously
attacked,” Waldman says. “They would just be stomping their feet and pounding
the tables.” With Born unlikely to change her mind, the industry focused on
working through the other regulators.
Born recalls taking a phone call from Lawrence Summers, then
Rubin’s top deputy at the Treasury Department, complaining about the proposal,
and mentioning that he was taking heat from industry lobbyists. She was not
dissuaded. “Of course, we were an independent regulatory agency,” she says.
The debate came to a head April 21, 1998. In a Treasury
Department meeting of a presidential working group that included Born and the
other top regulators, Greenspan and Rubin took turns attempting to change her
mind. Rubin took the lead, she recalls.
“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.
At congressional hearings that summer, Greenspan and others
warned of dire consequences; Born and the CFTC were cast as a loose cannon.
Reverting to a theme Born claims he raised at their earlier
lunch, Greenspan testified there was no need for government oversight, because
the derivatives market involved Wall Street “professionals” who could patrol
themselves.
Summers, Rubin’s deputy (and now director of the National
Economic Council), said the memo had “cast the shadow of regulatory uncertainty
over an otherwise thriving market, raising risks for the stability and
competitiveness of American derivative trading.”
Born assailed the legislation, calling it an unprecedented
move to undermine the independence of a federal agency. In eerily prescient
testimony, she warned of potentially disastrous and widespread consequences for
the public. “Losses resulting from misuse of OTC derivatives instruments or
from sales practice abuses in the OTC derivatives market can affect many
Americans,” she testified that July. “Many of us have interests in the
corporations, mutual funds, pension funds, insurance companies, municipalities
and other entities trading in these instruments.”
That September, seemingly bolstering her case, the Federal
Reserve Bank of New York was forced to organize a rescue of a large private
investment firm, Long Term Capital Management, which was a big player in the
OTC derivatives market. Fed officials said they acted to avoid a meltdown that
could have impacted the wider economy.
But the tide of opinion that had risen up against Born was
irreversible. Language was slipped into an agriculture appropriations bill
barring the CFTC from taking action in the six months left in her term.
“I felt as though that, at least, relieved me and the
commission of any public responsibility for what was happening,” she says.
Clinton aides sounded her out about a second term, but she said she wasn’t
interested and left the agency in June 1999.
A year later, Congress enacted the Commodity Futures
Modernization Act, which effectively gutted the ability of the CFTC to regulate
OTC derivatives. With no other agency picking up the slack, the market grew,
unchecked.
Some observers say now the episode and infighting showed how
even a decade ago a patchwork system of regulating Wall Street was badly in
need of reform.
“The fact that the . . . issue created such a threat to the
marketplace to me confirmed the fact that something was not right,” says
Richard Miller, a lawyer and editor of a widely read newsletter on derivatives.
“How could we have a system that hangs together by such a narrow thread?”
Miller testified at the time that the idea Born proffered should at least have
been considered.
The Obama administration has pledged an overhaul of the
financial system, including the way derivatives are regulated. Worrisome to
some observers is the fact that his economic team includes some former Treasury
officials who were lined up in opposition to Born a decade ago.
Born, who retired from her law firm in 2003, is not playing
a formal role in the process. An outdoor enthusiast, she was planning a trip to
Antarctica this winter, as the Obama team was settling in. “The important
thing,” she advises, “is that the new administration should not be listening to
just one point of view.”
RICK SCHMITT, a former staff writer for the Los Angeles
Times and the Wall Street Journal, is a freelance writer based in Washington,
D.C.
 |
| A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly. |
Greenspan Concedes to `Flaw' in His Market Ideology
By Steve Matthews and Scott Lanman - October 23, 2008
Oct. 23 (Bloomberg) /
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7is5F_Do6N0
Former Federal Reserve Chairman Alan Greenspan said a
``once-in-a-century credit tsunami'' has engulfed financial markets and
conceded his free-market ideology shunning regulation was flawed.
``Yes, I found a flaw,'' Greenspan said in response to
grilling from the House Committee on Oversight and Government Reform. ``I was
shocked because I'd been going for 40 years or more with very considerable
evidence that it was working exceptionally well.'' Greenspan added he was
``partially'' wrong for opposing the regulation of derivatives.
Greenspan's contrition came after lawmakers and Fed watchers
increasingly blamed the former Fed chairman for helping cause the crisis with
lax oversight of the housing boom and derivatives markets. Normally afforded
deference by Congress, he endured almost four hours of questions from lawmakers
less than two weeks before a national election.
``Greenspan is finally taking some responsibility for his
actions,'' said Paul Kasriel, director of economic research at Northern Trust
Co. in Chicago and a former Fed official. ``The damage has been done. His
reputation has definitely been tarnished.''
Greenspan, responding to questions, said only ``onerous''
regulation would have prevented the financial crisis. Stifling rules would have
suppressed growth and hurt Americans' standards of living, he said.
Not Infallible
``We have to do our best but not expect infallibility or
omniscience,' he said.
Part of the problem was that the Fed's ability to forecast
the economy's trajectory is an inexact science, he said.
``If we are right 60 percent of the time in forecasting, we
are doing exceptionally well; that means we are wrong 40 percent of the time,''
Greenspan said. ``Forecasting never gets to the point where it is 100 percent
accurate.''
The admission that free markets have their faults was a
shift for the former Fed chairman who declared in a May 2005 speech that
``private regulation generally has proved far better at constraining excessive
risk-taking than has government regulation.''
Committee Chairman Henry Waxman, a California Democrat, said
today that Greenspan had ``the authority to prevent irresponsible lending
practices that led to the subprime mortgage crisis.''
`Paying the Price'
``You were advised to do so by many others,'' he told the
man hailed in the 1990s as the ``Maestro'' of the global financial system and
awarded a knighthood in 2002. ``And now our whole economy is paying the price.''
Greenspan's devotion to free markets was nurtured in part by
his association with Ayn Rand, the libertarian novelist and philosopher who
espoused laissez-faire capitalism. He met Rand in the 1950s, becoming part of
her inner circle of followers meeting regularly in her Manhattan apartment.
``Greenspan in a very, very kind of unwise, left-brain way,
imputed pure rationality to markets,'' James Grant, editor of Grant's Interest
Rate Observer, said in an interview on ``Night Talk'' with Mike Schneider to be
broadcast later today on Bloomberg Television. ``They are just as rational and
just as efficient as the people that operated in them.''
Waxman echoed that sentiment to Greenspan: ``The mantra
became government regulation is wrong. The market is infallible.''
Gramlich's Warnings
Former Fed Governor Edward Gramlich, who died in 2007, had
urged Greenspan to strengthen oversight of banks during the record U.S.
mortgage boom from 2004 to 2006.
Questioned about those warnings, Greenspan said ``Governor Gramlich
said to me that he had problems'' and that he left the meeting expecting a Fed
subcommittee dealing with consumer and community affairs to present
recommendations, which didn't occur. ``I presumed at the time that essentially
the subcommittee didn't think it rose to the higher level'' requiring action,
Greenspan said.
Responding to criticism that he was too ideological,
Greenspan said he sought as chairman to abide by laws passed by Congress, ``not
my own predilections.''
He later added that he couldn't respond to every warning.
``There are always a lot of people raising issues, and half the time they're
wrong.''
Regulatory Actions
Greenspan pointed out that he voted for every regulatory
action the Fed moved on, drawing a rebuke from Waxman. ``On the other hand, you
didn't get to vote on regulations that you didn't put before the Federal
Reserve board, even though you had the legal authority for those regulations.''
Firms that bundle loans into securities for sale should be
required to keep part of those securities, Greenspan said in prepared
testimony. Other rules should address fraud and settlement of trades, he said.
Greenspan opposed increasing financial supervision as Fed
chairman from August 1987 to January 2006. Policy makers are now struggling to
contain a financial crisis marked by record foreclosures, falling asset prices
and almost $660 billion in writedowns and losses tied to U.S. subprime
mortgages.
 |
Ayn Rand, the Spititual and Philosophical Master of
Greenspam
She supported rational and ethical egoism, and rejected
ethical altruism. In politics, she condemned the initiation of force as immoral
and opposed collectivism and statism as well as anarchism, instead supporting a
minarchist limited government and laissez-faire capitalism, which she believed
to be the only social system that protected individual rights.
|
Taking Hard New Look at a Greenspan Legacy
“Not only have individual financial institutions become less
vulnerable to shocks from underlying risk factors, but also the financial
system as a whole has become more resilient.” — Alan Greenspan in 2004
By PETER S. GOODMAN / http://www.wehaitians.com/taking%20hard%20new%20look%20at%20a%20greenpan%20legacy.html
George Soros, the prominent financier, avoids using the
financial contracts known as derivatives “because we don’t really understand
how they work.” Felix G. Rohatyn, the investment banker who saved New York from
financial catastrophe in the 1970s, described derivatives as potential
“hydrogen bombs.”
And Warren E. Buffett presciently observed five years ago
that derivatives were “financial weapons of mass destruction, carrying dangers
that, while now latent, are potentially lethal.”
One prominent financial figure, however, has long thought
otherwise. And his views held the greatest sway in debates about the regulation
and use of derivatives — exotic contracts that promised to protect investors
from losses, thereby stimulating riskier practices that led to the financial
crisis. For more than a decade, the former Federal Reserve Chairman Alan
Greenspan has fiercely objected whenever derivatives have come under scrutiny
in Congress or on Wall Street.
“What we have found over the years in the marketplace is
that derivatives have been an extraordinarily useful vehicle to transfer risk
from those who shouldn’t be taking it to those who are willing to and are
capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003.
“We think it would be a mistake” to more deeply regulate the contracts, he
added.
Today, with the world caught in an economic tempest that Mr.
Greenspan recently described as “the type of wrenching financial crisis that
comes along only once in a century,” his faith in derivatives remains unshaken.
The problem is not that the contracts failed, he says.
Rather, the people using them got greedy. A lack of integrity spawned the
crisis, he argued in a speech a week ago at Georgetown University, intimating
that those peddling derivatives were not as reliable as “the pharmacist who
fills the prescription ordered by our physician.”
But others hold a starkly different view of how global
markets unwound, and the role that Mr. Greenspan played in setting up this
unrest.
“Clearly, derivatives are a centerpiece of the crisis, and
he was the leading proponent of the deregulation of derivatives,” said Frank
Partnoy, a law professor at the University of San Diego and an expert on
financial regulation.
The derivatives market is $531 trillion, up from $106
trillion in 2002 and a relative pittance just two decades ago. Theoretically
intended to limit risk and ward off financial problems, the contracts instead
have stoked uncertainty and actually spread risk amid doubts about how
companies value them.
If Mr. Greenspan had acted differently during his tenure as
Federal Reserve chairman from 1987 to 2006, many economists say, the current
crisis might have been averted or muted.
Over the years, Mr. Greenspan helped enable an ambitious
American experiment in letting market forces run free. Now, the nation is
confronting the consequences.
Derivatives were created to soften — or in the argot of Wall
Street, “hedge” — investment losses. For example, some of the contracts protect
debt holders against losses on mortgage securities. (Their name comes from the
fact that their value “derives” from underlying assets like stocks, bonds and
commodities.) Many individuals own a common derivative: the insurance contract
on their homes.
On a grander scale, such contracts allow financial services
firms and corporations to take more complex risks that they might otherwise
avoid — for example, issuing more mortgages or corporate debt. And the
contracts can be traded, further limiting risk but also increasing the number
of parties exposed if problems occur.
Throughout the 1990s, some argued that derivatives had
become so vast, intertwined and inscrutable that they required federal
oversight to protect the financial system. In meetings with federal officials,
celebrated appearances on Capitol Hill and heavily attended speeches, Mr.
Greenspan banked on the good will of Wall Street to self-regulate as he fended
off restrictions.
Ever since housing began to collapse, Mr. Greenspan’s record
has been up for revision. Economists from across the ideological spectrum have
criticized his decision to let the nation’s real estate market continue to boom
with cheap credit, courtesy of low interest rates, rather than snuffing out
price increases with higher rates. Others have criticized Mr. Greenspan for not
disciplining institutions that lent indiscriminately.
But whatever history ends up saying about those decisions,
Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much
less scrutinized phenomenon: the spectacular boom and calamitous bust in
derivatives trading.
Faith in the System
Some analysts say it is unfair to blame Mr. Greenspan
because the crisis is so sprawling. “The notion that Greenspan could have
generated a totally different outcome is naïve,” said Robert E. Hall, an economist
at the conservative Hoover Institution, a research group at Stanford.
Mr. Greenspan declined requests for an interview. His
spokeswoman referred questions about his record to his memoir, “The Age of
Turbulence,” in which he outlines his beliefs. Mr. Greenspan remains firms in
his beliefs in laissez-faire.
“It seems superfluous to constrain trading in some of the
newer derivatives and other innovative financial contracts of the past decade,”
Mr. Greenspan writes. “The worst have failed; investors no longer fund them and
are not likely to in the future.”
In his Georgetown speech, he entertained no talk of
regulation, describing the financial turmoil as the failure of Wall Street to
behave honorably.
“In a market system based on trust, reputation has a
significant economic value,” Mr. Greenspan told the audience. “I am therefore
distressed at how far we have let concerns for reputation slip in recent
years.”
As the long-serving chairman of the Fed, the nation’s most
powerful economic policy maker, Mr. Greenspan preached the transcendent,
wealth-creating powers of the market.
A professed libertarian, he counted among his formative
influences the novelist Ayn Rand, who portrayed collective power as an evil
force set against the enlightened self-interest of individuals. In turn, he
showed a resolute faith that those participating in financial markets would act
responsibly.
An examination of more than two decades of Mr. Greenspan’s
record on financial regulation and derivatives in particular reveals the degree
to which he tethered the health of the nation’s economy to that faith.
As the nascent derivatives market took hold in the early
1990s, and in subsequent years, critics denounced an absence of rules forcing
institutions to disclose their positions and set aside funds as a reserve
against bad bets.
Time and again, Mr. Greenspan — a revered figure
affectionately nicknamed the Oracle — proclaimed that risks could be handled by
the markets themselves.
“Proposals to bring even minimalist regulation were
basically rebuffed by Greenspan and various people in the Treasury,” recalled
Alan S. Blinder, a former Federal Reserve board member and an economist at
Princeton University. “I think of him as consistently cheerleading on
derivatives.”
Arthur Levitt Jr., a former chairman of the Securities and
Exchange Commission, says Mr. Greenspan opposes regulating derivatives because
of a fundamental disdain for government.
Mr. Levitt said that Mr. Greenspan’s authority and grasp of
global finance consistently persuaded less financially sophisticated lawmakers
to follow his lead.
“I always felt that the titans of our legislature didn’t
want to reveal their own inability to understand some of the concepts that Mr.
Greenspan was setting forth,” Mr. Levitt said. “I don’t recall anyone ever
saying, ‘What do you mean by that, Alan?’ ”
Still, over a long stretch of time, some did pose questions.
In 1992, Edward J. Markey, a Democrat from Massachusetts who led the House
subcommittee on telecommunications and finance, asked what was then the General
Accounting Office to study derivatives risks.
Two years later, the office released its report, identifying
“significant gaps and weaknesses” in the regulatory oversight of derivatives.
“The sudden failure or abrupt withdrawal from trading of any
of these large U.S. dealers could cause liquidity problems in the markets and
could also pose risks to others, including federally insured banks and the
financial system as a whole,” Charles A. Bowsher, head of the accounting
office, said when he testified before Mr. Markey’s committee in 1994. “In some
cases intervention has and could result in a financial bailout paid for or
guaranteed by taxpayers.”
In his testimony at the time, Mr. Greenspan was reassuring.
“Risks in financial markets, including derivatives markets, are being regulated
by private parties,” he said.
“There is nothing involved in federal regulation per se
which makes it superior to market regulation.”
Mr. Greenspan warned that derivatives could amplify crises
because they tied together the fortunes of many seemingly independent
institutions. “The very efficiency that is involved here means that if a crisis
were to occur, that that crisis is transmitted at a far faster pace and with
some greater virulence,” he said.
But he called that possibility “extremely remote,” adding
that “risk is part of life.”
Later that year, Mr. Markey introduced a bill requiring
greater derivatives regulation. It never passed.
Resistance to Warnings
In 1997, the Commodity Futures Trading Commission, a federal
agency that regulates options and futures trading, began exploring derivatives
regulation. The commission, then led by a lawyer named Brooksley E. Born,
invited comments about how best to oversee certain derivatives.
Ms. Born was concerned that unfettered, opaque trading could
“threaten our regulated markets or, indeed, our economy without any federal
agency knowing about it,” she said in Congressional testimony. She called for
greater disclosure of trades and reserves to cushion against losses.
Ms. Born’s views incited fierce opposition from Mr.
Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers
concluded that merely discussing new rules threatened the derivatives market.
Mr. Greenspan warned that too many rules would damage Wall Street, prompting
traders to take their business overseas.
“Greenspan told Brooksley that she essentially didn’t know
what she was doing and she’d cause a financial crisis,” said Michael
Greenberger, who was a senior director at the commission. “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.”
Ms. Born declined to comment. Mr. Rubin, now a senior
executive at the banking giant Citigroup, says that he favored regulating
derivatives — particularly increasing potential loss reserves — but that he saw
no way of doing so while he was running the Treasury.
“All of the forces in the system were arrayed against it,”
he said. “The industry certainly didn’t want any increase in these
requirements. There was no potential for mobilizing public opinion.”
Mr. Greenberger asserts that the political climate would
have been different had Mr. Rubin called for regulation.
In early 1998, Mr. Rubin’s deputy, Lawrence H. Summers,
called Ms. Born and chastised her for taking steps he said would lead to a
financial crisis, according to Mr. Greenberger. Mr. Summers said he could not
recall the conversation but agreed with Mr. Greenspan and Mr. Rubin that Ms.
Born’s proposal was “highly problematic.”
On April 21, 1998, senior federal financial regulators
convened in a wood-paneled conference room at the Treasury to discuss Ms.
Born’s proposal. Mr. Rubin and Mr. Greenspan implored her to reconsider,
according to both Mr. Greenberger and Mr. Levitt.
Ms. Born pushed ahead. On June 5, 1998, Mr. Greenspan, Mr.
Rubin and Mr. Levitt called on Congress to prevent Ms. Born from acting until
more senior regulators developed their own recommendations. Mr. Levitt says he
now regrets that decision. Mr. Greenspan and Mr. Rubin were “joined at the hip
on this,” he said. “They were certainly very fiercely opposed to this and
persuaded me that this would cause chaos.”
Ms. Born soon gained a potent example. In the fall of 1998,
the hedge fund Long Term Capital Management nearly collapsed, dragged down by
disastrous bets on, among other things, derivatives. More than a dozen banks
pooled $3.6 billion for a private rescue to prevent the fund from slipping into
bankruptcy and endangering other firms.
Despite that event, Congress froze the Commodity Futures
Trading Commission’s regulatory authority for six months. The following year,
Ms. Born departed.
In November 1999, senior regulators — including Mr.
Greenspan and Mr. Rubin — recommended that Congress permanently strip the
C.F.T.C. of regulatory authority over derivatives.
Mr. Greenspan, according to lawmakers, then used his
prestige to make sure Congress followed through. “Alan was held in very high
regard,” said Jim Leach, an Iowa Republican who led the House Banking and
Financial Services Committee at the time. “You’ve got an area of judgment in
which members of Congress have nonexistent expertise.”
As the stock market roared forward on the heels of a
historic bull market, the dominant view was that the good times largely stemmed
from Mr. Greenspan’s steady hand at the Fed.
“You will go down as the greatest chairman in the history of
the Federal Reserve Bank,” declared Senator Phil Gramm, the Texas Republican
who was chairman of the Senate Banking Committee when Mr. Greenspan appeared
there in February 1999.
Mr. Greenspan’s credentials and confidence reinforced his
reputation — helping him to persuade Congress to repeal Depression-era laws
that separated commercial and investment banking in order to reduce overall
risk in the financial system.
“He had a way of speaking that made you think he knew
exactly what he was talking about at all times,” said Senator Tom Harkin, a
Democrat from Iowa. “He was able to say things in a way that made people not
want to question him on anything, like he knew it all. He was the Oracle, and
who were you to question him?”
In 2000, Mr. Harkin asked what might happen if Congress
weakened the C.F.T.C.’s authority.
“If you have this exclusion and something unforeseen
happens, who does something about it?” he asked
Mr. Greenspan in a hearing. Mr. Greenspan said that Wall
Street could be trusted. “There is a very fundamental trade-off of what type of
economy you wish to have,” he said. “You can have huge amounts of regulation and
I will guarantee nothing will go wrong, but nothing will go right either,” he
said.
Later that year, at a Congressional hearing on the merger
boom, he argued that Wall Street had tamed risk.
“Aren’t you concerned with such a growing concentration of
wealth that if one of these huge institutions fails that it will have a
horrendous impact on the national and global economy?” asked Representative
Bernard Sanders, an independent from Vermont.
“No, I’m not,” Mr. Greenspan replied. “I believe that the general
growth in large institutions have occurred in the context of an underlying
structure of markets in which many of the larger risks are dramatically — I
should say, fully — hedged.”
The House overwhelmingly passed the bill that kept
derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider
limiting the C.F.T.C.’s authority to an 11,000-page appropriations bill. The
Senate passed it. President Clinton signed it into law.
Pressing Forward
Still, savvy investors like Mr. Buffett continued to raise
alarms about derivatives, as he did in 2003, in his annual letter to shareholders of
his company, Berkshire Hathaway.
“Large amounts of risk, particularly credit risk, have
become concentrated in the hands of relatively few derivatives dealers,” he
wrote. “The troubles of one could quickly infect the others.”
But business continued.
And when Mr. Greenspan began to hear of a housing bubble, he
dismissed the threat. Wall Street was using derivatives, he said in a 2004
speech, to share risks with other firms.
Shared risk has since evolved from a source of comfort into
a virus. As the housing crisis grew and mortgages went bad, derivatives
actually magnified the downturn.
The Wall Street debacle that swallowed firms like Bear
Stearns and Lehman Brothers, and imperiled the insurance giant American
International Group, has been driven by the fact that they and their customers
were linked to one another by derivatives.
In recent months, as the financial crisis has gathered
momentum, Mr. Greenspan’s public appearances have become less frequent.
His memoir was released in the middle of 2007, as the disaster
was unfolding, and his book tour suddenly became a referendum on his policies.
When the paperback version came out this year, Mr. Greenspan wrote an epilogue
that offers a rebuttal of sorts.
“Risk management can never achieve perfection,” he wrote. The
villains, he wrote, were the bankers whose self-interest he had once bet upon.
“They gambled that they could keep adding to their risky
positions and still sell them out before the deluge,” he wrote. “Most were
wrong.”
No federal intervention was marshaled to try to stop them,
but Mr. Greenspan has no regrets.
“Governments and central banks,” he wrote, “could not have
altered the course of the boom.”
Copyright 2008 The New York Times Company. Reprinted from
The New York Times, National, of Thursday, October 9, 2008.
Born and the OTC Derivatives Market
Born was appointed to the CFTC on April 15, 1994 by
President Bill Clinton. Due to litigation against Bankers Trust Company by
Procter and Gamble and other corporate clients, Born and her team at the CFTC
sought comments on the regulation of over-the-counter derivatives, a first step
in the process of writing CFTC regulations to supplement the existing
regulations of the Federal Reserve System, the OCC, and the National
Association of Insurance Commissioners. Born was particularly concerned about
swaps, financial instruments that are traded over the counter between banks,
insurance companies or other funds or companies, and thus have no transparency
except to the two counterparties and the counterparties' regulators, if any.
CFTC regulation was strenuously opposed by Federal Reserve chairman Alan
Greenspan, and by Treasury Secretaries Robert Rubin and Lawrence Summers. On
May 7, 1998, former SEC Chairman Arthur Levitt joined Rubin and Greenspan in
objecting to the issuance of the CFTC’s concept release. Their response dismissed
Born's analysis and focused on the hypothetical possibility that CFTC
regulation of swaps and other OTC derivative instruments could create a
"legal uncertainty" regarding such financial instruments,
hypothetically reducing the value of the instruments. They argued that the
imposition of regulatory costs would "stifle financial innovation"
and encourage financial capital to transfer its transactions offshore. The
disagreement between Born and the Executive Office's top economic policy advisors
has been described not only as a classic Washington turf war, but also a war of
ideologies, insofar as it is possible to argue that Born's actions were consistent
with Keynesian and neoclassical economics while Greenspan, Rubin, Levitt, and
Summers consistently espoused neoliberal, and neoconservative
policies.
In 1998,
a trillion dollar hedge fund called Long Term Capital
Management (LTCM) was near collapse. Using mathematical models to calculating
debt risk, LTCM used derivatives to leverage $5 billion into more than $1
trillion, doing business with fifteen of Wall Street's largest financial
institutions. The derivative transactions were not regulated, nor were
investors able to evaluate LTCM's exposures. Born stated, "I thought that
LTCM was exactly what I had been worried about". In the last weekend of
September 1998, the President's working group was told that the entire American
economy hung in the balance. After intervention by the Federal Reserve, the
crisis was averted. In congressional hearings into the crisis, Greenspan
acknowledged that language had been introduced into an agriculture bill that
would prevent CFTC from regulating the derivatives which were at the center of
the crisis that threatened the US economy. U.S. Representative Maurice Hinchey
(D-NY) asked "How many more failures do you think we'd have to have before
some regulation in this area might be appropriate?" In response, Greenspan
brushed aside the substance of Born's warnings with the simple assertion that "the
degree of supervision of regulation of the over-the-counter derivatives market
is quite adequate to maintain a degree of stability in the system".Born's
warning was that there wasn't any regulation of them. Born's chief of staff,
Michael Greenberger summed up Greenspan's position this way: "Greenspan
didn't believe that fraud was something that needed to be enforced, and he
assumed she probably did. And of course, she did." Under heavy pressure
from the financial lobby, legislation prohibiting regulation of derivatives by
Born's agency was passed by the Congress. Born resigned on June 1, 1999.
The derivatives market continued to grow yearly throughout
both terms of George W. Bush's administration. On September 15, 2008, the
bankruptcy of Lehman Brothers forced a broad recognition of a financial crisis
in both the US and world capital markets. As Lehman Brothers' failure
temporarily reduced financial capital's confidence, a number of newspaper
articles and television programs suggested that the failure's possible causes
included the conflict between the CFTC and the other regulators.
Born declined to publicly comment on the unfolding 2008
crisis until March 2009, when she said: "The market grew so enormously,
with so little oversight and regulation, that it made the financial crisis much
deeper and more pervasive than it otherwise would have been." She also
lamented the influence of Wall Street lobbyists on the process and the refusal
of regulators to discuss even modest reforms.
An October 2009 Frontline documentary titled The
Warning described Born's thwarted
efforts to regulate and bring transparency to the derivatives market, and the
continuing opposition thereto. The program concluded with an excerpted
interview with Born sounding another warning: "I think we will have
continuing danger from these markets and that we will have repeats of the
financial crisis -- may differ in details but there will be significant
financial downturns and disasters attributed to this regulatory gap, over and
over, until we learn from experience."
In 2009 Born, along with Sheila Bair of the FDIC, was
awarded the John F. Kennedy Profiles in Courage Award in recognition of the
"political courage she demonstrated in sounding early warnings about
conditions that contributed to the current global financial crisis".
According to Caroline Kennedy, "...Brooksley Born recognized that the
financial security of all Americans was being put at risk by the greed,
negligence and opposition of powerful and well connected interests... The catastrophic
financial events of recent months have proved them [Born and Sheila Bair]
right." One member of the President's working group had a change of heart
about Brooksley Born. SEC Chairman Arthur Levitt stated "I've come to know
her as one of the most capable, dedicated, intelligent and committed public
servants that I have ever come to know", adding that "I could have
done much better. I could have made a difference" in response to her
warnings.
In 2010,
a documentary film Inside Job further alleged that the
crafting of derivatives regulation was flawed from the Clinton administration
on. Along with fellow whistleblower, former IMF Chief Economist Raghuram Rajan,
who was also aggressively rebuked by the economic establishment, Brooksley Born
was cited as one of the marginalized voices arguing that financial derivatives
increase economic risk.
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