Tuesday, June 2, 2009

Gadfly of the Week: Brooksley Born

As chairwoman of the Commodity Futures Trading Commission (CFTC), Brooksley Born predicted the present economic collapse ... more than ten years ago!

Born's views resulted in battles with then- Treasury Secretary Robert Rubin, his deputy, Larry Summers, and Securities and Exchange Commission (SEC) head Arthur Levitt, members of Congress, financial elites, and--as she had much of her adult life--sexism.

According to The Washington Post,
She wanted to release a "concept paper"--essentially a set of questions--that explored whether there should be regulation of over-the-counter derivatives. (Derivatives are so-named because they derive their value from something else, such as currency or bond rates.) ...

"I was very concerned about the dark nature of these markets," Born said. "I didn't think we knew enough about them. I was concerned about the lack of transparency and the lack of any tools for enforcement and the lack of prohibitions against fraud and manipulation."
Despite threats and opposition, Born ultimately released the paper. But her critics, kowtowing to the banking industry, persuaded Congress to pass a moratorium on CFTC regulation of over-the-counter derivatives. Less than a year later, she left her post.

Only cave-dwellers are unaware of the recent economic turbulence, caused in part by these derivatives.

The good news?

On May 18th, Born was honored with a John F. Kennedy Profile in Courage Award. In her acceptance speech she said:
We are in the midst of the most significant financial crisis since the Great Depression, and regulatory gaps including the failure to regulate over-the-counter derivatives have played an important role in the crisis ...

While over-the-counter derivatives have been justified as vehicles to manage financial risk, they have in practice spread and multiplied risk throughout the economy and caused great financial harm. They include the credit default swaps disastrously sold by AIG and many of the toxic assets held by our biggest banks. Warren Buffett has dubbed them “financial weapons of mass destruction.”

We now have a unique opportunity--a narrow window of time--to fashion and implement a comprehensive regulatory scheme for these instruments.
Let's hope Washington is now more willing to listen to her.

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