Brooksley Born; The Warning Continues … Unheeded

November 19, 2010

(I wrote this Blog in September of 2010 but forgot to publish it.  And though some of my outrage has subsided … I still want you to know this. Undoubtedly there will be more to talk about when it comes to professional politicians and public servants.) 

I must warn you that I am feeling particularly spunky today.  If you cotton to professional politicians you might want to skip reading this entry.  If you are a public servant … thank you for your service.  And if by chance you are reading this AND you are a professional politician who is dishonest or you’ve forgotten whom you serve … a pox on you!  I fervently hope that there is such a thing as Karma.

OK.  So it doesn’t take long for a tiger to show its stripes, and politicians to forget who they serve.  It takes longer for a Fed Chairman to screw things up; but they’re all probably just as inevitable.  But they are minor players in this entry.  This is the story of a for real public servant, and the story of others who hold themselves out to be serving the public, but fail miserably.  I was able to glean a great deal of this from a PBS special which is footnoted below.  I also did a little of my own research lending to the veracity of the “facts” presented in the video and now here.

Brooksley Born graduated from Stanford University in the 1960’s and went on to Stanford Law School, becoming the first female to graduate at the top of her class and first female President of the Stanford Law Review.  Bill Clinton considered her for the Attorney General’s position ultimately given to Janet Reno.  Some say as a consolation prize, Brooksley Born was appointed to head the Commodities Futures Trade Commission (CFTC).  Now I was taught by a Yaley that when the President of the United States taps you on the shoulder, you step up and serve.  Though we don’t run in the same circles, I suspect that Brooksley Born must have learned that too.

As head of the CFTC she called attention to the existence of a market in Over the Counter Derivatives; in essence, risk instruments that various players on Wall Street enter into to protect themselves from unforeseen calamities.  At that time, around 1993, it was a completely unregulated $27 Trillion market operating in a “black box” environment.

Brooksley Born testified at least four times to Congress concerning the dangers of this fast growing, unregulated and highly secretive financial market.  She was concerned because the market was utilized heavily by the banking and financial services industries and involved huge “bets” by well know financial players such as Bank of America, Lehman Brothers, Bankers Trust, and Long Term Capital Markets.

In 1993 one player, Bankers Trust, was sued by a client alleging that Bankers Trust sold derivatives to the client and intentionally took advantage of the client.  That client was Procter and Gamble.  The CFTC found out about the frauds occurring in these markets because P&G filed its lawsuit against Bankers Trust alleging, among other things, millions of dollars of fraud.  With a little sniffing around, the CFTC could see that a calamity in this unregulated and secretive market had the potential to take down the entire American financial system.  Brooksley Born issued a warning and a call to action.

Not really a politician and without significant political capital, Brooksley Born had few supporters and, promoting the idea of tougher regulation provided her with some significant detractors; specifically Federal Reserve Chairman Alan Greenspan, Secretary of the Treasury Robert Rubin and his lieutenants, Tim Geithner and Deputy Treasury Secretary Larry Summers.

Brooksley Born got a phone call from Larry Summers who said he had 13 bankers in his office who had informed him of what the CFTC was contemplating.  Summers read her the riot act and told Born this talk of regulating the derivatives markets had to stop.  The well oiled and highly financed Washington D.C. lobby for the financial industry was up in arms.  Congressional members were inundated with calls and visits demanding that Congress get Brooksley Born off their backs.

The standing committee known as the President’s Working Group, was an influential collection of the “finest minds” to advise the president on matters economic and financial.  Members of the group headed and steered by Treasury Secretary Rubin also included Greenspan, Summers, and Arthur Leavitt, Chairman of the SEC.  By executive order, Brooksley Born was commanded to attend the meetings too.

An emergency meeting of the President’s Working Group was called to address were called together to find a way to address what was now a political hot potato … the topic of the Concept Release, the draft of the CFTC approach to regulate the derivatives markets.  Each of the titans, Rubin, Summers, Greenspan and Leavitt took their turn at trying to convince Brooksley Born to bury the Concept Release and any further contemplation by the CFTC to regulate this “dark” market of derivatives.  Born listened but would not relent.  Two weeks later Born ordered her staff to publish the Concept Release document.

At her own personal and professional peril, Brooksley Born took the steps she thought were necessary to protect the interest of the American public.   What happened next in the ensuing days, weeks, and years speaks volumes for how corrupt the highest levels of government are in Washington D.C.  Brooksley born was crucified in congressional hearings, and in the press by the powers at be in the Washington establishment.  Member of the President’s Working Group published a memo expressing “grave concerns” over the CFTC actions and warning of dire consequences that such regulation would bring. 

Rather than continue sharing facts, I will use this opportunity to express my own opinion.  And in case you are one of those titans of Washington or Wall Street, since this is my blog , we play by my rules here.  Get your own blog if you disagree! 

Now, let’s recount for a moment the titles of the people involved in this story. 

  • Chairman of the Federal Reserve Board of the United States of America,
  • Secretary of the Treasury,
  • Deputy Secretary of the Treasury,
  • Chairman of the Securities and Exchange Commission,
  • Senior Advisor to the President of the United States of America. 

Most notably, allthese people are feeders at the public trough; … all sworn protectors and preservers of the Constitution and, in turn, fiduciaries supposedly serving the best interest of the American people.  Yet who’s interest  did they really serve from 1993 to the summer of 1998 and beyond? 

Well, as Paul Harvey used to say, “and now …  the rest of the story.”  Excuse my French; but in 1998 the shit hit the proverbial fan.  Throughout a ridiculous number of congressional committee hearings, Greenspan, Summers, Rubin and Leavitt lobbied heavily against Born and the CFTC.  Brooksley Born was ruthlessly pummeled and then publicly eviscerated. The CFTC was rendered effete as it relates to regulation of the derivatives market.  Congress saw to that. 

Brooksley Born tendered her resignation.  Then, six weeks later, rocked by a financial crisis in Russia, Long Term Capital Markets, the hedge fund placing market bets using derivatives had leveraged $5 Billion into $1 Trillion in derivatives was on the verge of going belly up.  The meltdown which subsequently occurred in 2008 probably would have occurred ten years earlier. 

Everything that Brooksley Born had worried about … had warned Congress and the Administration about, had begun to come true.  It was only because the Fed and the Treasury forced Bank of America and a baker’s dozen of other financial institutions to pony up $400 Million each to keep LTCM solvent that the debacle did not occur in 1998.  $3.5 Billion later the crisis had been temporarily averted; Greenspan told Congress that the incident was an anomaly, and thus felt comfortable sticking its Medusian head in the sand.

Now, with Brooksley Born out of the way and the CFTC rendered powerless to regulate; both unfettered and unregulated, the derivatives market continued to grow to nearly $600 Trillion (yes … that’s right … $600 Trillion).  Then … it all hit the fan … again.  Lehman Brothers filed for bankruptcy.  AIG, GM, Chrysler and many of America’s biggest banks were technically, if not actually insolvent.  And the American taxpayer was about to become the victim of the one of the biggest heists ever foisted upon a population of peoples who freely, blindly and naively elect those who represent them in Washington D.C.,  …. and then pick the pockets of those who they pretend to represent.

Brooksley Born represents to me a conscientious professional who served the public well during her tenure, and who was chewed up and spit out by the politicos of D.C.  She understood who it was she was obligated to serve, and whose interest she was there to protect.  Brooksley Born was the kind of public servant we need.   Arthur Leavitt ,the SEC Chairman eventually did an about face concerning Brooksley Born, calling her, “one of the most capable, dedicated, intelligent and committed public servants that I have ever come to know.  I wish that I knew her better in Washington.  I could have done much better.  I could have made a difference.”

Formerly known as the Wizard, even Allen Greenspan, the laissez-faire Fed chair eventually in 2008 admitted to Congress that he was wrong about the markets being self correcting.   He went on to admit that regulation and enforcement is a necessity for the financial industry.

But what about the rest of the players, Robert Rubin, Larry Summers, and Tim Geithner.  They seemed to serve someone other than the people whose welfare they had been entrusted as a fiduciary.  Bob Rubin left government with a $100 Million taxpayer subsidized dowry payable to his new employer, Citibank.  No one ever said he wasn’t bright!

Both Summers and Geithner have been given places of honor at the Obama table. In my humble opinion each has failed miserably as public a servant and ought to be thanked for whatever service they have provided, patted on the butt, and allowed to go lead some hedge fund or think tank.  “Tim, Larry … thanks guys.  Now hit the road … and don’t come back!”  And if they don’t go voluntarily, there’s always the pummeling and public evisceration they so solidly endorsed and participated in for their colleague.

So I ask you now … What’s really changed?  We didn’t heed the warning …  … the financial reform legislation that was passed doesn’t really reform or correct much of anything.  Banks and financial service companies will continue to charge usurious rates to consumers, change the rules at will, and get away with … whatever they damn well please.  And naturally, they will also continue to contribute to the re-election campaigns of those who serve the interests of the financial service companies and forget about their constituents.  And professional politicians and other feeders at the public trough will continue to pick the pockets of all of us, so long as we allow them to put their own interest before their fiduciary obligation to first serve the interest of their constituents.  Sounds pretty bleak … right?

Watch for more on this later.   I have an idea!

Mike Stockwell writes this blog for his clients, friends and frankly, for his own entertainment.  Mike is the Founder of The Pacific Group – Business Advisory Services and works with owners and executives small and mid-size businesses in California and Hawaii, helping them to take their business to the next level. 

Find out more about Mike and his business at: www.TPG-BAS.com and contact him at Mike@TPG-BAS.com

For more on Brooksley Born, Link to the PBS Program: FRONTLINE — The Warning http://www.pbs.org/wgbh/pages/frontline/warning/view/?utm_campaign=searchpage&utm_medium=videosearch&utm_source=videosearch

For more on the current economic malaise, Link to the PBS Program: FRONTLINE – Inside The Meltdown http://www.pbs.org/wgbh/pages/frontline/meltdown/?utm_campaign=homepage&utm_medium=bigimage&utm_source=bigimage

P.S.:  I just found out that John Boehner (Do you think that’s a spray on tan or is it from some recent sunny junket 🙂 ) said the same thing recently about Tim Geithner.  Apparently Mr. Boehner and I agree. Excuse me while I go shoot myself !

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