Op-Eds Speaking Truth to the Powers-That-Be
Who is Brooksley E. Born?
Ask almost anyone and you’ll invariably get a shrug. Elizabeth Warren may be a bit better known, but if the Republicans have their way, she will likely also be erased forever from the American consciousness.
From August 26, 1996 until June 1, 1999, Brooksley E. Born chaired the Commodity Futures Trading Commission (CFTC), the federal agency charged with oversight of the futures and commodity options markets.
Unfortunately, like Warren today, Born took her role seriously and lobbied Congress and President Clinton for regulation of highly complex financial instruments known as “derivatives,” whose value derives from combinations of other, more basic, underlying assets.
Born was particularly concerned about the lack of transparency in credit default swaps, sophisticated transactions traded over-the-counter between banks, insurance companies or other funds or companies. In a Frontline interview, Born said:
“We had no regulation. No federal or state public official had any idea what was going on in those markets, so enormous leverage was permitted, enormous borrowing. There was also little or no capital being put up as collateral for the transactions. All the players in the marketplace were participants and counterparties to one another’s contracts. This market had gotten to be over $680 trillion in notional value as of June 2008 when it topped up. I think that was the peak. And that is an enormous market. That’s more than 10 times the gross national product of all the countries in the world.”
Eerily prescient, Born predicted that, without regulation of these derivatives, the country could be headed toward an economic disaster. She naively expected her clarion call to be heeded by those economic policy advisors in a position to understand the dangers and affirm the need for systemic change.
She couldn’t have been more wrong.
By publicly calling for transparency and regulation in her concept release, a report outlining a proposed rule change, she had unknowingly set herself up as a Public Enemy #1 of Federal Reserve chairman Alan Greenspan.
Greenspan was absolute in his belief in free markets and his opposition to regulation. Along with Treasury Secretaries Robert Rubin and Lawrence Summers, Greenspan began a cold-hearted campaign to marginalize Born.
Even former SEC chairman Arthur Levitt joined in the arguments against Born’s analysis: In testimony to Congress about CFTC regulation of swaps and other over the counter derivatives, Levitt created a “legal uncertainty” regarding such financial instruments. He leveled the threat that the golden geese of Wall Street would flee when he testified that Born’s proposed rule changes would reduce the value of the credit default swaps, stifling innovation and encouraging those investing capital to transfer their transactions offshore.
With capital markets soaring and the country prosperous, political will to backstop Born withered. Republicans and a handful of Blue Dog Democrats were able to foil Born’s efforts by convincing both parties in Congress to enact legislation prohibiting any oversight of derivatives by either the CFTC or the Securities Exchange Commission.
The market continued to grow unfettered by regulation throughout George W. Bush’s administration until Lehman Brothers declared bankruptcy on September 15, 2008.
By then Born had been away from government for almost a decade, and her call to curb derivative trading had been long forgotten.
Fast forward to 2011 and we appear to have history repeating itself with Elizabeth Warren, an Assistant to the President and Special Advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau. She was appointed by President Obama to be the chair of the Congressional Oversight Panel created to control the U.S. banking bailout, also known as the Troubled Assets Relief Program or TARP.
Attorney Born was a derivatives expert. Attorney Warren is a bankruptcy expert with a similar track record for credibility. She is a Leo Gottlieb Professor of Law at Harvard Law School, where she has taught contract law, bankruptcy, and commercial law. She has long advocated for a Consumer Financial Protection Bureau (CFPB). Mr. Obama agreed, and launched the new government agency whose stated mission is to “make markets for consumer financial products and services work for Americans—whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.”
When President Obama selected Warren to set up the CPFB, he stopped short of nominating her to be its official leader.
Why? Given the huge public backlash to the financial debacle of 2008, one would have assumed that the opponents of any financial regulation should have feared that voting public’s outrage. Wall Street should have accepted someone with Warren’s strong credentials and humbly accepted more transparency in the cold light of the wreckage that their derivative toxic waste ponds had created.
Up to their hips in both the free money that trillions of that the Treasury under George W. Bush handed out without strings, and the billions in TARP money loaded with conditions of repayment, they had enough carrot, and taste of Mr. Obama’s sticks to develop the war chest and the stomach to go back to fighting any controls at all, just as they had done to Born. Top economic policy advisors like Treasury Secretary Timothy Geithner as well as free-market purists in Congress and on Wall Street refused to acknowledge past mistakes.
Instead, history repeated itself: They declared war on Elizabeth Warren. Paul Krugman, Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, a Centenary Professor at the London School of Economics, and an op-ed columnist for the New York Times wrote last March:
“The fact that she’s so well qualified is, of course, the reason she’s being attacked so fiercely. Nothing could be worse, from the point of view of bankers and the politicians who serve them, than to have consumers protected by someone who knows what she’s doing and has the personal credibility to stand up to pressure.”
Republicans have worked hard to vilify Warren for months. The testiness and cat-calling has been so fierce that it borders the ridiculous. Representative Patrick T. McHenry, a North Carolina Republican, called her a liar over the trivial issue of what time Warren had been told she could leave the hearing after a testy exchange where Warren was accused of overstepping her role by becoming involved in an investigation of the mortgage servicing industry.
In an attempt to avoid Republican opposition to Warren’s official appointment as head of the CFPB, 89 Democrats have now called for her appointment by the President during the Congressional recess. However, that option may be impossible. Republicans have scheduled pro-forma sessions during the break specifically to prevent recess appointments.
In 2009 Born was awarded the John F. Kennedy Profiles in Courage in recognition of the “political courage she demonstrated in sounding early warnings about conditions that contributed to the current global financial crisis”.
Ten years after the fact, Brooksley Born has a Facebook fan page. So does Elizabeth Warren. Warren’s fans even flocked to Representative McHenry’s Facebook page to defend her after recent Congressional hearing.
Why did it take a world wide economic crisis to finally vindicate Born? As long as the economic picture appeared rosy, no one at the top of the Republican-led White House or Congress was willing to clear away the smoke and mirrors. In fact, they all worked hard to keep the smoke machines putting a haze over the backroom deals that protected financial deals so complex that many professionals selling them had no real clue as to how they were wired together.
Mr. Obama is hamstrung in an election year, and those relatively few Democratic congressmen, it would appear, will not be enough to approve Warren for the lead role of the CFPB.
The real question is how close do we have to come to another economic meltdown before our elected representatives understand that Wall Street and the banking industry need to be reined in? Without brave souls like Born and Warren, who are willing to champion the consumer, true capitalism will ultimately fail because the plutocracy, unfettered by regulation, will be able to completely usurp the benefits of a free market economy.
Sadly, at this moment, the powers-that-be simply like the question of “who is Elizabeth Warren?” to elicit the same shoulder shrug produced when asked “who is Brooksley E. Born?”
The question you should be demanding of your Congressmen: If not Warren and the CFPB, what are they going to do about preventing another epic melt-down of Wall Street and the world economy?
Deborah Shlian is a physician an the award-winning novelist whose latest title, “DEVIL WIND: A Sammy Greene Thriller” is available in hardback and on Kindle at Amazon.com and other fine booksellers now.