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Sunday, November 20, 2011

The Committee to Save the World and Brooksley Born - 4 Men and a Woman

This is a short conversation about derivatives and credit default swaps and what part they played in the breakdown of our financial system in 2008. It is also about some of the significantly responsible people who were involved.

First, it is possible to separate, to some extent, the housing bubble from the machinations of the financial institutions. The housing bubble, to a great extent, was caused by having interest rates too lowfor too long a period and by the overzealousness of Fannie and Freddie to move hordes of people to home ownership. It was then that Wall Street got into the picture. The mortgages were incorrectly rated , traunched and sold, some as backers of securities. Then derivatives, along, with other sophisticated devices were used to hedge their bets. Derivatives are, in effect, insurance policies and derivative contracts were entered into by private parties so that there was no transparency or regulation.

Before that, however, in 1998, after President Clinton appointed Brooksley Born Chairman of CFTC (Commodity Futures Trading Commission), the dirty work began. Brooksley Born was a woman who had earlier applied to Stanford University to study medicine. She was advised by her guidance counselor to become a nurse. Instead, Ms. Born decided to go to law school at Stanford and graduated first in her class.

Later, she became an expert on derivatives and, thus, was named the head of the CFTC, an agency with the sole authority to regulate derivatives. Brooksley Born, as chairman of the Commodity Futures Trading Commission, was well aware of the danger that unregulated, sophisticated financial instruments such as derivatives would be likely to cause.

At the time, there were four men who were named to the President's powerful “Working Group on Financial Markets.” Three of them, Alan Greenspan, Robert Rubin and Larry Summers were called, by Time magazine, “The Committee to Save the World.” After the CFTC started its work in earnest to regulate derivatives, “The Committee to Save the World,” joined by Arthur Levitt, head of the SEC, decided that Brooksley Born had to be stopped.

One morning, Larry Summers called Ms. Born and told her that he had thirteen bankers in his office who had just told him that her actions would bring chaos to the derivative market and, further, would stifle financial innovation and encourage financial capital to transfer its transactions offshore. “You're going to cause the worst financial crisis since the end of World War II.” He further said, “Stop, right now. No more.”

Later, the four men (Arthur Levitt, Alan Greenspan, Larry Summers and Robert Rubin) subsequently appeared before Congress and completely discredited Brooksley Born. They, in effect, told Congress that this is just a woman who doesn't understand derivatives. Arthur Levitt was to say, much later, that he had never met Ms. Born and that he totally relied on the other three in his criticism of her.

As to Alan Greenspan, he was in part responsible for the housing bubble in that he held interest rates unreasonably low for 2 ½ years or more. In addition, Greenspan was, in part, responsible for the financial crisis because of his opposition to the regulation of derivatives. Derivatives are seen, by many experts, as playing a central role in the financial breakdown. Bob Rubin, in his role as chairman of the executive committee of Citicorp, contributed to the downfall of Citicorp. Larry Summers, by his bullying of Brooksley Born, played a major role in the deregulation of derivatives. In fact, in the year 2000, once again, under President Clinton, the Commodities Futures Modernization Act was passed and signed into law. (The act would more appropriately be called, “The Tax Payers Net Worth Reduction Act.”) The chief proponents of this law were "The Committee to Save the World.” In addition, Sen. Gramm, Republican from Texas, insisted that the act include Swaps. It does.

The question remaining is, “What do these perpetrators suffer?”-these mighty individuals who played so great a part in losing trillions of dollars for millions and millions of Americans. Apparently, they suffer nothing. Alan Greenspan appears frequently on CNBC for his sage financial advice. Larry Summers was named chief financial advisor to and by President Obama. As for Bob Rubin, President Clinton, in an interview in 2010, said that Rubin was wrong in the advice he gave him not to regulate derivatives. Since his demise, Bob Rubin has appeared for very few interviews.

Is it any wonder that many people in America are, even now, parading in the streets against those policymakers in our government and those big banks and others they bailed out on Wall Street?