The Ghetto Economist and Dulce on Brooksley Born-a Hero you may not be aware of

If anyone has ever had the right to say “I told you so” it’s Brooksley Born. A San Francisco native and the first female president of Stanford Law Review, Ms Born was raised to wear white gloves when she left the house and has always been too much of a lady to use the phrase. But she’d be well within her rights to do so.

In 1994 Bill Clinton appointed Born to head the Commodity Futures Trading Commission, formed in the early 70’s to protect the public from fraud in the futures market. This same year Orange County, California went bankrupt due to investments in derivatives and Bankers Trust suffered major losses, also due to derivatives. Derivatives are debt instruments (like bonds or securities) which are derived from an asset. Because futures contracts are a form of derivatives regulated by the CFTC these new forms of derivatives arguably fell within the scope of the CFTC.

Born went to work on a derivatives Concept Paper, which solicits input on regulation and is the first step in the process of establishing a regulatory framework. Fed President Alan Greenspan strongly urged her to drop the concept paper, telling her “there wasn’t a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him.”

Treasury Secretary Robert Rubin told her if derivatives were regulated, markets would implode and there would be tidal waves of lawsuits. Deputy Treasury Secretary and current head of the National Economic Council Larry Summers telephoned her, saying he had 13 bankers in his office and ” If you go forward with this you’ll cause the worst financial crisis since World War 11″. SEC Chairman Arthur Levitt described her as ” irascible, difficult, stubborn and unreasonable”.

After several closed door meetings between Ms Born and the Unholy Trinity of Greenspan, Rubin and Summers resulted in Born standing her ground, the three successfully lobbied Congress to place a six-month moratorium on CFTC regulatory ability, including action on the Concept Paper. What’s striking about the moratorium is that just days before Congress approved it, Long Term Capital Management collapsed in large part due to derivatives activity-derivatives valued at 1.25 trillion dollars with 4 billion dollars in capital to back them up. The Fed brokered a deal with the biggest banks to arrange a bailout of LTCM-yet Congress still didn’t think derivatives should be regulated and voted in favor of the moratorium. Ms Born resigned several days later to go into private practice.

Although derivatives regulation would not have prevented our financial crisis, I believe it would have confined it to institutions heavily invested in toxic securitized assets. No massive debt due to betting against those toxic assets, no freeze in the money markets, no bailout (certainly Fed intervention but no dragging the taxpayer into it) and single digit unemployment.

Ms Born was appointed as one of ten members of the Financial Crisis Inquiry Commission. Below she is questioning Citibank panelists about derivatives. It’s kind of geeky, but if you watch for a minute or two I think you will see the absolute competence of the woman, a woman who stood her ground, who stood for what was right, who stood for the American people against Wall St’s finest in Washington.

The Ghetto Economist and Dulce have no economic training. Dulce would love to sink her claws into a banker.

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