Brooksley Born’s Derivatives Warning Was Ignored – Again.

Posted on December 16, 2014

by Jerry Alatalo

superior2222-1Alphabet While Chair of the Commodity Futures Trading Commission (CFTC) from 1996-1999, Brooksley Born warned Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, Securities Exchange Commission Chair Arthur Leavitt, and the United States Congress about the massive potential risks to the nation’s financial system from the unregulated over the counter derivatives market. She became ignored and attacked for recommending firm regulation, then the “Great Recession” of 2008 occurred – as a direct result of that ignorance.

Ms. Born delivered the following talk titled “Financial Regulatory Reform – Imperative For Our Future” at the Woodrow Wilson School for Public and International Affairs in March of 2012. She explains what happened in 2008 – and what just occurred days ago in the United States Congress – in an excellent, wise, easily understood discussion which should come to the awareness of all Americans.

Unbelievably, as shown by the recent repeal of Dodd-Frank restrictions on derivatives trading from financial industry language included in the omnibus U.S. government spending bill, she wasn’t heard… again.

She began her talk by speaking to how vital regulatory reform is to the well-being of the American people. She points out that the global economic crisis of 2008 was not the result of a normal economic downturn, but the lack of regulation in the American financial sector. The consequences were, and continue being experienced around the world today, devastating. Trillions of tax dollars went toward the bailout of out various sectors of the economy, 22 million people lost their jobs, millions lost their homes, and millions more are in the process of facing foreclosure.

Trillions of dollars of wealth have been lost by the American people, businesses large and small have suffered, state and local governments have suffered great financial harm, and the impacts will continue being felt for at least a generation.

Brooksley Born told the audience that the crisis was avoidable. The primary cause was a widespread failure of regulation and oversight, excessive borrowing, risky investments, lack of transparency in unregulated derivatives trading, lack of accountability, and lack of ethics. According to Ms. Born, a well-tailored set of government regulations is an absolute necessity to prevent a repeat of 2008’s crisis. Some twenty years of emphasis on deregulation, based on the false assumption that markets can somehow regulate themselves and are sufficient, formed the basis of a deeply flawed philosophical view which led to inaction and catastrophe.

That catastrophe is viewed by Brooksley Born and many other observers as “perhaps the greatest financial crisis in history”.

At this point in her talk, she gives an explanation of derivatives. They are complex financial transactions which are carried out in forms of a variety of economic, financial situations, some legitimate, such as when a farmer tries to protect him or herself in the case of falling prices for the foods or livestock they grow. Where the problems rise is when speculators “bet” with derivatives on economic circumstances like the rising and falling of interest rates, the price of commodities, metals, or housing, foreign exchange rates, credit risks, the rise or fall of nations’ financial conditions, or even the weather. Speculators, unlike farmers or manufacturers who take part in derivatives for mostly legitimate business purposes, produce nothing but either sometimes tremendous profits or systemically risky losses.

The pivotal point which saw the potential for damage from unregulated derivatives markets was during the Clinton administration when the Glass-Steagall Act became repealed. The act prevented banks from engaging in speculative transactions while putting customer deposits at risk, written after the Great Depression, when speculation excesses tore down the economy. After that repeal, the flood gates became opened wide for the over-the-counter derivatives market to explode.

Before Ms. Born took over as head of the CFTC, in 1993 the wife of Texas Senator Phil Graham, Wendy, held the position. During Ms. Graham’s “service”, certain derivatives became exempt from regulation. Derivatives grew into the tens of trillions of dollars after 1993, while secretive and unregulated. In 1996 a Japanese corporation lost $2.6 billion on over-the-counter derivatives copper manipulations.  In 1994, Orange County, California went bankrupt after risking and losing taxpayer money on interest rate derivatives. Ms. Graham went on to Enron, which proceeded to become bankrupt, the at-the-time largest corporate bankruptcy in U.S. history, the fall precipitated by derivatives transactions gone bad.

While the Chair of the CFTC, Ms. Born faced the task of keeping financial giants like J.P. Morgan Chase, Goldman-Sachs and others in line, overpowered by them due to the small organization she managed. She became very concerned about the derivatives market’s tremendous growth, the mentioned secret nature of the transactions, and the increasingly more apparent risks to the financial system. She decided action had become required, and directed attempts to decide whether a derivatives regulatory framework was necessary. She became met by a “firestorm” of opposition from the Greenspan, Rubin, Leavitt, and Clinton economic advisor Larry Summers.

The financial industry lined up against Brooksley Born as well, for derivatives had become an extremely profitable center of activity. There were 17 hearings in Congress about the issue, while in that timeframe the world’s largest hedge fund, Long Term Capital Management, nearly collapsed from the weight of $1.2 trillion in derivatives losses. The Federal Reserve Bank of New York arranged for a number of derivatives dealers to pitch in $3.6 billion each to take over Long Term Capital Management.

Brooksley Born resigned in 1999; several months later Greenspan, Rubin, Leavitt, and Summers told Congress to eliminate all regulations on derivatives, then the previously mentioned Texas Senator Phil Graham became the political force behind the bill which removed all derivatives regulations: The Commodity Futures Modernization Act.

After the Act passed in Congress, derivatives grew to $673 trillion, 10 times the gross domestic product of all nations on Earth. Insurance giant AIG collapsed in 2008. Lehman Brothers, with some 900,000 derivatives transactions, also collapsed, its counter-party obligations covered by the U.S. taxpayers. The Dodd-Frank Act of 2010 was the first attempt to deal with the results of decades of deregulation leading to the crisis.

When Brooksley Born gave this talk in 2012, she noted that the derivatives market had grown to over $700 trillion, was still unregulated, and large financial institutions became engaged in “full efforts to prevent implementation of Dodd-Frank rules”.

Dodd-Frank derivatives rules were overturned on December 15, 2014 when the United States Senate failed to prevent a Citigroup-written provision of the nation’s spending bill from being included, thereby preventing the dis-implementation of extremely important Dodd-Frank legislation.

Brooksley Born warned while head of the Commodity Futures Trading Commission from 1996-1999. She warned again in 2012 when she concluded this talk: 

“The political power of the financial sector is still enormous, and policy makers in Congress, the Executive branch, and the regulatory agencies must have the political will to resist those efforts to derail regulatory reform. If we do not learn from the financial crisis and put in place the needed regulatory reforms to address its causes, we may well face future catastrophic crises”.

“The American people deserve something better”.   


(Thank you to Woodrow Wilson School of Public and International Affairs at YouTube)

Money. Part 7.

Finance - Financial injection - Finance
Finance – Financial injection – Finance (Photo credit: @Doug88888)

June 13, 2013 by Jerry Alatalo

People around the world are familiar with the minimum wage. What would happen if there were also a maximum wage? This will strike many as really thinking outside the box. It is just a thought. Why not? It would be interesting to hear what any critics of such a proposal would use as arguments against. What human being could disagree that a maximum wage would result in a literal improvement in the living conditions of every man, woman and child on planet Earth? Since there are monetary systems almost everywhere on Earth how about a maximum wage of $1,000,000 per year? It would seem that any human being could live a fairly decent, comfortable life anywhere on Earth with $1,000,000 per year. Perhaps we could see a one year worldwide trial of a $1,000,000 maximum wage.

Imagine what kind of world we will live in when this maximum wage becomes the agreed upon law of the land everywhere. There will be enough resources to pay for the projects and actions which will end many of the problems faced by humanity. Humanity has finally come to the point in history where there is no other choice but to solve our problems. Every action will result in the easing of our fellow brothers’ and sisters’ agonies and miseries. We will understand charity, compassion and love.

We have seen overwhelming evidence presented through history of the financial and economic devastation brought about by those whose addiction is money and power. We have all seen the banking scandals, Ponzi schemes, fraudulent derivatives, mortgage frauds, insurance scams, murders, sabotage, blackmail etc. right down the line of crimes committed because of the love of money. Now is the time to relegate greed to the history books. The end of greed will be looked back upon by future generations as one of the noblest actions ever taken by civilization. Our children, grandchildren and great-grandchildren will be eternally grateful to us for having created such a wonderful world for them.

The instituting of a maximum wage would go a long way towards eliminating corruption, fraud and deceit. After all, what is the motive behind corruption, fraud and deceit where there are financial transactions? The motive is to gain fraudulently at someone else’s cost. Those who would object to instituting a maximum wage argue that this move would lower incentives for people to create and grow their businesses. They will argue that economic activity would be reduced as the incentives of the owners of business enterprises, actors, professional athletes, doctors, lawyers, hedge fund managers and anyone in the $1,000,000 plus per year income range would be taken away.

Imagine the scenario where there is a $1,000,000 maximum wage. First and foremost, the incentives which result in people using fraud and deceit to gain financially by stealing from others would be almost eliminated. There would be a sharp decrease in financial crimes along with a sharp increase in the negative consequences felt by those who commit them. The historical concept of making a killing would no longer exist. All of the crimes committed so as to make a killing, be they with the pen or the gun, would be sharply reduced.

The world’s economic activity would no longer be based on making as much money as possible with economically devastating, malevolent acts of crime and fraud, but toward benevolent ends. More and more economic activity would be undertaken in goodwill, helping others and solving human problems. The dominant philosophy of “How much can I get?” will transform into the new dominant philosophy of “How much can I give?”

The major positive outcome of instituting a maximum wage is that the incentives would change. The current incentive of profit maximization would be replaced by the incentive to help your fellow-man. Those who would disagree with a $1,000,000 per year maximum wage would have to consider the question: “Is your life all about you, or is it all about others?” This is the very basic spiritual question which all people invariably have to answer. This question goes into the very essence of the meaning of human existence. Here is the choice made between the ego and the Holy Spirit; between love and fear.  There is no other choice.

Perhaps the maximum wage could be tested for just one year. Perhaps all of the countries on planet Earth would agree to the “One Year for Humanity and Mother Earth” implementation of the maximum wage. Imagine the profound increase and change in spiritual awareness by the human race which would occur. Can anyone debate that such a measure would not result in improvements over our current situation? What would be revealed about those who would object to a one year trial? Could their objection be, “How do you expect me to live on $1,000,000 a year?”

Regulation of financial companies would be strictly enforced with proper punishments, including widespread public media attention given to those who take advantage of others through fraudulent gain. There will be no more monetary fines for illegal financial activities. The man who steals food to feed his family is given more real punishment than those who steal amounts thousands, millions and billions of times larger.

Since 1913 the Federal Reserve banks of the United States and countries around the world with their manipulations of money supplies, markets and economies have caused booms and busts. Long term planning of business leaders is disrupted. The private Federal Reserve bank system is a failure. There have been eighteen recessions since 1913. Now we witness the world depression of 2013. Nothing good comes from private control of money supplies. It is long past time for governments to take control of their monetary systems.

As a result of the latest financial crises of 2008-2013 households in America have taken an eleven trillion-dollar loss. What will it take to get serious action? Do not let too big to fail banks grow any larger, shrink them down to 50 billion dollars in assets over a five-year period, while intensively regulating them during the downsizing. Compensation systems are necessary to end incentives for the “big kill” on large, risky trades and transactions. At present there are tons of money in rewards if things go well but possible destruction of global financial markets, and losses in the trillions of dollars if the bets are lost. As of 2013 no serious re-regulation or Glass-Steagall legislation has been made into law. The Glass-Steagall act worked extremely well for sixty years and should be brought back now.

Austerity measures simply prolong and increase economic crises as less spending starts a vicious downward spiral. Governments should increase spending and reduce taxes on the middle and lower-income classes. Consider no taxes on income up to $50,000. Revenue sharing to states would be a large part of the spending to help states keep employees and provide essential services. Austerity in times of economic crises is negative.

As of 2013 advanced industrialized countries, most notably in Europe, are in depressions. Poor regulation and a hands-off approach to the financial system has facilitated a prolonged recession and some think a depression. This is a situation that not many can remember. It is very serious. This is why the idea of a $1,000,000 maximum wage was a serious proposal. The incomes of the top 1% have pulled away from the 99%; the top .1% has really pulled away to Gatsby-era levels of 1910. Income inequality has risen to 1930’s levels. Part of the problem has been the differing opinions of economists on policy directions.

Many have the erroneous opinion that the government must act like a household about finances. Government, especially during economic crises, must increase its role to intervene in the economy. Income inequality results in political inequality. Reforms in the political system are necessary so that the 99% are  represented as opposed to the top 1% whose situations are very good. How much of the business that the financial sector does is for the enabling of productive, economic growth for the well-being of all as opposed to actions which have to do with personal gain and greed?

Banks have become market makers to take advantage of insider knowledge and tactics to maximize profits. Nobody is against making a profit but the balance between helping the country’s economy and people and helping oneself has gotten way out of kilter. With so many homes under water reducing principals and interest rates could be undertaken to both stimulate the economy and help hard pressed citizens. The old model of serving self is ending. The new accepted point of view of service to others is starting to gain momentum and unstoppable.