The Woman Greenspan, Rubin & Summers Silenced

"Break the Glass" was the code-name high-level Treasury Department
figures gave the $700 billion bailout; it was to be used only as a
last- resort measure.

Now millions have been sprayed and damaged by broken glass.

But more than a decade ago, a woman you're likely never to have
heard of, Brooksley Born, head of the Commodity Futures Trading
Commission-- a federal agency that regulates options and futures
trading--was the oracle whose warnings about the dangerous boom in
derivatives trading just might have averted the calamitous bust now
engulfing the US and global markets. Instead she was met with scorn,
condescension and outright anger by former Federal Reserve Chair Alan
Greenspan, former Treasury Secretary Robert Rubin and his deputy
Lawrence Summers. In fact, Greenspan, the man some affectionately
called "The Oracle," spent his political capital cheerleading these
disastrous financial instruments.

On Thursday, the New York Times ran a masterful and revealing front
page article exposing the culpability of Greenspan, Rubin and Summers
for the era of dangerous turbulence we live in.

What these "three marketeers" --as they were called in a 1999 Time
magazine cover story--were adept at was peddling the timebombs at the
heart of this complex crisis: exotic and opaque financial instruments
known as derivatives--contracts intended to hedge against risk and
whose values are derived from underlying assets. To cut to the quick,
Greenspan, Rubin and Summers opposed regulating them. "Proposals to
bring even minimalist regulation were basically rebuffed by Greenspan
and various people in the Treasury," recalls Alan Blinder, a former
Federal Reserve board member and economist at Princeton University, in
the Times article.

In 1997, Brooksley Born warned in congressional testimony that
unregulated trading in derivatives could "threaten our regulated
markets or, indeed, our economy without any federal agency knowing
about it." Born called for greater transparency--disclosure of trades
and reserves as a buffer against losses.

Instead of heeding this oracle's warnings, Greenspan, Rubin &
Summers rushed to silence her. As the Times story reveals, Born's wise
warnings "incited fierce opposition" from Greenspan and Rubin who
"concluded that merely discussing new rules threatened the derivatives
market." Greenspan deployed condescension and told Born she didn't know
what she doing and she'd cause a financial crisis. (A senior Commission
director who worked with Born suggests that Greenspan and the guys
didn't like her independence. " Brooksley was this woman who was not
playing tennis with these guys and not having lunch with these guys.
There was a little bit of the feeling that this woman was not of Wall
Street.")

In early 1998, according to the Times story, one of the guys, Larry
Summers, called Born to "chastise her for taking steps he said would
lead to a financial crisis. But Born kept at it, unwilling to let
arrogant men undermine her good judgment. But it got tougher out there.
In June 1998, Greenspan, Rubin and the then head of the SEC, Arthur
Levitt, Jr., called on Congress "to prevent Ms. Born from acting until
more senior regulators developed their own recommendations." (Levitt
now says he regrets that decision.) Months later, the huge hedge fund
Long Term Capital Management nearly collapsed--confirming some of
Born's warnings. (Bets on derivatives were a key reason.)

"Despite that event," the Times reports, " Congress (apparently as a
result of Greenspan & Summer's urging, influence-peddling and
pressure) "froze" Born's Commissions' regulatory authority. The next
year, Born left as head of the Commission.Born did not talk to the
Times for their article.

What emerges is a story of reckless, willful and arrogant action and
behaviour designed to undermine a wise woman's good judgment. The three
marketeers' disdain for modest regulation of new and risky financial
instruments reveals a faith-based fundamentalist approach to the
management of markets and risk. If there is any accountability left in
our system, Greenspan, Rubin and Summers should not be telling anyone
how to run anything. Instead, Barack Obama might do well to bring back
Brooksley Born and promote to his team economists who haven't
contributed to the ugly mess we're in.