Frontline: The Warning

The Warning reveals that at least one person, CFTC head Brooksley Born, spoke out against OTC derivatives, over a decade ago.

Frontline: The Warning

Airtime: Tuesday, 8pm ET
Cast: Brooksley Born, Arthur Levitt,
Network: PBS
Director: Michael Kirk
Air date: 2009-10-20

"I'm opposed to all forms of control. I am for an absolute laissez faire economy," Ayn Rand told Mike Wallace back in 1959, "for the separation of state and economics." As sure of herself and her philosophy as she was, Rand could hardly have known how far-reaching her effects would be, some 50 years after this pronouncement. According to this week's episode of Frontline, faith in such "separation" led directly to Wall Street's recent collapse.

It didn't have to be this way. Even as The Warning traces a direct line from Rand's narcissistic pontificating to the more consequential maneuvers of her most powerful disciple Alan Greenspan, it also reveals that at least one doubter spoke out, early and insistently. The would-have-been hero of this story is Brooksley Born, first female president of the Stanford Law Review, friend of Hillary, and one of Bill Clinton's appointments to the Commodities Futures Trading Commission (CFTC) in 1994. When she became head of this small federal regulatory agency in 1996, Born became aware of the "dark market" of over-the-counter derivatives. These unregulated contracts are not traded on exchanges, and leave behind no records or reports. Thus functioning beyond "all forms of control," they seem, at first look, an ultimate expression of Rand's ideal system.

Born saw in derivatives the possibility for fraud, that is, the precise domain of the CFTC. When she instructed her staff to look into such activities, however, she was instructed to back down. The edict came from on high, namely the President's Working Group, a committee that discussed and essentially set financial policy called at the discretion of Secretary of the Treasury, at the time, Rubin. With a membership that included Larry Summers, Arthur Levitt (SEC Chairman from 1993-'01), and the "wizard" Greenspan, this group was "not welcoming of someone who looked at the world differently," says David Wessel, author of In Fed We Trust. A special meeting of the Working Group was called, the "clear mission" of which was to keep the CFTC from issuing its report, recalls Michael Greenberger, director of CFTC after Born, from 1997-'99.

Born might have known what was coming as she and Greenspan were famously at odds. The Warning lays out their opposing ideologies, noting as well the "odd" circumstance that Greenspan was Fed Chair, the most powerful "central banker," given that, as Joseph Stiglitz of the Council of Economic Advisors (1993-'97) says, "central banking is a massive intervention in the market, setting interest rates." The program recounts one particular meeting between Greenspan and Born in 1997, when she took over the CFTC. Though Greenspan (and Rubin and Summers, et. al.) declined to speak with Frontline and Born won't speak about "the Alan Greenspan lunch" on camera, the program floats the story -- via the New York Times' Joe Nocera, among others -- that Greenspan told Born that her agency was not supposed to pursue fraud, that the "market would figure it out." This laissez faire approach didn't hold up, as Born read it, when Procter & Gamble sued Bankers Trust over fraudulent derivatives trading.

But even this exposure didn't lead to new regulatory legislation. As The Warning has it, Born's refusal to drink the free-market kool-aid resulted in a series of difficulties for her and her office, not least being some hostile congressional hearings during the summer of 1998. Born recalls now, the Working Group and other financial players in the administration "were totally opposed to [the CFTC report]. That puzzled me. Why did it have to be a completely dark market? So it made me very suspicious and troubled." As the New York Times' Tim O'Brien describes the ordeal, she was "stepping into the maw of the most well oiled and highly financed lobby in the history of Washington, DC, the financial lobby." That these dark markets have not been made completely transparent and that this lobby is currently resisting efforts to regulate Wall Street now are probably not surprising turns of events. But they do indicate that few "lessons" were learned a decade ago.


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