PBS : The Warning / from Brooksley Born, CFTC's chairman (& a financial markets hero?) Deregulation of fraud and derivatives, how Born was silenced by TPTB
#1
- Tri-Centurion
Posted 21 October 2009 - 05:16 PM
PBS : The Warning / from B. Born, CFTC's chairman
Greenspan and deregulation of fraud and derivatives
====================================
Brooksley Born, the former CFTC chairperson*
New PBS documentary, many interesting interviews and snippets. Highly recommended:
PBS : The Warning
http://www.pbs.org/wgbh/pages/frontline/warning/view/
Take aways: Alan Greenspan thought financial fraud should not be regulated. Markets would take care of it.
And boy did they! Not just in the way that perhaps was meant.
LOL
== ==
Andrew Sorkin's interview with Charlie Rose illuminates some additional issues, like the role of JPM:
http://www.thebigmoney.com/features/book-c...le-too-big-fail
Highly recommended, if you want to know the details.
==================
EDIT: Title, photo added by DrB
*Another confirming interview about the CFTC with Michael Greenberger, who worked with Ms. Born:
http://www.pbs.org/wgbh/pages/frontline/wa...reenberger.html
It doesn't sound like Brooksley Born is somebody who wants to take a job and just kind of work for the industry. She wants to regulate?
Brooksley comes in; she wants to be an effective regulator. Part of her job was to bring in top-flight lawyers and other professionals, and she built an infrastructure that was very effective and smooth-working. So the only change here is not a sense that we're overwhelmed. The change is that the industry is saying: "Whoa, wait a minute. We can't tell these people to jump and then when they ask how high to tell them how high. Now they're telling us what needs to be done. They're enforcing the law."
In this vein, I don't want to take you too far off track, but in my division there was a policy that lawyers could come in and say, "Look, we have a question that we view as being ambiguous under the law, and we want to get a staff letter from you that tells us we can go ahead and do this, and we won't be subject to enforcement." And these are called no-action letters, "no-action" meaning the enforcement division will take no action if you commit to do what you tell us you're going to do.
One of the first things Brooksley tells me when I walk in the door, "You be very careful of this no-action process, because this is not a question of what the letter says; it's a question of who signs the letter." And there are a group of highly favored lawyers who whatever they say they want to do, arguably ambiguous, in many instances clearly in conflict with the law, they're going to get a letter back saying, "It's fine." ... So there's all this low-level favoritism going on.
Now, Brooksley and I look at this, and we say: "This is not the way the system is going to work. If you need these kinds of exemptions" -- we established a rule -- "here's the way it needs to be filed. Here are the set of facts you have to set out. Here's the law you have to cite. And this has to be a regularized, objective, neutral process." Before we got there, it was a matter of who signed the letter. ...
"Brooksley's oft-repeated mantra [was] that: "If you're troubled by us doing this, fine. Someone's got to do it. You want the SEC to do it? Fine. You want the Treasury to do it? Fine. But this is a world-class problem." And she used to say she would lay awake at night turning in her bed because she could see coming down the road [that] the crisis kept building and building, and now we've seen [that] historically."
Greenspan and deregulation of fraud and derivatives
====================================
Brooksley Born, the former CFTC chairperson*
New PBS documentary, many interesting interviews and snippets. Highly recommended:
PBS : The Warning
http://www.pbs.org/wgbh/pages/frontline/warning/view/
Take aways: Alan Greenspan thought financial fraud should not be regulated. Markets would take care of it.
And boy did they! Not just in the way that perhaps was meant.
LOL
== ==
Andrew Sorkin's interview with Charlie Rose illuminates some additional issues, like the role of JPM:
http://www.thebigmoney.com/features/book-c...le-too-big-fail
Highly recommended, if you want to know the details.
==================
EDIT: Title, photo added by DrB
*Another confirming interview about the CFTC with Michael Greenberger, who worked with Ms. Born:
http://www.pbs.org/wgbh/pages/frontline/wa...reenberger.html
It doesn't sound like Brooksley Born is somebody who wants to take a job and just kind of work for the industry. She wants to regulate?
Brooksley comes in; she wants to be an effective regulator. Part of her job was to bring in top-flight lawyers and other professionals, and she built an infrastructure that was very effective and smooth-working. So the only change here is not a sense that we're overwhelmed. The change is that the industry is saying: "Whoa, wait a minute. We can't tell these people to jump and then when they ask how high to tell them how high. Now they're telling us what needs to be done. They're enforcing the law."
In this vein, I don't want to take you too far off track, but in my division there was a policy that lawyers could come in and say, "Look, we have a question that we view as being ambiguous under the law, and we want to get a staff letter from you that tells us we can go ahead and do this, and we won't be subject to enforcement." And these are called no-action letters, "no-action" meaning the enforcement division will take no action if you commit to do what you tell us you're going to do.
One of the first things Brooksley tells me when I walk in the door, "You be very careful of this no-action process, because this is not a question of what the letter says; it's a question of who signs the letter." And there are a group of highly favored lawyers who whatever they say they want to do, arguably ambiguous, in many instances clearly in conflict with the law, they're going to get a letter back saying, "It's fine." ... So there's all this low-level favoritism going on.
Now, Brooksley and I look at this, and we say: "This is not the way the system is going to work. If you need these kinds of exemptions" -- we established a rule -- "here's the way it needs to be filed. Here are the set of facts you have to set out. Here's the law you have to cite. And this has to be a regularized, objective, neutral process." Before we got there, it was a matter of who signed the letter. ...
"Brooksley's oft-repeated mantra [was] that: "If you're troubled by us doing this, fine. Someone's got to do it. You want the SEC to do it? Fine. You want the Treasury to do it? Fine. But this is a world-class problem." And she used to say she would lay awake at night turning in her bed because she could see coming down the road [that] the crisis kept building and building, and now we've seen [that] historically."
“We are trying to prove ourselves wrong as quickly as possible, because only in that way can we find progress.” - Richard Feynman
#2
- Tri-Millennium Guru
Posted 22 October 2009 - 05:01 AM
I saw the Sorkin interview, and it was excellent.
Sorkin’s approach to his subject matter is positively Halberstamian. Sorkin, a New York Times columnist and senior business writer, introduces us to his characters with long anecdotes from their pasts. Ben Bernanke waited tables at South of the Border, the best novelty tourist trap on the East Coast; Jamie Dimon’s college essay got him his first job in finance; Dick Fuld bloodied his commanding officer in his collegiate ROTC program. These are the small details about important men that permeate Sorkin’s—and Halberstam’s—book. They’re so minute, so personal, that they inform our understanding of their owners’ more important decisions later in life. Bernanke didn’t have time to foster an ego at a dump like South of the Border, Dimon didn’t stumble into banking, and he’s not going to stumble out of it, Fuld is so intensely loyal and combative that he doesn’t know how to walk away. The assumption is Freudian: Powerful men are flawed just like the rest of us; their personalities will be evident in their pasts
So I shall watch the other with interest
Sorkin’s approach to his subject matter is positively Halberstamian. Sorkin, a New York Times columnist and senior business writer, introduces us to his characters with long anecdotes from their pasts. Ben Bernanke waited tables at South of the Border, the best novelty tourist trap on the East Coast; Jamie Dimon’s college essay got him his first job in finance; Dick Fuld bloodied his commanding officer in his collegiate ROTC program. These are the small details about important men that permeate Sorkin’s—and Halberstam’s—book. They’re so minute, so personal, that they inform our understanding of their owners’ more important decisions later in life. Bernanke didn’t have time to foster an ego at a dump like South of the Border, Dimon didn’t stumble into banking, and he’s not going to stumble out of it, Fuld is so intensely loyal and combative that he doesn’t know how to walk away. The assumption is Freudian: Powerful men are flawed just like the rest of us; their personalities will be evident in their pasts
So I shall watch the other with interest
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix
#3
- Tri-Millennium Guru
Posted 22 October 2009 - 05:12 AM
... I couldnt resist reposting this here, given the title of the Thread (& my feelings towards Greenspan ...
(from October 2005):
GREENSPAN'S MONEY MACHINE
Now for some reason, perhaps it is the Rube Goldberg images (Heath-Robinson for those in the UK), this passage makes me think of Mr. Greenspan, who seems to think that he has perfected a perpetual motion machine for our time.
In Greenspan's case, the motion he is seeking is that of dollars, since the economists of our time bizarrely measure growth in our economy in terms of spending, not in the number of jobs being created domestically. Greenspan's wheel was set in motion in the 1990s and early years of this new century, when the Fed made repeated cuts in interest rates. Lower rates, have worked like the accelerators on Grandpa Hupp's machine, triggering spending spurts as homeowners refinanced their mortgages. But this Greenspan mechanism may meet the same fate as did great Grandpa's non-perpetual machine.
Like the aggressive home and car buyers of the 1920s, people of our time have believed it is safe to borrow aggressively to improve their lifestyles, particularly when their homes have risen in value. Higher debt levels in a falling interest rate environment often come with little or no increase in monthly mortgage payments. So why not take the extra money, by borrowing more, when it seems it will be so easy to repay through a fixed payment, backed up by the security of a fast-appreciating home.
It is not a closed system, nor is this financing done in a vacuum. Money borrowed through our modern refi's has gone only partly into property investments. Consumer spending has shot up also. An important part of that money has circulated out of the US to China and Japan to pay for the imported goods that keep flowing into our country. Fortunately, our new bankers in the Far East also want to keep the big wheel turning, since from their point of view, all those exports to America create jobs back in China and in Japan. They also realise that the competitiveness of their goods in the global market might be endangered, if their currencies were to rise sharply against the dollar. So they have been investing their growing surpluses of dollars back into the US, usually buying Treasury Bonds. And this recycling operation has seemed like a virtuous cycle for the US economy. Strong foreign buying of bonds, have allowed Greenspan to keep both long and short term rates down. Confidence in the momentum of the economy has grown, even though actual job creation has remained anemic, weaker than is normal in a recovery coming out of recession.
The net result of the action of Greenspan's money machine is that Debt has grown in the US, while China and Japan have accumulated massive holdings of US debt. Meantime, other investors seeking better returns than on US government T-Bonds, have gorged themselves on mortgage-related debt, the product of the refi boom. By mid-2004, U.S. Household debt had risen to 86% of GNP, up from 64% just ten years earlier, and foreigners hold a majority of US treasury debt, up from almost insignificant amounts in 1994. (source: Comstock Partners, as quoted in Barrons, 25 Oct.2004)
So the wheel turns round and round, with consumer goods flowing into our country. Because the money flowed back from exporting countries- we have paid for purchased goods, not through working and earning higher incomes, but simply by increasing our debt. So far, this vendor finance, recycling operation has seemed painless. For a long time, we hardly noticed as debt built-up rapidly in the form of increased household mortgage debt and as massively increased liabilities of the US government. But the bad news is that, slowly and quietly, the US has lost control of its own destiny.
/see: Lessons of the Grandparents:
http://financialsense.com/fsu/editorials/2005/1003.html
(from October 2005):
GREENSPAN'S MONEY MACHINE
Now for some reason, perhaps it is the Rube Goldberg images (Heath-Robinson for those in the UK), this passage makes me think of Mr. Greenspan, who seems to think that he has perfected a perpetual motion machine for our time.
In Greenspan's case, the motion he is seeking is that of dollars, since the economists of our time bizarrely measure growth in our economy in terms of spending, not in the number of jobs being created domestically. Greenspan's wheel was set in motion in the 1990s and early years of this new century, when the Fed made repeated cuts in interest rates. Lower rates, have worked like the accelerators on Grandpa Hupp's machine, triggering spending spurts as homeowners refinanced their mortgages. But this Greenspan mechanism may meet the same fate as did great Grandpa's non-perpetual machine.
Like the aggressive home and car buyers of the 1920s, people of our time have believed it is safe to borrow aggressively to improve their lifestyles, particularly when their homes have risen in value. Higher debt levels in a falling interest rate environment often come with little or no increase in monthly mortgage payments. So why not take the extra money, by borrowing more, when it seems it will be so easy to repay through a fixed payment, backed up by the security of a fast-appreciating home.
It is not a closed system, nor is this financing done in a vacuum. Money borrowed through our modern refi's has gone only partly into property investments. Consumer spending has shot up also. An important part of that money has circulated out of the US to China and Japan to pay for the imported goods that keep flowing into our country. Fortunately, our new bankers in the Far East also want to keep the big wheel turning, since from their point of view, all those exports to America create jobs back in China and in Japan. They also realise that the competitiveness of their goods in the global market might be endangered, if their currencies were to rise sharply against the dollar. So they have been investing their growing surpluses of dollars back into the US, usually buying Treasury Bonds. And this recycling operation has seemed like a virtuous cycle for the US economy. Strong foreign buying of bonds, have allowed Greenspan to keep both long and short term rates down. Confidence in the momentum of the economy has grown, even though actual job creation has remained anemic, weaker than is normal in a recovery coming out of recession.
The net result of the action of Greenspan's money machine is that Debt has grown in the US, while China and Japan have accumulated massive holdings of US debt. Meantime, other investors seeking better returns than on US government T-Bonds, have gorged themselves on mortgage-related debt, the product of the refi boom. By mid-2004, U.S. Household debt had risen to 86% of GNP, up from 64% just ten years earlier, and foreigners hold a majority of US treasury debt, up from almost insignificant amounts in 1994. (source: Comstock Partners, as quoted in Barrons, 25 Oct.2004)
So the wheel turns round and round, with consumer goods flowing into our country. Because the money flowed back from exporting countries- we have paid for purchased goods, not through working and earning higher incomes, but simply by increasing our debt. So far, this vendor finance, recycling operation has seemed painless. For a long time, we hardly noticed as debt built-up rapidly in the form of increased household mortgage debt and as massively increased liabilities of the US government. But the bad news is that, slowly and quietly, the US has lost control of its own destiny.
/see: Lessons of the Grandparents:
http://financialsense.com/fsu/editorials/2005/1003.html
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix
#4
- Tri-Millennium Guru
Posted 25 October 2009 - 06:30 AM
This program was highlighted on this weekend's FS podcast
http://FinancialSense.com / http://www.netcastdaily.com/broadcast/fsn2009-1024-3a.mp3
An interesting story, of an "outsider's" efforts to get Washington to see risks, when everyone was enjoying the immediate fruits of a boom in financial markets. The hangovers would come later.
here's a Comment from the link given by Halcyon:
While generally quite laudable, this Frontline report commits a serious error of omission.
The first explicit government warning about the systemic risks posed by financial derivatives was in fact issued in 1994, two years before Ms. Born became chair of the CFTC, in a well-known, definitive GAO report entitled, Financial Derivatives: Actions Needed to Protect the Financial System (May 18, 1994). The report, based on an in-depth 2-year study of the derivatives market, analyzed the significant and growing risks posed by these products and recommended that Congress and financial regulators take a series of specific actions to monitor and control these risks because they threatened the stability of the entire financial system. The GAO report was the subject of a number of high-profile congressional hearings and received widespread coverage in a series of speeches and presentations by James L. Bothwell, the GAO director and principal author of the study, throughout the 1994-96 period. As the incoming chair of the CFTC, Ms. Born would certainly have been briefed about the GAO findings and recommendations in 1996. So give credit where credit is due. While Ms. Born certainly deserves credit for supporting and attempting to implement the GAO recommendations, she is certainly not the one who performed the analysis, or was the first to sound a clarion warning about the risks of derivatives in Washington, or the first to fight to control these risks. That credit belongs to the GAO. To its credit, the Columbia Journalism Review got the story right this past Spring. See the following links:http://www.cjr.org/the_audit/derivatives_echo_chamber.php
www.cjr.org/the_audit/audit_interview_james_l_bothwe.php
James Bothwell Oct 24, 2009 14:07
http://FinancialSense.com / http://www.netcastdaily.com/broadcast/fsn2009-1024-3a.mp3
An interesting story, of an "outsider's" efforts to get Washington to see risks, when everyone was enjoying the immediate fruits of a boom in financial markets. The hangovers would come later.
here's a Comment from the link given by Halcyon:
While generally quite laudable, this Frontline report commits a serious error of omission.
The first explicit government warning about the systemic risks posed by financial derivatives was in fact issued in 1994, two years before Ms. Born became chair of the CFTC, in a well-known, definitive GAO report entitled, Financial Derivatives: Actions Needed to Protect the Financial System (May 18, 1994). The report, based on an in-depth 2-year study of the derivatives market, analyzed the significant and growing risks posed by these products and recommended that Congress and financial regulators take a series of specific actions to monitor and control these risks because they threatened the stability of the entire financial system. The GAO report was the subject of a number of high-profile congressional hearings and received widespread coverage in a series of speeches and presentations by James L. Bothwell, the GAO director and principal author of the study, throughout the 1994-96 period. As the incoming chair of the CFTC, Ms. Born would certainly have been briefed about the GAO findings and recommendations in 1996. So give credit where credit is due. While Ms. Born certainly deserves credit for supporting and attempting to implement the GAO recommendations, she is certainly not the one who performed the analysis, or was the first to sound a clarion warning about the risks of derivatives in Washington, or the first to fight to control these risks. That credit belongs to the GAO. To its credit, the Columbia Journalism Review got the story right this past Spring. See the following links:http://www.cjr.org/the_audit/derivatives_echo_chamber.php
www.cjr.org/the_audit/audit_interview_james_l_bothwe.php
James Bothwell Oct 24, 2009 14:07
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix
#5
- Tri-Millennium Guru
Posted 25 October 2009 - 07:26 AM
QUOTE (halcyon @ Oct 22 2009, 01:16 AM) <{POST_SNAPBACK}>
New PBS documentary, many interesting interviews and snippets. Highly recommended:
http://www.pbs.org/wgbh/pages/frontline/warning/view/
http://www.pbs.org/wgbh/pages/frontline/warning/view/
I am tempted to contact the makers of the documentary, or maybe write something new for FS.
I posted the following comment on the YouTube thread with a Trailer for The Warning
QUOTE
Interesting, but not a totally accurate picture.
I was one of the principle "inventors" of one of those OTC derivatives, the OIl Swap, which my bank (Chase) pioneered in 1986. The CFTC tried to stop it then, in those days before Brooksley Born took over. But they understood it little.
Here is my own WARNING about OTC derivatives from June 2008: http://financialsense.com/fsu/editorials/2008/0605.html
UNQUOTE
Here's another comment from that thread
professorofliberty (1 day ago)
Amazingly she was far from the only one.
Some of my associates testified before congressional committee on banking and finance when Barney Frank was forcing the FNMA to lower their credit standards in order to bring toxic loans to the marketplace. They explictly stated that the mortgage industry would fail in a decade and bring down the economy. He told them they were fools...that he knew what he was doing...that was in 1994-95.
Barney Frank...why is he still in office?
/see: http://www.youtube.com/watch?v=ACkiKVtF3nU
The market is "bipolar", swinging back and forth from a focus on
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