Page 1 of 2 Born again - and again By Julian Delasantellis
It may seem tame considering what has come since, but Henry Levin's 1960 teen
romantic comedy Where the Boys Are was fairly revolutionary for its
time.
Hewing to the still mostly standard Hollywood formula of showcasing the
limb-grinding adventures of attractive hormone-sodden young satyrs before, in
the last reel, showing the said same fulfillment of these desires devastating
their lives, the movie tells the tale of two college co-eds, Merritt (Dolores
Hart) and Melanie (Yvette Mimieux) on spring break in Fort Lauderdale, Florida.
Merritt hesitates on taking the penultimate step in the game of what she calls
"backseat bingo" in order to win the heart of a special beau; Melanie fairly
explicitly affirms (for the time, anyway) that she intends to show no such
restraint.
Of course, it ends very badly for Melanie. Lured to a party at a
roadside motel where she believes that her new boyfriend will be present along
with other desirable young Ivy League "Yalies", she is next seen wandering
aimlessly in the middle of a busy highway, hair and clothes disheveled - as the
then movie morals code would not allow the word that described her obvious
violation to be explicitly uttered, the audience was left to draw the obvious
inference as to the terrible price she paid for her licentiousness.
She gets hit by a car; in the hospital, she confesses the worst part of her sin
to Merritt. "They weren't even Yalies!" she sobs.
Thirty eight years later, in 1998, US Commodity Futures Trading Commission
chairwoman Brooksley Born, in seeking to uphold the integrity of the financial
system, was similarly accosted. However, in contrast to poor Melanie, the gang
that attacked her possessed just about the highest imaginable academic
pedigrees. They were the then deputy secretary of the Treasury (and now the
chair of President Barack Obama's National Economic Council) Laurence Summers
(BA Massachusetts Institute of Technology, Phd Harvard); Federal Reserve Board
chairman Alan Greenspan (BA, MA Columbia, Phd New York University); and the
leader of the gang, Treasury secretary Robert Rubin (BA Harvard, LLB Yale -
yes! he was even a Yalie). After the attack on chairwoman Born, the gang
carelessly hopped into their souped-up hot rod and proceeded to further make
the preparations for their rich-kid, thrill-kill firebombing of the world
financial system we see occurring today.
If you ever have the misfortune to be locked in a history seminar listening to
the instructor drone on and on about how America in the interwar period
withdrew from the world to focus on itself, isolationism, and just plain
irrelevancies, it would not be impudent to raise your hand and ask "But just
which interwar period are you talking about, Herr doktor professor?"
The common perception would be that the period being referred to was the
1918-1941 period between America's experience in the first and second world
wars. But now there's another interwar period - the 12 years between the 1989
fall of the Berlin Wall, which represented the end of the Cold War, and the
attacks of September 11, 2001, which essentially marked the beginning of the
so-called "War on Terror". As Derek Chollet and James Goldgeier put it in their
new book From 11/9 to 9/11- America Between the Wars
... in one
respect, however, the 1990s were indeed a "holiday." The end of the Cold War
made many Americans and their leaders believe the world had become more benign
and, therefore, of less concern. The three Presidential campaigns of that era -
in 1992, 1996, and 2000 - spent little time on foreign policy issues. The
mainstream media closed overseas bureaus and reduced the newsprint and airtime
spent on events abroad. Instead of looking outward, Americans looked in -
obsessed with oddities such as the OJ Simpson trial and hopes fueled by the
booming stock market. In many respects, these years were self indulgent ones.
David Halberstam called them "a time of trivial pursuits."
Gordon
W Prange's 1982 book At Dawn We Slept tells the tale of an America
blissfully unaware of the true nature of the world threats facing it as the
world fell into war and the Japanese prepared the attack on Pearl Harbor; if
America was sleeping in 1941, in the late 1990s it was in a permanent haze of
total blitzed zonk generated by the world's most-prescribed sleeping pill,
Halcion, and very much enjoying it as it gazed wistfully at its plastic
Kabbalah bracelet and nodded off some more.
It was the same in economics and financial policy. Francis Fukuyama declared
the "End of History", meaning that the central operative principle to be
learned from the fall of state socialism was that the government which governed
least governed best. Bill Clinton, noting the electoral disasters that befell
leftist Democratic presidential nominees Walter Mondale and Michael Dukakis in
1984 and 1988, pointedly ran in 1992 with the blessing of the party's centrist
Democratic Leadership Council. Following the electoral drubbing received by the
party in 1994 after the public rejected his vision of a government-run
healthcare system, his innate centrist instincts were brought even more to the
fore. Proposals and bureaucrats advocating income redistribution and/or
antagonistic stances towards business and finance would be banished to
academia.
Since the administration's poll fortunes (not to mention its members' actual
fortunes) rose so closely in tandem with the stock market, no "enemy of the
people" would be allowed to advocate policies that might kill, or even mildly
irritate, the golden goose. The Democratic economic policy secretariat might be
more favorably inclined to more gender and/or racial diversity than the
Republicans they replaced, and the art on their walls might be more Jackson
Pollock and Mark Rothko than Frederic Remington and LeRoy Niemen; otherwise,
their views were basically identical.
That pattern held at the US Commodity Futures Trading Commission (CFTC), the
government agency charged with regulating and monitoring the frequently very
topsy-turvy world of commodity and financial futures markets and trading.
Clinton had appointed Mary Schapiro as his first CFTC chair in 1993 - she had
been a member of the Securities and Exchange Commission ( SEC) from the Ronald
Reagan-George Bush Snr era (and is now Obama's choice to lead the SEC). Clinton
then in 1996 appointed Washington corporate lawyer Brooksley Born as his second
choice to chair the CFTC.
As an associate with the uber-connected law firm of Arnold and Porter, the
Clinton gang must have thought they had made an outstanding choice - another
female face as a sop to the feminist component of the base, but one trustworthy
enough not to shake the pro-business and markets applecart being plied by the
adults upstairs.
Well, one out of two isn't bad.
One thing that the Clinton gang must have overlooked in making sure that Ms
Born wasn't the financial regulation equivalent of the actor and drag queen Ru
Paul was that her self-described most memorable case while at Arnold and Porter
was litigation arising out of the failed attempt by the Hunt Brothers to corner
the market in silver as the inflationary spike of the 1970s flamed out in 1979
and 1980.
In a 2003 interview in Washington Lawyer, Born noted that she personally
witnessed the case "causing great damage to traders when the price [of silver]
went up and then again when it collapsed".
"That's nice," the Clinton official who vetted her must have tut-tutted. "The
press wants to know, what color will your credenza be."
In early 1998, she pulled something out of that credenza. They sure noticed her
upstairs then.
Traditionally, the CFTC's mandate and purview extended no further than
commodity options and futures traded on recognized and established commodity
exchanges, such as the Chicago Board of Trade or the New York Mercantile
Exchange.
In her interview, Born explains how she witnessed the development of
futures-like contract instruments traded away from the exchanges, so-called
over the counter (OTC) derivatives, and how it troubled her.
"One major issue was the enormous growth of over-the-counter derivatives. OTC
derivatives had been legally permitted for the first time in 1993 ... This
allowed the growth of a business that is now (2003-2007 estimates for this
market put its notional value at over US$500 trillion) estimated at over a $100
trillion annually in terms of the notional value of contracts worldwide.
[Federal Reserve chairman] Alan Greenspan had said that the growth of this
market was the most significant development in the financial markets of the
1990s. The market was virtually unregulated and many, many times as big as the
trading on the futures exchanges ... The commission had kept some nominal
authority over this market, but there were no mechanisms for enforcing the
rules. For example, antifraud rules were retained, but no reporting was
required. The market was completely opaque. Neither the commission nor any
other federal regulator knew what was going on in that market! Also, there had
been a number of major problems in the market, including the near collapse of
Barings Bank until it was taken over by ING ... I became enormously concerned
about OTC derivatives and thought the market was a nightmare waiting to happen
... I was particularly concerned that there was no transparency. No federal
regulator knew what kind of position firms like Long-Term Capital Management
[LTCM] and Enron had in the derivatives markets.
"These instruments can be used to reduce economic risk, and they are certainly
very valuable and useful economic instruments, but they can also create
enormous risks, as they did at Enron and Long-Term Capital Management. Warren
Buffett has recently called them financial weapons of mass destruction. I
became concerned about it once I got to the commission and began to learn about
the OTC market. The more I learned, the more I realized we didn't know. I
realized there was a tremendous potential danger to the markets in the United
States and to the international economy."
Yeah, yeah kid - go play outside.
But it was her next move that really got the alarm bells ringing up in the
suites of the Ivy Leaguers who had Clinton's ear. This related to LTCM, the
Greenwich, Connecticut hedge fund whose September 1998 insolvency necessitated
an emergency rescue package by the Federal Reserve to prevent the entire world
financial system from being dragged down along with it.
"About three months before we knew about Long-Term Capital Management, the
commission came out with a concept release in the Federal Register asking for
input from the industry and other interested people concerning the need for
more oversight of the over-the-counter derivatives market."
Of course, these were the days of the American Republic's powerful ruling First
Triumvirate - Rubin, Greenspan and Summers - the trio that Time Magazine would
soon anoint as "The Committee to Save the World." Back in April 1998, however,
all they were doing was keeping the US economy, and more importantly its stock
market, humming along at crowd-pleasing and poll-boosting numbers.
Early that April, the Dow Jones Industrial Average topped 9,000 for the first
time, nearly tripling in just over three years. The woman who was really giving
Clinton conniption fits then was not Born but Monica Lewinsky, and by not
getting the financial industry mad, by keeping the stock market hopping,
Clinton, correctly it turns out, felt that he could defeat the real threat the
Lewinsky scandal posed to his presidency. Therefore, one woman , Born, was not
going to be allowed to sidetrack his defense against the threat posed by
another - Lewinsky.
The roadside motel party came on April 21, 1998 - except that the location was
changed to Rubin's oak-paneled conference room at the Treasury. Rubin had found
out what Born was about to propose, and the former co-chairman of Goldman Sachs
would have none of it. Formally, it was a meeting of the President's Working
Group on Financial Markets, with Rubin, Greenspan and SEC chairman Arthur
Levitt going three to one against Born.
Rubin laid out his, or, more accurately, the financial industry's concerns.
"So, you're not going to do anything, right?" Rubin, according to a report of
the meeting published recently in the Washington Post.
Born was non-committal. The Rubin gang thought that they had gotten the message
across. In that, couldn't have been more wrong. Born called and raised.
In the May 7, 1998, CFTC press release that introduced the initiative to the
world, Born described her thinking, taking special note that, as had become
sine qua non in Washington policymaking then and now, no monied sacred oxen
would be gored.
The Commission believes it is appropriate to review its
regulatory approach to OTC derivatives. The goal of this re-examination is to
assist it in determining how best to maintain adequate regulatory safeguards
without impairing the ability of the OTC derivatives market to grow and the
ability of US entities to remain competitive in the global financial
marketplace. In that context, the Commission is open both to evidence in
support of broadening its existing exemptions and to evidence of the need for
additional safeguards.
Thus, the concept release identifies a broad range of issues in order to
stimulate public discussion and elicit informed analysis. The Commission seeks
to draw on the knowledge and expertise of a broad spectrum of interested
parties, including OTC derivatives dealers, end-users of derivatives, other
industry participants, other regulatory authorities, and academicians. The
Commission emphasized that it is mindful of the industry's need to retain
flexibility permitting growth and innovation, as well as the need for legal
certainty.
The release does not in any way alter the current status of any instrument or
transaction under the Commodity Exchange Act. All currently applicable
exemptions, interpretations and policy statements issued by the Commission
remain in effect, and market participants may continue to rely on them. Any
proposed regulatory modifications resulting from the concept release would be
subject to rulemaking procedures, including public comment, and any changes
that imposed new regulatory obligations or restrictions would be applied
prospectively only.
Probably the only way this could have been
made less
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