Well Behaved Women Rarely Make History, Volume XXVII

Monday, November 16, 2009

This is Brooksley Born. She's a Stanford educated attorney who was the first woman to ever be named as the President of the Stanford Law Review, and graduated at the top of her class in 1964.

She's a smart cookie. If she'd spent the rest of her professional life doing nothing more than being a smart cookie in the field of financial law, then she'd still be an ill-behaved woman for her role in breaking down barriers for women in the field of law. But that's not how she spent the rest of her professional life.

From August 26, 1996 to June 1, 1999, Ms. Born was the Chairperson of the Commodity Futures Trading Commission (CFTC), the federal agency which oversees the futures and commodity options markets. This little known agency was charged with the regulation of of financial instruments called "derivatives."

During her tenure, Ms. Born, being an extremely skilled and experienced attorney, began to wonder why an instrument called "over the counter derivatives" were so difficult to track, and why there was no regulation associated with these instruments. She had her staff begin investigating these OTC derivatives, and during the course of their investigation, she came to the conclusion that these instruments, if left without regulation and without requirements for cash reserves, posed a significant threat to the U.S. financial system.

Because the CFTC is a fairly minor agency, Ms. Born did what any good team player would do - she approached the heads of other government agencies to express her concern and to let them know that she intended to pursue regulation, as was her responsibility as the head of the CFTC.

Well. You'd have thought she had suggested a re-institution of slavery, with the roles of the slaves and the masters being reversed. The response to Ms. Born's plan was immediate and vociferous. Alan Greenspan,  Robert Rubin and Larry Summers went after Brooksley Born with a vengeance. Congressional hearings were called. Testimony was given. The entire Clinton Administration and the Congress basically told her she was full of shit.

Her response? She proceeded with plans to do what she thought was best - she announced her intention to regulate OTC derivatives. And the Administration shut her down. Not only did they shut her down, they essentially castrated her entire agency, making it extremely difficult for any Chairperson to enact regulation surrounding OTC derivatives.

What could she do? She resigned.


And two years later, her concerns were proven to be justified - the derivative trader LTCM overextended themselves to the point where they needed federal intervention to save their bacon. In 1998. A clear signal that OTC derivatives were dangerous, and needed some regulation. But that didn't happen. Alan Greenspan wouldn't budge, saying that LTCM's troubles were not indicative of a larger problem, but a one-off incident. He received congratulations for "saving the economy," and Ms. Born continued to do what she did - pro bono work, teaching, working with the American Bar Association.


And then came 2008, and the meltdown of our economy - the exact crisis predicted by Ms. Born. I myself probably could not have resisted slapping the "Three Marketeers" in the head with a shovel, while simultaneously screaming "I TOLD YOU SO!" Thankfully, Ms. Born took the high road, and commented, "I think we will have continuing danger from these markets and that we will have repeats of the financial crisis -- may differ in details but there will be significant financial downturns and disasters attributed to this regulatory gap, over and over, until we learn from experience."

With the Wall Street lobbyists essentially getting their way regardless of consideration for the public good, it seems unlikely that we will "learn from experience."

But Ms. Born received the John F. Kennedy Profiles in Courage Award this year for her incredible fortitude in standing up and speaking the truth, regardless of the consequences. Ms. Born, you are ill-behaved and awesome. Congratulations.


H/T to Frontline, for the source material.

8 comments:

mom in northern said...

Matt Taibbi has been doing a series of articles in Rolling Stone about the games that Wall Street has been play to the determent of the economy. Makes your blood boil. No one seems to be minding the store even now….
Or is even interested in making some changes.

Janiece said...

Yes, reading his work gives me Hypertension.

Which is one of the reasons why he's our entire family's Celebrity Boyfriend.

And you're right - OTC derivatives still aren't regulated.

John the Scientist said...

Derivatives ought to be illegal unless there is a clear formula for risk assessment of the instrument. Otherwise, to me, they are a sophisticated means to buy stuff on leverage, and we outlawed that in the 1930s.

Janiece said...

John, you surprise me. Given your free-market/libertarian leanings, I would have thought you would be opposed to regulation.

John the Scientist said...

Janiece, I'm a small "L" libertarian. That means I admit that the Tragedy of the Commons exists as a social dynamic. There is a reason that humanity throughout its history has needed some form of governance, and Libertarians who think we can do away with it all are insane.

What I oppose is over-regulation which is rather harder to define, but I know it when I see it in a 2000 page health care reform bill :D. This opens me to charges of not really being a libertarian, but really, the Ayn Rand fan club can go fuck themselves. I'm interested in real-world solutions that maximize my political viewpoint, but "real world" includes the realization that no ideology has a lock on reality in all of its permutations.

So, for example, those people who say that lenders were "predatory" and blame the fact that people took out larger mortgages than they could afford make me nervous because it sounds as if they are tacitly proposing regulation in place of personal responsibility. That sounds like over-regulation to me. If you can't figure out what's in your own financial best interest, or find someone to do so before making a major decision, then you are so badly Dunning-Krugered that we need to find you a court-appointed guardian and revoke your adult privileges in society.

But 1929 clearly shows that even very smart people (and in today's world, perhaps especially very smart people using flawed computer simulations) will engage in short-term risky behavior if the long-term damage is sufficiently unapparent to be easily rationalized away.

Apropos of the ToC, this article and ipretty clearly demonstrates why a regulator is needed in inter-connected, lemming-like ToC-prone Wall Street, and in the process shows why Tabbi is a raving lunatic, and that Goldman could not and did not single-handedly organize four bubbles:

Context and good facts were in short supply in favor of a lively, if incoherent, narrative. As a fellow financial journalist put it: "If you read the article without knowing anything about finance, by the end you would still not know anything about finance—but you would hate Goldman Sachs."

My advice as an MBA: don't get your financial reporting from Rolling Stone. :D

Janiece said...

John, you can bad-mouth Taibbi on your own space if you wish - around here, them's fighting words.

Okay, not really. But Taibbi did make some salient points, in spite of your criticism. Love him or hate him, respect The Rolling Stone or not, there are SHENANIGANS going on at Goldman Sachs and every other Wall Street firm that need some close examination. While I recognize that being called out on them by The Rolling Stone is pretty damn embarrassing, I find I'm less than sympathetic to their hurt feelings.

And let me take this opportunity to mention that while your scientific credentials carry some weight, your MBA impresses me not at all. I have known, and have worked with, many, many MBA's over the years. Without exception, their ability to earn that degree meant exactly dick in terms of how much they knew about finance, actual business, or any other real world application. Not to mention at least half of them were dumber than a damn stump and couldn't find their ass with both hands.

As a triple-degreed friend once told me, if I wanted to REALLY learn business, then I should save my money and read the WSJ every day for a year. Since one of his advanced degrees was an MS in finance, I find his insights to be eminently more credible than any MBA's. So please do not try not to use that particular "accomplishment" as a means to increase your credibility here. With me, it has exactly the opposite effect.

As far as regulation goes, I have to admit that even though I'm a self-described liberal, I, too, have some issues with a policy that ignores personal responsibility as it relates to personal finance. While I do believe there was a great deal of predatory lending going on, at some point adults have to take responsibility for their own lives.

And I believe I've already made my viewpoint perfectly clear when it comes to health care reform.

John the Scientist said...

Well, I read Taibbi's prose and about 3 sentences in I was offput by the sweeping generalizations and name calling. I kept searching for references and data, but the more I read, the more it looked like a paranoid conspiracy theory.

As the article I linked to pointed out, he has so many factual errors in his reporting that I really don't trust anything he says because I can't sort the hyperbole from the nuggets of truth.

On the one hand I know a lot of dipshit MBAs. On the other hand, they were all from unknown schools or took 7 years to complete an executive program, and had forgotten everything they'd studied in the first year by the time they graduated. Maybe you could equal an MBA from a Podunk school with self study - but then such an MBA diploma isn't worth the paper it's printed on. I don't know where the people you've interacted with went to school, but I can say that unless it was in the first or second tier in the Business Week rankings, it was probably a waste of time. Equating those people to a graduate of Harvard or Wharton is like condemning all college graduates because your company hired some rejects from the local junior college.

You can't self-study your way to equality with a graduate from from a top program with a concentration in Finance. Not one that would generate someone with enough skill to get hired on the Street. I could not self-study my way into an investment bank Finance position - and that's with the head start of my rudimentary finance training (my MBA concentrations were in Marketing and Strategic Planning).

To really learn business you have to have the basic knowledge imparted by an MBA or other business training, then you have to work as an apprentice in a real business. The MBA lets you see patterns where otherwise you might not have, making the most of your real-world experience. Without the training of an MBA, it takes years of drudge work to get enough insight to equal a good education - if you are lucky enough to get the right experience in the first place. The Journal won't shortcut that.

You won't learn the nitty-gritty of how to develop instruments and conduct market research, and how to evaluate that research, from the Journal (that was a skill that helped land me my first job). You won't learn more than a cursory knowledge of GAAP from the Journal. You won't get exposed to the obvious crap that is most of Organizational Behavior as it's taught in B-schools, and although that is probably a good thing on the whole, you won't know where those drones in HR are coming from, either.

I'm also not negating the need for healthcare reform, I just think that any piece of legislation that is 2000 pages long has some serious issues with over-regulation.

Janiece said...

John, DU's Business School isn't Harvard, but it's not the "podunk" program you've implied it is.

I should have been more clear about my friend - one of his degrees is an MBA. In addition to his MS in Finance, in addition to working in the investment world. So he does in fact know from where he speaks. Since I don't believe you have a degree in Finance, I consider him more of an authority on these matters than you. I certainly don't expect you to admit to his superior credentials, but it's unlikely that your laundry list of "MBA skills" will carry more weight with me than someone who works in the field and whose degrees all pertain directly to the subject at hand.

It seems to me there are two kinds of MBA's in the world - those who are impressed by their degree, and those who are not. You obviously fall into the former, and my meat friend falls into the latter. Since it's obviously a matter of opinion based on personal experience, I think we'll have to agree to disagree (again).