WASHINGTON – No one regulated the limitless derivative transactions that wound up wrecking Wall Street, but Brooksley Born would have regulated them if Federal Reserve chairman Alan Greenspan and Congress hadn't stopped her.
In 1998 Born vainly asserted authority over derivatives as head of the Commodity Futures Trading Commission.
Greenspan and Richard Rubin, treasury secretary for President Bill Clinton, convinced Congress to include a provision in a bill to temporarily deny her authority.
President Bill Clinton signed the bill, Born left the commission, and in 2000 Congress and Clinton banned regulation permanently.
Events have vindicated Born, a Stanford Law School graduate.
"The woman who tried to save our money," Stanford University proudly proclaims beside her picture on the cover of its current magazine for parents.
San Diego University law professor Frank Partnoy told the magazine, "If there is one person we should have listened to, it was Brooksley."
"History has already shown that Greenspan was wrong about virtually everything and Brooksley was right," Partnoy said.
Daniel Waldman, Born's general counsel at the commission, said, "Exposures were very, very big and if it was your job to worry about things that could go wrong – and I think it was – this is one of the things you couldn't help but notice."
"It was only your blind faith in the participants that could give you much comfort because you really did not know much about the real risks," Waldman said.
Former adviser Marcia Greenberger said, "She could see that the data points, by lack of regulation, were heading the country into a serious set of calamities, each calamity worse than the one before."
Clinton appointed Born to lead the commission in 1996.
The commission regulated simple derivative transactions that occurred on exchanges but it exempted intricate "over the counter" deals between sophisticated parties.
These "OTC" derivatives had exploded to $28 billion, and they bothered Born.
"There was no transparency of these markets at all, no market oversight," she told Stanford magazine. "There was no reporting to anybody."
She circulated a draft among regulators and trade groups, but Greenspan warned that the prospect of regulation would cause chaos around the world.
"We would go to conferences and it would be viciously attacked," Waldman said.
"They would just be stomping their feet and pounding the tables," he said.
Rubin assembled a "presidential working group" that included Born but isolated her.
Born told the magazine that at a group meeting Rubin said she lacked jurisdiction.
She said she asked for his legal analysis but he never supplied one.
She said Greenspan maintained that merely inquiring about derivatives would drive business offshore.
"It was as though the other financial regulators were saying, we don't want to know," she said.
Born issued a formal proposal on May 7, 1998.
Within hours Greenspan, Rubin and Arthur Levitt of the Securities and Exchange Commission jointly expressed grave concern.
Congress called a hearing, and Rubin sent deputy Larry Summers to testify.
Summers, current chairman of President Barack Obama's council of economic advisers, said the proposal cast a shadow of uncertainty over a thriving market.
Born testified that, "Losses resulting from misuse of OTC derivatives instruments or from sales practice abuses in the OTC derivatives market can affect many Americans."
She testified that many Americans have interests in corporations, mutual funds, pension funds, insurance companies and municipalities trading in those instruments.
The next agriculture appropriations bill carried a provision barring any action in the six months that remained of Born's term.
Clinton didn't reappoint her, and in 1999 his working group recommended a permanent ban on regulation.
In 2000 House agriculture committee chairman Thomas Ewing of Illinois introduced the ban as the Commodity Futures Modernization Act.
At a hearing Ewing said, "Regulatory relief for domestic futures exchanges is of great importance to ensure that U.S. futures exchanges can compete globally."
"Chairman Greenspan said it most clearly in some of his past testimony," Ewing said.
Rubin assistant Lewis Sachs said, "When used properly derivatives can help businesses, farmers and financial institutions hedge their risks efficiently and effectively."
He said they promoted efficient allocation of capital across the economy.
He said they could lower mortgage payments and insurance premiums.
"It is to be expected that in times of distress some participants in these markets, as in other markets, will be adversely affected," he said.
"The recommendations we have made and the provisions in this bill will not prevent these situations from occurring, nor are they intended to do so," he said.
"What needs to be protected, however, is the financial system as a whole, and not individual institutions," he said.
He promised "greater competition, transparency, liquidity and efficiency."
The bill didn't advance on its own but in December 2000 it surfaced as a provision of an omnibus spending bill.
The provision remained, the bill passed, and Clinton signed it on Dec. 21, 2000.