This article by Bloomberg today sites the work done 10 years ago by a woman named Brooksley Born. She was head of the CFTC in 1998 during the collapse of Long Term Capital Management and cried out for several years to regulate these products. Her stubborn refusal to back down on the issue was not just ignored by people like Greenspan, Rubin and Authur Levitt but her statements were outright discounted publicly by them. Obviously they had too much push from the industry that was making money hand over fist creating and selling them.
This quote from the article about how they played down Ms. Born:
She roiled colleagues when her agency said on May 7, 1998, that it would consider whether the over-the-counter instruments should remain exempt from oversight. That same day, Greenspan, Rubin and Levitt issued a rebuke of Born's plan, saying in a joint statement, ``we seriously question the scope of the CFTC's jurisdiction in this area.''
… The near-collapse of Long-Term Capital Management, a hedge fund that had more than $1 trillion in derivative contracts, in September 1998 should have been a ``wake-up call,'' as Born once put it. The argument failed to sway other regulators.
Here is a statement of how the industry was making so much money they would do anything to stop oversight:
Investment banks fought regulation for more than a decade because derivatives, whose value is derived from bonds, currencies or other assets, were a cash cow. As much as 40 percent of the profit for dealers, including Goldman Sachs Group Inc. and Morgan Stanley, was from the private transactions, according to fixed-income research firm CreditSights Inc.
I have said many times any time you have a completely non-transparent market where the products are designed by mathematicians and sold by an army of Ivy League “idiots” with no idea of what the hell they are selling and don’t care as long as they make a lot of money doing it is a formula for disaster. This entire crises is the result of government actions going back to the late 1990’s with deregulation of banking and investment institutions followed by Greenspan's tacit approval of anything Wall Street wanted to do followed by the influx of every one and any one starting an unregulated hedge fund to buy and sell at extreme leverage all of these exotic products.
This quote shows and example of lax oversight Ms. Born tried to tighten”
While leading the CFTC in 1998, Born declared that the unregulated contracts could ``pose grave dangers to our economy.'' Born, a lawyer who according to futures attorney Dan Roth battled fellow regulators with the ferocity of a courtroom litigator, lost a turf fight with Alan Greenspan and Robert Rubin over policing the deals.
After Congress exempted the contracts from U.S. oversight in 2000, the market swelled from about $100 trillion to $684 trillion by June 30. The growth included credit-default swaps and collateralized debt obligations, custom-made products barely in use under Born's reign. They played a part in almost $1 trillion of global bank losses and are prompting lawmakers to seek controls on the complex deals.
``Brooksley has been vindicated,'' said John Tull, a CFTC commissioner from 1993 to 1999. ``Had they listened to her, I think this catastrophe could have been averted.''
Need I say more?
Thank you Bloomberg for a concise article. I love when the many things I have been writing about which many people find extreme or don’t know where I get them from come together in one well-written short article…
No comments:
Post a Comment