a bronze statue in the Washington Mall…

Posted on Tuesday 30 December 2008

Brooksley Born, isn’t giving interviews these days [the last one I found was in 2003] despite the important role she played as a voice of reason as Chairman of the Commodity Futures Trading Commission from 1995 until 1999.

But going back in time, during the Administration of George H.W. Bush, Wendy Gramm, a Ph.D. Economist and wife of Senator Phil Gramm was Chairman of the Commodity Futures Trading Commission. The not-yet-notorious Enron Corporation was lobbying to be exempted from regulation in its trading of Energy Derivatives. In 1993 as her last actbefore leaving, she granted the exception. She left the CFTC, and [went on the Board of Enron]. She was followed at the CFTC in 1994 by Mary Schapiro who moved on to become President of NASD. So Brooksley Born became Chairman of the Commodity Futures Trading Commission a couple of years after Wendy Gramm’s exception. By 1998, that exception had grown into a gajillion dollar, unregulated Derivatives Market. In May of 1998, Born published a "concept release" asking for input about whether and how to regulate this expanding Derivatives Market [the "dark" Market]. This idea was immediately opposed by Federal Reserve Chairman Alan GreenspanTreasury Secretary Robert E. Rubin and Securities and Exchange Commission Chairman Arthur Levitt Jr. Then when Long Term Capital Management, a Hedge Fund heavily into Derivative Trading collapsed, she escalated her concerns about this unregulated Market in Derivatives. Her opponents responded by getting Congress to declare a 6 month moratorium on regulating Derivatives. After multiple meetings and some seventeen Congressional appearances, she gave up and left her post in June 1999. In November, the President’s Working Group on the Economy [Treasury Secretary Lawrence H. Summers, Federal Reserve Chairman Alan Greenspan, Securities and Exchange Commission Chairman Arthur Levitt Jr., and the new Chairman of the Commodity Futures Trading Commission Arthur Levitt William J. Rainer] issued a report, Over-the-Counter Derivatives Markets and the Commodity Exchange Act, unanimously recommending that these Derivative Markets continue unregulated. Then there was the one-two punch by Senator Phil Gramm:
  • Gramm-Leach-Bliley Act of 1999:
    The Gramm-Leach-Bliley Act … is an Act of the United States Congress which repealed part of the Glass-Steagall Act of 1933, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.

    The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate. For example, Citibank merged with Travelers Group, an insurance company, and in 1998 formed the conglomerate Citigroup, a corporation combining banking and insurance underwriting services under brands including Smith-Barney, Shearson, Primerica and Travelers Insurance Corporation. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Company Act by combining insurance and securities companies, if not for a temporary waiver process. The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the financial services industry.
  • The Commodity Futures Modernization Act of 2000 … is United States federal legislation which repealed the Shad-Johnson jurisdictional accord, which had banned single-stock futures in 1982. The legislation also provided certainty that products offered by banking institutions would not be regulated as futures contracts.

    This act was incorporated by reference into H.R. 4577, an omnibus spending bill. It was passed by the 106th United States Congress and signed by President Bill Clinton on December 21, 2000…

    The act has been cited as a public-policy decision significantly contributing to Enron’s bankruptcy in 2001 and the much broader liquidity crisis of September 2008 that led to the bankruptcy filing of Lehman Brothers and emergency Federal Reserve Bank loans to American International Groupand to the creation of the U.S. Emergency Economic Stabilization fund.

    The "Commodity Futures Modernization Act of 2000" was introduced in the House on Dec. 14, 2000 … and never debated in the House. The companion bill was introduced in the Senate on Dec. 15th, 2000 (The last day before Christmas holiday) … and never debated in the Senate.

    Given the above-stated chronology, it would appear that the House and Senate versions of the bill were introduced just prior to the Christmas holiday in December of 2000, following George W Bush’s (first) election (in November of 2000), while then-President Clinton was serving out his final days as President. The bill was never debated by the House or Senate. The bill by-passed the substantive policy committees in both the House and the Senate so that there were neither hearings nor opportunities for recorded committee votes. In substance, it appears that the leadership of the Republican-controlled Senate and House incorporated the deregulation of credit default swaps into an omnibus budget bill at a time when the outgoing president was in no position to veto anything. The following article suggests that Bill Clinton and Alan Greenspan endorsed this law The Bet That Blew Up Wall Street though Clinton’s position in 2000 is only suggested, not confirmed or made clear in the report…

    The Commodity Futures Modernization Act of 2000 has received criticism for the so-called "Enron loophole," which exempts most over-the-counter energy trades and trading on electronic energy commodity markets. The "loophole" was drafted by lobbyists for Enron working with senator Phil Gramm seeking a deregulated atmosphere for their new experiment, "Enron On-line."
What I’ve written here is dense and full of innuendo. Let me be more direct about what I think it means:
    Senator Phil Gramm and his wife Wendy Gramm singlehandedly opened the door for the collossal scam known as Enron. The two of them, acting in different arenas opened the doors on the Derivative Markets including the Credit Default Swaps, that have taken the whole country to financial ruin. They were key players in the Deregulation that brought us to where we are today [brought us down to where we are today]. Alan Greenspan and others stopped the only voice of sanity that opposed the madness that engulfed Wall Street – Brooksley Born. There should be a bronze statue on the Washington Mall to honor her brave attempt to stop the landslide that brought us here. Presidents Reagan, Bush I, Clinton, and Bush II all participated in negative ways in what has happened. There are two names in this story about to rejoin us in Obama’s Administration. Let’s hope they learned some things along the way – Lawrence H. Summers and  Mary Schapiro.

Update: 12/31/2008:

As the world financial system implodes, Democrats have blamed the Bush administration’s lack of regulation for creating the conditions for collapse. But a top Clinton regulator acknowledges that he and his colleagues a decade ago "beat back" regulatory efforts that could have prevented credit markets from becoming so precariously balanced they were “milliseconds” from disaster.

“That was a point in history when perhaps we should have anticipated something like where we are today, at least the possibility,” says Arthur Levitt, chairman of the Securities and Exchange Commission from 1993 to 2001.

In 1998, an obscure federal agency, the Commodity Futures Trading Commission, raised the prospect of regulating the burgeoning market in complex financial instruments, which then had a notional value of $28.7 trillion. Today the notional value is $531.2 trillion, according to the International Swaps and Derivatives Association.

The nation’s leading financial officials – Levitt, Federal Reserve Chairman Alan Greenspan, Secretary of the Treasury Robert Rubin, and his deputy Lawrence Summers – pummeled the proposal, saying it was dangerous to even discuss the idea.  Led by Rubin, Levitt and Greenspan, the Clinton White House instead proposed a modest set of reforms. Months later, Clinton Administration officials walked away from their own recommendations, concluding the market could be best managed by the financial industry.

Neither Rubin, Summers, nor Greenspan would comment for this story. Rubin and Summers are serving as economic advisers to Democratic presidential nominee Barack Obama, who has repeatedly blamed the financial crisis on regulatory failures of the Bush Administration.

Levitt, the longest serving head of the SEC, said Democrats and Republicans should be held responsible. Asked about Democratic House Speaker Nancy Pelosi’s observation that the financial collapse can be blamed on the "anything goes" policies of the Bush Administration,  Levitt said,  "No, I think it goes back before that. This was decided under Clinton as well"…
    March 26, 2010 | 6:31 PM

    […] up to 10% of assets in commercial loans, and up to 10% of assets in commercial leases." Derivatives 1993: …during the Administration of George H.W. Bush, Wendy Gramm, a Ph.D. Economist and […]

    April 15, 2010 | 12:50 AM

    […] anything. Through a complex series of maneuvers, they are completely unregulated [again?…, a bronze statue in the Washington Mall…]. The problem is that the big banks are involved in trading them [unregulated]. If they crash, as […]

Sorry, the comment form is closed at this time.