Marketplace Scratch Pad

I told you so

Scott Jagow Oct 20, 2009

Not me, Brooksley Born. She gave “The Warning” in the late 90’s that credit derivatives were dangerous and needed to be regulated. Tonight on PBS, Frontline tells the whole sordid story.

Born ran the Commodity Futures Trading Commission (CFTC) for three years during the Clinton administration. She was a long-time securities lawyer who specialized in derivatives, so she knew her stuff. Actually, Born was in the running for Attorney General, only to lose out to Janet Reno.

But Clinton’s Financial Markets team didn’t think Born was so sharp. They fought her bitterly to prevent regulation of derivatives, and they won:

“I walk into Brooksley’s office one day; the blood has drained from her face,” says Michael Greenberger, a former top official at the CFTC who worked closely with Born. “She’s hanging up the telephone; she says to me: ‘That was [former Assistant Treasury Secretary] Larry Summers. He says, “You’re going to cause the worst financial crisis since the end of World War II.”… [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.'”

All I can say is, BLEEP.

Well, Summers was right about one thing. The worst financial crisis since World War II was coming. I wonder if his powers of prediction got him his current job as head of President Obama’s National Economic Council.

Derivatives regulation is in the Congressional pipeline right now, but the current CFTC says the bill has loopholes.

And Born has another warning:

“It’ll happen again if we don’t take the appropriate steps. There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience.”

Watch clips from “The Warning” at Frontline’s website. It airs at 9 pm ET on PBS stations. Tonight on Marketplace, the documentary’s producer, Michael Kirk, will give us a sneak preview.

If you’d like to better understand derivatives, here’s a brief, easy to comprehend tutorial from Whiteboard master, Paddy Hirsch:

Derivatives from Marketplace on Vimeo.

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