Born, Greenspan & Rubin: OTC regulation comes full circle

Photo from C-SPAN

As the global financial markets unraveled, and words like “derivatives”, “credit default swaps” and “collateralized debt obligations” seeped into America’s lexicon, Brooksley Born stayed quiet.

During her tenure as Commodity Futures Trading Commission chairwoman in the Clinton administration, Born recognized and warned her colleagues about the dangers of an unregulated over-the-counter derivatives market.

But then-Federal Reserve Chairman Alan Greenspan, along with then-Treasury Secretary Robert Rubin and Securities and Exchange Commission Chairman Arthur Levitt scoffed at her proposal that the CFTC regulate the products, and eventually, after a failed push for regulation, Born resigned in 1999 and went quietly into the private sector.

Now, as a member of the Financial Crisis Inquiry Commission, Born spoke forcefully.

And, ironically, her detractors Greenspan and Rubin listened as she castigated the men for their role in the deregulation of OTC derivatives, the same derivatives that caused the near-collapse of American International Group Inc. and the demise of investment banks Lehman Brothers Inc. and Bear Stearns Inc.

“You’ve long championed the growth of the over-the-counter derivatives market because of the risk-shifting opportunities it provides,” Born said to Greenspan. “You’ve also taken the position that the over-the-counter derivatives market should not be regulated. “

“You welcomed the adoption of the Commodity Futures Modernization Act of 2000, which eliminated virtually all Federal government regulation of the OTC derivatives market and also pre-empted certain state laws relating to it,” Born said. “So as a result, OTC derivatives have been trading with virtually no regulation for a decade and the market grew to exceed $680 trillion in notional amount by the summer of 2008.”

Greenspan’s response: “There was no evidence that they [OTC derivatives] didn’t work exactly as they were going to.”

And, at one point during Rubin’s testimony, he said he wasn’t in favor of any derivatives deregulation during his time as Treasury Secretary.

Greenspan and Rubin’s testimonies revealed Wall Street and Washington’s lethargy toward changing its ways, even though the crisis has proven Born to be right.

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