All the Devils Are Here [65]
Perhaps as a result, she had a steely side. Though always polite and cordial and collegial, she was tough when it came to things she cared about. She took her new post with the same resolve that had long characterized her.
It wasn’t long before she was focusing her attention on derivatives. In the years since Wendy Gramm had ruled that they didn’t constitute futures, the business had exploded. Sumitomo, a large Japanese commodities dealer, had been caught using over-the-counter derivatives as part of an effort to corner the copper market. The Procter & Gamble and Orange County debacles were still fresh on people’s minds. After she had been in office for a while, Born also began to hear rumors that firms were using swaps to doctor their quarterly financial statements.
As she looked more closely, she realized there was some question as to whether the grounds for the Gramm exemption still applied. After all, it was only supposed to pertain to one-of-a-kind derivatives between sophisticated counterparties. Yet swaps had become so commonplace that many of them were practically standardized and used off-the-shelf contract language. If derivatives were becoming standardized, Born wondered, shouldn’t they also be traded on exchanges? Shouldn’t they be classified as futures? And shouldn’t they be regulated?
Although the Sumitomo market manipulation case had been exposed before she took office, the agency conducted its investigation—and imposed a hefty fine—on Born’s watch. The experience made her realize that “we were trying to police a very rapidly growing part of the market for manipulation and fraud, but we knew nothing about the market,” she later said. “There were no record-keeping requirements. No reporting requirements. It was totally opaque.”
Born was in many ways a political naïf. She ran an agency with fewer than six hundred employees. She lacked both the power base and the political skills to sway members of Congress or her fellow regulators. All she knew was that derivatives were a gigantic market and that some bad things had happened in the past, and that meant, in all likelihood, that bad things might very well happen in the future. And no one in the government had a clue. Born and others at the CFTC started calling derivatives “the hippopotamus under the rug.”
About a year into her tenure, Born hired a top Washington litigator, Michael Greenberger, to be the director of the CFTC’s division of trading and markets, which made him one of her top deputies. The hiring itself suggested what a tin ear she had for politics: Greenberger had never been involved in commodities, and so had no natural allies on the agriculture committees that oversaw the CFTC. He and Born had gotten to know each other serving on the board of an agency that helped the homeless. But he was no rube—he had spent his career involved in complex litigation and had argued several cases before the Supreme Court. Like his new boss, he also knew how to be tough when he needed to be. Not coming out of the commodities industry, he later said, gave him an advantage over just about anyone else who might have taken that job. “Because I was not dependent on the futures business, I really did not care what the futures industry thought of me.” Not long after he came on board, Greenberger had a meeting with Born. “I remember her telling me that we have a lot of things to do, but that I had to start focusing on over-the-counter derivatives,” he says.
Thus it began.
That Bob Rubin worried about derivatives was not the result of some conversion experience that took place after he joined the government. He had felt the same way during his years on the fixed-income desk at Goldman Sachs. It’s not that he hadn’t traded in derivatives—what was an option, after all, but a kind of derivative?—or that he didn’t understand their value as a hedging device. But he had always had a healthy fear of them, because he understood better than most that in a crisis, their combination of excessive leverage and