All the Devils Are Here [67]
The draft of the concept release was completed in March 1998. As an independent regulator, Born had the right to simply publish it and let the world react. But she didn’t do that. Viewing herself as someone who wanted to collaborate with other regulators, she sent it around to all the other important actors—not just the other regulators, but lobbyists, key legislators, and the Treasury Department—to solicit their feedback.
Feedback? Blowback was more like it. “One day I walked into Brooksley’s office,” says Greenberger. “She put down the phone and all the blood was drained from her face. She said, ‘That was Larry Summers.’ He had been screaming at her.” Summers had told her that he had just been visited by a group of bankers who said that if the CFTC insisted on pursuing their concept release, they would move their derivatives business to London. “Summers wanted us to stop,” says Greenberger. Adds Born: “There was so much pressure. The derivative dealers did not want this market looked at—at all. For some of them, derivative trading made up 40 percent of their profits.”
A month later, the President’s Working Group met to discuss Born’s concept release. The PWG, as it’s called, consists of four regulators: the chairs of the Fed, the SEC, and the CFTC, plus the Treasury secretary. But this had become such a hot-button issue in Washington that virtually all the bank regulators were there: Larry Summers. John Hawke, the comptroller of the currency. Ellen Seidman, the director of the Office of Thrift Supervision. William McDonough, the president of the New York Fed. “It was a very tense meeting,” recalls one person who was there. The date was April 21, 1998.
The purpose of the meeting, it quickly became clear, was to persuade Born to back off. The other regulators made all the old arguments about the dangers of classifying derivatives as futures. Born, for her part, said that CFTC was a long way from trying to regulate derivatives; all it was trying to do was ask some useful questions and glean some useful answers. “Greenspan thought even asking the questions was dangerous,” recalls Born.
And where was Rubin? Given his history of concerns about derivatives, you might have expected him to be Born’s one ally in the room. During the Asian financial crisis, Rubin had asked one of his aides to find out how much derivatives exposure U.S. financial institutions had to South Korea. “We couldn’t find out,” this aide recalled. Rubin was stunned. But in this meeting, Rubin sided, without hesitation, with his fellow regulators. His reaction to Born’s arguments was almost visceral—a far cry from the man who was so admired for his ability to listen and ask questions. He bullied Born in a way that seemed out of character to anyone used to watching him manage a meeting. “It was controlled anger,” Greenberger later recalled for the New York Times. “I’ve never seen him like that before or after.”
Late in the meeting, Rubin turned to Born and said brusquely, “My general counsel says you have no jurisdiction.”
“Our view is that we have exclusive jurisdiction,” she replied.
Rubin: “Would you agree to discuss this with our general counsel before you issue the concept release?”
Born: “Of course.”
One suspects that Rubin thought this exchange would cause the issue to go away. Instead, it gave Born hope. She was a big-time lawyer after all; a frank and fruitful exchange of views with the general counsel of the U.S. Treasury was a fine outcome. It played to her strengths. Except that for the next two weeks she couldn’t get Treasury’s lawyer on the phone. That’s when her steely side emerged. In Born’s view, if the general counsel couldn’t be bothered to explain Treasury’s legal reasoning, then she saw no reason to delay the publication of the concept release. On May 7, the CFTC published it.
The other three members of the PWG were incensed. Rubin, Greenspan, and Arthur