• Choose a category
• All
• Classic-Fiction

By Root 847 0

movement. Perhaps as important was the fact that the core instrument facilitating the derivatives market—asset-backed securities, where the asset was a mortgage—was exempted from any SEC oversight at all. In 1992 the SEC determined that these assets were not the sort that the Investment Company Act of 1940 had intended the SEC to regulate. By a rule, the SEC therefore exempted them.18 But while these assets may not have fit into the regulatory structures of the Investment Company Act, it certainly made no sense to exempt them from any of the traditional forms of financial oversight, by any agency at all. Yet the then- (and now-?) dominant zeitgeist was not about to entertain a new regulatory structure to fill the gap created by the SEC, and mortgage companies were certain to block any effort by any agency to fill that gap. The assets were therefore left untouched.

These are not stories of public officials being bribed. Indeed, the most complicating and difficult fact of this whole transformation is how firmly, and independently, many of the key figures believed in deregulation as an ideal. Some were motivated mainly, or partly, by money. Some were motivated by a well-justified frustration with the incredible incompetence of existing regulators and regulations. But many were motivated by principles, even if, as I believe, those principles were incomplete and unrealistic. You can call the principled man wrong, or even negligent. It is hard to call him evil.

We can see this moral complexity in perhaps the most famous of the firefights that produced this extreme policy of deregulation.

By the middle of the Clinton administration, the volume in derivatives had grown to $13 trillion. (Compare: the total GDP of the United States in 1998 was $8.7 trillion.) Some at the SEC wondered whether the SEC should exercise jurisdiction over derivatives. To the surprise of almost everyone, however, it was a weaker regulatory agency, the Commodity Futures Trading Commission (CFTC), that initially took the lead.

The CFTC reasoned that derivatives functioned much like “futures contracts,” and futures contracts were already regulated by the CFTC. So the agency, then headed by Brooksley Born, floated the idea, in a draft release, that it should regulate derivatives, and it circulated that release to other relevant federal agencies. The document reasserted the presumptive jurisdiction of the CFTC over the market, and “float[ed] the idea of increased supervision.”19

The reaction to Born’s draft release was quick and harsh. As Roger Lowenstein, a financial journalist who wrote for the Wall Street Journal for more than a decade, describes it:

Every banker in Washington complained about the upstart CFTC. Following Wall Street’s urging, Treasury secretary Rubin, a former cochairman of Goldman Sachs, was extremely hostile. A posse of regulators scheduled a meeting for late April, for the purpose of persuading Born to bury the release. Before the meeting, Larry Summers, Rubin’s top deputy at the Treasury Department, called Born and berated her. Summers huffed, “There are thirteen bankers in my office. They say if this is published we’ll have the worst financial crisis since World War II.”20

By the April meeting, tempers had not cooled. Lowenstein:

[Alan] Greenspan got in Born’s face, blowing and blustering until he reddened. Rubin, always more politic, spoke with controlled fury, as if Born’s proposal were unsuited to his society. He repeated that the CFTC was out of its jurisdiction and asked if Born (who had been elected president of the Stanford Law Review in 1963, when most of the women in law firms were still pouring coffee) would like an education in the applicable law from Treasury’s general counsel.21

Born persisted. She published the draft in May 1999, calling for more study. Greenspan, Rubin, and Summers reacted immediately, announcing that they would seek legislation to stop Born and her CFTC. Shortly thereafter, Born resigned. In November a government working group produced a report about derivative regulation and the CFTC.