The Messenger Wore A Skirt

I had written this in 2009 and it also appeared in “the new agenda.” It is a decent piece about people who saw the coming crisis pre-2007/8 and those who opposed them.

Recently, Stanford Magazine did an article on one of the University’s former law review presidents who graduated at the top of the 1964 class. The first female to hold either distinction of graduating first in her class and also as president of the school’s Law Review. Prophet and Loss. Stanford Magazine, April 2009.

“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” Alan Greenspan

“I thought it was counterproductive. If you want to move forward . . . you engage with parties in a constructive way,” Rubin told the Washington Post. “My recollection was . . . this was done in a more strident way.”

“characterized as being abrasive.” Arthur Levitt

It would seem the three coupled with Larry Summers’s push back in Congress on the regulation of derivatives, had the problem and not Brooksley Born. Since then, all three men have suggested there should have been more regulation of the derivatives market Greenspan has called its recent collapse a “once in-a-century credit tsunami.” Called a modern-day Cassandra by Stanford Magazine, one could only wonder where we would be today if the economic and financial wizards had taken heed of Brooksley’s warning.

Short histories on CDO/CDS . . . Collateral Debt Obligations (CDO) were invented by Drexel Burnham Lambert (Milken) as a way to package asset-based securities. The CDO was tranched into similar asset backed securities of the same rating allowing investors to concentrate on the rating rather than the issuer of the bond. Ten years later, JP Morgan invented Credit Default Swaps (CDS) which was used as a mechanism to bet on a 3rd party default. In 2000, CDS were made legal with the passage of the Commodity Futures Modernization Act and any regulation of them was stymied with this bills passage. Later on, an investment firm decided to team CDS and CDO together, transferring the risk from the CDO to the issuer of the CDS, and creating a synthetic CDO. Few CDS if any and their counters naked CDS had the reserves set aside to payout a claim against a failed CDO.

It was 1994, Bankers Trust lost ~$800 million from various derivative investments. The chief losers were P&G and Gibson Greetings. Bankers Trust was formed by a consortium of banks, shedding the loan image for conducting trades. Bankers Trust was successfully sued by P&G for its losses by claiming racketeering and fraud. Bankers Trust also became known for its remarks about Gibson Greetings not knowing what Bankers Trust was doing. In 1998, Bankers Trust pled guilty to institutional fraud due to the failure of certain members of senior management to escheat abandoned property to the State of New York and other states.

In 1998, LCTM was struck by a downturn in the market when Russia defaulted on government bonds, a security LCTM was holding. To make a significant profit on small differences in value, the hedge fund took high-leveraged positions. At the start of 1998, the fund had assets of about $5 billion and had borrowed about $125 billion. When investors panicked and sold Japanese and European bonds and bought US treasuries, the spreads between LCTM holdings increased, resulting in a loss of ~$1.8 billion by August 1998. LCTM was saved by an orchestrated Fed bailout utilizing private investors.

In both cases, the history was there to call for more regulation.

It was in 1998, Brooksley Born testified to Congress about the dangers of the unregulated derivatives market referencing the LCTM losses as a recent example. It was then deputy Treasurer Larry Summers testified to Congress that Born’s desire to regulate is “casting a shadow of regulatory uncertainty over an otherwise thriving market.” Larry’s testimony set the stage for Congress to rein in the power of the Brooksley Born’s and the CFTC with the passage of Phil Gramm’s Financial Service Modernization Act of 1999 prohibiting the regulation of the derivatives market (In 2005, the revised bankruptcy laws would place derivatives outside of the laws making it the first in line to receive compensation). Wall Street and banks had clear unregulated sailing in the sea of laissez faire in 2000 with a closing of the door for debtors in 2005. It was little better than a roach motel, you could check in but you could never check out.

In 1999 in the Senate, opposition arose to the passage of the Financial Services Act in the form of North Dakota’s Senator Dorgan. An excerpt from the Senator’s speech the day before the bill was passed:

I, obviously, am in a minority here. We have people who dressed in their best suits and they just think this is the greatest piece of legislation that has ever been given to Congress. We have choruses of folks standing outside this Chamber who spent their lifetimes working to get this done, to say: Would you just forget all that nonsense back in the 1930s about bank failures and Glass-Steagall and the requirement to separate risk from banking enterprises; just forget all that. Time has moved on. Let’s understand that. Change with the times.

We have folks outside who have worked on this very hard and who very much want this to happen. We have a lot of folks in here who are very compliant to say: Absolutely, let me be the lead singer. And here we are. We have this bill, which I will bet, in 5, 10, 15 years from now, we will be back thinking of this bill like we thought of the bill passed in the late 1970s and early 1980s, in which this Congress unhitched the savings and loans so some sleepy little Texas institution could gather brokered deposits from all around America and, like a giant rocket, become a huge enterprise. And guess what. With all the speculation in the S&Ls and brokered deposits and all the things that went with it that this Congress allowed, what did it cost the American taxpayer to bail out that bunch of failures? What did it cost? Hundreds of billions of dollars. I will bet one day somebody is going to look back at this and they are going to say: How on Earth could we have thought it made sense to allow the banking industry to concentrate, through merger and acquisition, to become bigger and bigger and bigger; far more firms in the category of too big to fail?

Daily KOS, Senator Dorgan’s Speech, November 4, 1999 on “Gramm-Leach – Bliley Act” also known as the Financial Services Modernization Act (you can hear the 16-minute speech here or read it)

Larry Summers has been present throughout much of this change, supporting it, denigrating the opposition, and claiming his experience at D. E Shaw gave him an insider’ knowledge as to how the derivatives market works. While President of Harvard University; Larry received a letter (May 12, 2002) from Iris Mack, a new employee of the Harvard Management Company managing Harvard’s endowment funds. A Doctorate in Mathematics from Harvard and a former employee of Enron who dealt in derivative trades, she expressed concern about the trades (swaps and other complex financial instruments) being made by the funds and the lack of understanding of the trades by the traders. On July 1, Iris was called into the office of Jack Meyer, the chief manager of Harvard Management. On July 2, Iris was fired for making what Harvard Management termed as: ‘baseless allegations against HMC to individuals outside of HMC.”Ex-Employee Says She Warned Harvard of Risky Moves” Boston Globe, April 3, 2009. While Harvard Management Company claims above normal returns on its endowment funds, it has spent much of last year selling off private equity and investments to raise cash to pay for losses.

The attitude expressed by the head of the Economic Council was one of “trust me now” as I have all of the experience necessary to fix the current economic and financial problems. Instead he has promulgated the issues of the collapse by denigrating Brooksley Born’s request to Congress for regulatory power, ignoring the advice of Iris Mack at Harvard University, by consulting to D.E. Shaw (hedge fund) making ~$5.2 million as the financial engineer’s engineer following a model Buffet called Financial Weapons of Destruction, and he has been repeatedly wrong in his direction and advice to Congress and Industry.

In the game of deregulation and global efficiency, Larry Summers was its cheer leader signing off on a letter encouraging the dumping of toxic wastes in Asia at the World Bank. He helped to shepherd China into the WTO claiming:

The agreement with China is a one-way street. China opens its markets to an unprecedented degree, while in return the United States simply maintains its current market access policies.
‘It is difficult to discern any disadvantage to the United States in passing this legislation.
Larry Summers and Senator Dorgan, Angry Bear blog.

Personality, ego, and a blind belief in the ability of the market place to dictate the proper path and the correction has gotten in front of common sense. Maybe it was time to sideline Greenspan, Summers and his protégé Geithner beliefs in favor of Born, Mack, and Dorgan’s?. The latter has shown more foresight into how today’s problems and issues were created and how to resolve them. SEC head Arthur Levitt later recanted his decision to support the Commodity Futures and Modernization Act calling it one of the worst decision he ever made.

I certainly am not pleased with the results. I think the market grew so enormously, with so little oversight and regulation, that it made the financial crisis much deeper and more pervasive than it otherwise would have been.” Brooksley Born, Stanford Magazine, April 2009

*’The messenger wore a skirt,’ says Marna Tucker, a Washington lawyer and a longtime friend of Born. ‘Could Alan Greenspan take that?’”

run75441@ Angry Bear Blog
revised Sept. 20, 2018

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