A month or so ago, some friends (who read lots of books) forwarded something on the economy. It's sat in the back of my mind ever since, so I did a little research and here's the results- 3 articles about Brooksley Born:  "The Woman Greenspan, Rubin & Summers Silenced", "The Lessons Of Long-Term Capital Management L.P." (Oct'98), and "The World According to Brooksley Born" (May'97). Falls under the heading of "What 'they' didn't want us to know," of course.

  My own 2cents for Obama on the economy and... (after listening to KUOW's "To the Point" Report, "Reshaping the Pentagon for a Dangerous New World"):
      It's said that in sex, death, and taxes, the biggest weapon or tool, is one's imagination. (Ok, maybe the saying only applied to sex, but who would dispute the relationships? But more to the point:) That especially applies when it comes to the economy and and national defense (or offense). We can save a fight by using our head, not to mention our heart - like most things, they work best when used together. (EG: making enemies is expensive in most every way). That means foregoing (LOW-prioritizing) instant gratification, what LOOKS sexy, and most other image-maintenance. This may be asking for a lot (perhaps a paradigm shift), but it also means emphasis on education, broad-reading/viewing and context-awareness, emotional intelligence, and preventative maintenance (for anything of essential value, but especially body-mind health), AND (education about) the implications of having those as major priorities - personal and communal. That also implies education on the downside (ie: end products) of emphesis on sound-byte communications, winner-loser competition, glitz-flaunting, as well as the more commonly acknowledged addictions. (I think there's some really great books on all this, including one entitled, "What I learned in Kindergarten" or something like that... Wow, google that!). Part of that broad view might include public radio (ie: KUOW in Seattle Area) which has been including MANY discussions from a broad variety of perspectives on these and related topics, by the way.
      (HA! talk about synchronicity): after I wrote the above, I got this email posting (by Andy Borowitz ) on Obama's complete sentences - includes a great Sarah Palin quote to boot!]


Thank you (and for your patience on this one!),
Chris Pringer, polypsyart@iinet.com,
PolyPsyArts.Com,     Citizen Healing .Org,    Veterans For Peace, Ch.92
"Seattle12" of SNOW, Web-Admin for US Peace Academy at vUSPA.Org
<small>   * Site Map & Organization Chart & Relating Chalice-Bridging / PolyPsyArts to Cross-Discipline Approach</small>
<small>   * New Page: "The Obama Momentum"</small> <small><small>Links</small><small> & profiling, a little wonder-whiling, & some discussion on the beguiling</small></small>

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<big><big><big>"The Woman Greenspan, Rubin & Summers Silenced"</big></big></big>
http://www.thenation.com/blogs/edcut/370925/the_woman_greenspan_rubin_summers_silenced

The Woman Greenspan, Rubin & Summers Silenced
posted by Katrina vanden Heuvel on 10/09/2008 @ 11:46pm

"Break the Glass" was the code-name high-level Treasury Department figures gave the $700 billion bailout; it was to be used only as a last- resort measure.

Now millions have been sprayed and damaged by broken glass.

But more than a decade ago, a woman you're likely never to have heard of, Brooksley Born, head of the Commodity Futures Trading Commission-- a federal agency that regulates options and futures trading--was the oracle whose warnings about the dangerous boom in derivatives trading just might have averted the calamitous bust now engulfing the US and global markets.  Instead she was met with scorn, condescension and outright anger by former Federal Reserve Chair Alan Greenspan, former Treasury Secretary Robert Rubin and his deputy Lawrence Summers.  In fact, Greenspan, the man some affectionately called "The Oracle," spent his political capital cheerleading these disastrous financial instruments.

On Thursday, the New York Times ran a masterful and revealing front page article exposing the culpability of Greenspan, Rubin and Summers for the era of dangerous turbulence we live in.

What these "three marketeers" --as they were called in a 1999 Time magazine cover story--were adept at was peddling the timebombs at the heart of this complex crisis: exotic and opaque financial instruments known as derivatives--contracts intended to hedge against risk and whose values are derived from underlying assets.  To cut to the quick, Greenspan, Rubin and Summers opposed regulating them.  "Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury," recalls Alan Blinder, a former Federal Reserve board member and economist at Princeton University, in the Times article.

In 1997, Brooksley Born warned in congressional testimony that unregulated trading in derivatives could "threaten our regulated markets or, indeed, our economy without any federal agency knowing about it. " Born called for greater transparency--disclosure of trades and reserves as a buffer against losses.

Instead of heeding this oracle's warnings, Greenspan, Rubin & Summers rushed to silence her.  As the Times story reveals, Born's wise warnings "incited fierce opposition" from Greenspan and Rubin who "concluded that merely discussing new rules threatened the derivatives market. " Greenspan deployed condescension and told Born she didn't know what she doing and she'd cause a financial crisis.  (A senior Commission director who worked with Born suggests that Greenspan and the guys didn't like her independence.  " Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys.  There was a little bit of the feeling that this woman was not of Wall Street. ")

In early 1998, according to the Times story, one of the guys, Larry Summers, called Born to "chastise her for taking steps he said would lead to a financial crisis.  But Born kept at it, unwilling to let arrogant men undermine her good judgment.  But it got tougher out there.  In June 1998, Greenspan, Rubin and the then head of the SEC, Arthur Levitt, Jr. , called on Congress "to prevent Ms.  Born from acting until more senior regulators developed their own recommendations. " (Levitt now says he regrets that decision. ) Months later, the huge hedge fund Long Term Capital Management nearly collapsed--confirming some of Born's warnings.  (Bets on derivatives were a key reason. )

"Despite that event," the Times reports, " Congress (apparently as a result of Greenspan & Summer's urging, influence-peddling and pressure) "froze" Born's Commissions' regulatory authority.  The next year, Born left as head of the Commission. Born did not talk to the Times for their article.

What emerges is a story of reckless, willful and arrogant action and behaviour designed to undermine a wise woman's good judgment.  The three marketeers' disdain for modest regulation of new and risky financial instruments reveals a faith-based fundamentalist approach to the management of markets and risk.  If there is any accountability left in our system, Greenspan, Rubin and Summers should not be telling anyone how to run anything.  Instead, Barack Obama might do well to bring back Brooksley Born and promote to his team economists who haven't contributed to the ugly mess we're in. 

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<big><big> <big>"THE LESSONS OF LONG-TERM CAPITAL MANAGEMENT L.P."</big></big></big>
http://www.cftc.gov/opa/speeches/opaborn-37.htm

REMARKS OF
BROOKSLEY BORN, CHAIRPERSON
COMMODITY FUTURES TRADING COMMISSION
CHICAGO KENT-IIT COMMODITIES LAW INSTITUTE
CHICAGO, ILLINOIS

OCTOBER 15, 1998

I last addressed this conference two years ago, shortly after I joined the Commodity Futures Trading Commission ("Commission" or "CFTC"), and I am pleased to be back. I would like to discuss recent events in the over-the-counter ("OTC") derivatives markets and to share some thoughts about the appropriate role of regulation in responding to them.

The events surrounding the financial difficulties of Long-Term Capital Management L.P. ("LTCM") raise a number of important issues relating to hedge funds and to the increasing use of OTC derivatives by those funds and other institutions in the world financial markets. Most of these issues were raised by the Commission in its Concept Release on OTC Derivatives in May 1998. They include lack of transparency, excessive leverage, insufficient prudential controls, and the need for coordination and cooperation among international regulators.

I welcome the heightened awareness of these issues that the LTCM matter has engendered and believe that it is critically important for all U.S. financial regulators to work together closely and cooperatively on them. Therefore, I applaud Secretary of the Treasury Robert Rubin's call for a meaningful study by the President's Working Group on Financial Markets and look forward to working with him and the other members of the Working Group. Swift regulatory responses may well be needed to protect the U.S. and world economy.

1.      Lack of Transparency

While the CFTC and the U.S. futures exchanges had full and accurate information about LTCM's exchange-traded futures positions through the CFTC's required large position reports, no federal regulator received reports from LTCM on its OTC derivatives positions. Notably, no reporting requirements are imposed on most OTC derivatives market participants. This lack of basic information about the positions held by OTC derivatives users and about the nature and extent of their exposures potentially allows OTC derivatives market participants to take positions that may threaten our regulated markets or, indeed, our economy without the knowledge of any federal regulatory authority.

Furthermore, there are no requirements that a hedge fund like LTCM provide disclosure documents to its counterparties or investors concerning its positions, exposures, or investment strategies. It appears that even LTCM's major creditors did not have a complete picture. A hedge fund's derivatives transactions have traditionally been treated as off-balance sheet transactions. Therefore, even though some hedge funds like LTCM are registered with the Commission as commodity pool operators and are required to file annual financial reports with the Commission, those reports do not fully reveal their OTC derivatives positions.

Unlike futures exchanges where bids and offers are quoted publicly, the OTC derivatives market has little price transparency. Lack of price transparency may aggravate problems arising from volatile markets because traders may be unable accurately to judge the value of their positions or the amount owed to them by their counterparties. Lack of price transparency also may contribute to fraud and sales practice abuses, allowing OTC derivatives market participants to be misled as to the value of their interests.

Transparency is, of course, one of the hallmarks of exchange-based derivatives trading in the U.S. Recordkeeping, reporting, and disclosure requirements are established by the Commodity Exchange Act and the Commission's regulations; prices are discovered openly and competitively; and quotes are disseminated instantaneously. Positions in exchange-traded contracts are marked-to-market at least daily, thus ensuring that customers are always aware of the profit or loss on their positions. This transparency significantly contributes to the fact that U.S. futures markets are the most trusted in the world.

A number of questions that commentators are now asking about the lack of transparency in the OTC derivatives market in light of the LTCM matter were raised by the Commission in its Concept Release on OTC Derivatives. In that Release, the Commission specifically sought comment on the need for recordkeeping and reporting requirements and for disclosure by OTC derivatives dealers to their customers. At the time that the Concept Release on OTC Derivatives was published, I emphasized that neither the Commission nor I had preconceived notions of whether changes in the regulation of the OTC derivatives market were needed. Now, as a result of the LTCM episode and other developments in the global economy in the past five months, I have come to believe that more transparency is clearly necessary in the OTC derivatives market.

I am not alone in this view. A report two weeks ago by the G-22 group of industrialized and developing nations called for improved transparency in both the public and private sectors, including an examination of the feasibility of compiling and publishing data on the international exposures of investment banks, hedge funds and other large institutional traders. If reporting and disclosure requirements had been in place in the U.S., some of the difficulties relating to LTCM might have been averted.

2.      Excessive Leverage

While traders on futures exchanges must post margin and have their positions marked to market on at least a daily basis, no such requirements exist in the OTC derivatives market. Reportedly, LTCM managed to borrow approximately 100 times its capital and to hold derivatives positions with a notional value of approximately $1.25 trillion ­ or 1000 times its capital. Indeed, it has been reported that LTCM generally insisted that it would not provide OTC derivatives counterparties with initial margin. LTCM's swap counterparties and other creditors reportedly did not have full information about its extensive borrowings from others and therefore unknowingly extended enormous credit to it. This unlimited borrowing in the OTC derivatives market ­ like the unlimited borrowing on securities that contributed to the Great Depression ­ may pose grave dangers to our economy.

The Commission's Concept Release on OTC Derivatives describes many of the risk-limiting mechanisms of the futures exchanges ­ including mutualized clearing arrangements, marking to market, margin requirements, and capital and audit requirements. The Release requests comment on whether similar protections are needed in the OTC derivatives market. Some market participants have already answered in the affirmative. For example, George Soros is among those currently calling for margin requirements for OTC derivatives transactions. The London Clearing House has applied to the Commission to permit clearing of swaps. Clearing of OTC derivatives transactions could be a useful vehicle for imposing controls on excessive extensions of credit. I believe that it is essential for federal financial regulators to consider how to reduce the high level of leverage in the OTC derivatives market and its attendant risks.


3.      Insufficient Prudential Controls

Closely related to the issue of excessive lending to LTCM is the apparent insufficiency of the internal controls applied by the firm itself and its lenders and counterparties. In the Concept Release on OTC Derivatives, the Commission calls for comment on a number of issues relating to the sufficiency of internal controls and risk management mechanisms employed by OTC derivatives market participants, including value-at-risk ("VAR") models. LTCM now stands as a cautionary tale of the fallibility of even the most sophisticated VAR models. The prudential controls of LTCM's OTC counterparties and creditors, the parties that presumably had the greatest self-interest in assessing LTCM's financial wherewithal, also appear to have failed. They were reportedly unaware of the fund's extensive borrowings and risk exposures. U.S. financial regulators urgently need to address these failures.

4.      Need for a Coordinated International Approach

International regulators have expressed concern for some time about the lack of effective oversight of hedge funds and other large users of OTC derivatives and their ability to avoid regulation by any one nation in their global operations. Indeed, several emerging market countries have attributed crises in their currencies and markets to the actions of large hedge funds. The LTCM situation presents a new opportunity for the Commission and other U.S. regulators to work with authorities in other countries to harmonize regulation of the OTC derivatives market and to implement international regulatory standards. The recent report by the G-22 is an important step in this direction and demonstrates a growing international consensus regarding the need for increased transparency. A study by the G-22 of how to implement reporting requirements will proceed more or less in parallel with the President's Working Group study on the regulatory implications of the LTCM episode. Important work by the International Organization of Securities Commissions ("IOSCO") on the need for transparency and large position reporting related to exchange-traded derivatives will be useful to the G-22 study and the President's Working Group study on OTC derivatives.

*          *             *            *            *

In conclusion, there is an immediate and pressing need to address possible regulatory protections in the OTC derivatives market. The LTCM episode not only has demonstrated the potential risks posed by the OTC derivatives market for the domestic and global economy, but also has highlighted the importance of the safeguards in place for exchange-traded futures and options. Obviously, regulation must be adapted to the particular marketplace and must address the risks to the public interest that that market poses. Thus, regulatory solutions for exchanges are not necessarily appropriate for the OTC market. Nonetheless, the markets involve similar instruments and pose many of the same risks, and our successful experience with the U.S. futures exchanges will be invaluable in the study of the OTC derivatives market.

Thank you.

---

<big><big><big>The World According to Brooksley Born</big></big></big>
http://www.derivativesstrategy.com/magazine/archive/1997/0597qa.asp

Less than six months after she became the seventh Chairperson of the Commodity Futures Trading Commission, Brooksley Born discovered that a number of powerful congressmen wanted to dramatically limit her power to regulate the futures markets. The most controversial aspect of the new legislation sponsored by Senator Richard Lugar and others-and supported by the Chicago exchanges-is a proposal that would allow the exchanges to create "professional markets" that would be free of federal regulation.

In the last few weeks, Born has plunged into an active round of lobbying to save her agency and the cause of futures regulation. She is no stranger to Washington power plays. Before joining the CFTC, Born was a partner at heavyweight D.C. law firm Arnold & Porter, where she specialized in representing institutional and corporate clients in futures regulation matters. She speaks as a woman who knows the power of words and chooses them carefully. The interview took place in March with Editor Joe Kolman.

We present a number of differing viewpoints on the professional markets exemption in the Roundtable Section.

Derivatives Strategy: You've said that sophisticated institutional traders don't need the same degree of protection that retail investors do. But that begs the question: what protections do they need?

Brooksley Born: I do think they need protection against fraud and manipulation in these markets. Currently the CFTC conducts market surveillance and oversight over all the futures exchanges. We have people on the floor of the exchanges watching for trading violations. The exchanges are required to keep detailed records of trading, and we get reports from the exchanges and from traders on the markets, showing what the position of large traders is, for example. None of those things would be available as to professional markets under the proposed legislation. The federal government would not have an oversight role at all.

There are standards in the statute and the regulations that deal with trading practices and that are designed to prevent and deter abuses on the floor of the market-such as the audit trail requirement that allows us to see whether floor brokers are trading in front of their customers. There are standards prohibiting trading in front of the customers, wash sales, other kinds of illegal transactions-all that would be eliminated.

There are rules about the fitness of people who represent customers on the floor of the exchanges or act as intermediaries or FCMs (futures commission merchants). These include prohibitions against convicted felons doing this work. There are ethics training requirements, net capital requirements and requirements for segregation of customer funds. All of those requirements would be eliminated if the professionals restricted their activities to exempted markets.

DS: The exchanges would argue that all these things-audit trails, registration, fitness-would still operate under their own self-regulatory regimes. Why don't you believe them?

BB: I think it would be likely that some exchanges would do more than others. We already have difficulties that result in bringing enforcement actions because of misbehavior on the floor of exchanges. Right now all the exchanges impose standards on their own markets that were adopted in the statutory scheme. Under the legislation, those standards would be eliminated. The exchanges also impose some of their own standards. But that doesn't mean we don't have a very active enforcement program for abuses or that we don't work very closely with the exchanges to make sure they're complying with their self-regulatory responsibility.

DS: So you're saying the current self-regulatory efforts are simply not enough

BB: I believe there is a need for federal oversight to ensure compliance with those self-regulatory standards, and I think there should be federal standards for self-regulation. These standards would be totally eliminated in exempt markets by the proposed legislation.

DS: Under the professional market exemption legislation, exchanges would be able to determine which of their pits would become professional-and thus exempt from federal regulation. Are you afraid that the exchanges would turn most of the pits into professional markets?

BB: The exchanges say that more than 90 percent of the volume of trading on the exchanges today would be eligible for the professional markets exemption. I am concerned that the reason the exchanges are pushing so hard for this pro markets exemption is that they want to use it to eliminate federal oversight of their markets.

Another thing to remember is that trading in futures on U.S. government securities and foreign currency could be exempt under these bills, not only under the pro markets exemption but also under the Treasury Amendment's provisions. If so, they would even be exempt from the federal prohibition against fraud and manipulation. The Treasury Amendment revisions in the two bills would allow for the complete elimination of any applicability of the Commodity Exchange Act to futures markets in government securities or foreign currency, as long as the participants in those markets were somewhat more restricted than "the general public." What that means hasn't really been elaborated on.

DS: What kind of fraud do institutional investors have to fear if there were no regulatory controls?

BB: Suppose, for example, a floor broker who was assigned to execute an order on the floor of the exchange didn't do so at all, but instead made a private deal with one of his friends off the floor. We bring cases against that now

DS: ...despite the best efforts of the exchanges themselves. I suppose your argument is that exchanges may be trying their best now but an outside authority is necessary to really do the job properly.

BB: Yes, and also the exchanges, of course, are required by law to do their best. But under the legislation, they would no longer have that legal requirement. There would only be self-interest at work in terms of the motivation of the exchanges to maintain a well-designed and effective self-regulatory regime.

DS: And as a government regulator, you think that really isn't enough...

BB: Historically it certainly has not been enough in the futures and options markets.

DS: The exchanges argue that under the law, the CFTC would still be able to demand records and prosecute trading violations after the fact.

BB: We would be able to bring actions for fraud and manipulation, but the provisions relating to other trading abuses that are presently in our statute would not be applicable.

DS: What kind of trading abuses are we talking about?

BB: Things like wash sales or noncompetitive trading. We would have to be able to prove that trading actually involved fraud on a customer. That might be a much heavier burden of proof than we have today in many cases. But beyond that, there would be no guarantee that we would have the records available for our enforcement people since there would be no record-keeping requirements under the act.

Right now, the people who trade on the floor have to keep records, and the exchanges have to keep records. Under the proposed elimination of federal oversight, the record-keeping requirements would be gone. So if fraudulent traders on the floor wanted to, they could decide not to keep records or destroy their records. And they would not violate any federal law unless we actually had a subpoena out for them. It would also be harder to detect these abuses early on. So it would only be likely that we would find out about them if there either was a tremendous upheaval on the market or a customer came to us with a complaint. That might be substantially later than when we typically get involved now.

DS: So if someone wanted to corner the market in silver again or if they wanted to try it with the S&Ps, under the legislation you would be relegated to the sidelines, unable to prevent anything from happening.

BB: We would probably not have early warning of it. In the silver cases, for example, the commission did have large trader reports from the Hunts and other market participants that alerted the commission to the fact that large positions were being accumulated. We would no longer have that information until there was such a dramatic impact on the price of silver that it was clear that some improper behavior was occurring.

DS: But is there any evidence that the exchanges actually have plans to totally eliminate the record-keeping you need to do your job?

BB: The CBOT wrote me a letter at the end of January saying it believed it was entitled to the same elimination of federal regulation the OTC market enjoys. It said that the undue regulation to which it was subjected under the act included a number of things, and it started the list with record-keeping and reporting and ended with having to deal with federal enforcement officers.

DS: So that leads you to believe that if this bill passes, exchanges will take advantage of the legislation to the fullest.

BB: Usually the reason interest groups press for legislation is because they want to use it.

DS: Are you as afraid of abuses on existing exchanges as you are of new exchanges being formed that might become a sort of a lawless Wild West of trading?

BB: I'm not sure whether under the Senate bill any entity other than an existing futures exchange would have the advantages of creating an exchange free of regulation. The Futures Industry Association in its testimony on the Senate bill in February said that the Senate bill should be broadened so that anyone, including futures commission merchants, would be free to create a market in a futures contract and not have any provision of the act applicable to it.

DS: Some people fear a scenario in which the legislation passes and there are suddenly all these unregulated trading systems-perhaps on the Internet-where caveat emptor is the only rule that applies.

BB: If you are going to have unregulated exchanges, it's difficult to justify limiting the unregulated exchanges to a small group of entities. The futures exchanges seem to be saying that they don't want federal oversight or regulation but they do want the antitrust exemptions that have allowed them to have a monopoly on exchange trading. I'm not sure you can justify that kind of monopoly if there isn't significant regulation.

DS: So if the current regulatory environment ends, it's conceivable that a legal case would challenge certain protections that these exchanges have right now.

BB: Under the act, they also are protected from certain state laws. They also have protection from private rights of action that might otherwise exist.

DS: So is it conceivable that state gaming laws would become applicable to trading on the CBOT or Merc?

BB: I think that's an issue that probably would be explored.

DS: The exchanges have been vociferous in their complaints about the competitive edge that they are losing to the OTC market. You don't put much stock in these complaints. Why?

BB: Largely because the exchanges have experienced such healthy growth in the last decade. They have more than doubled their trading-an increase of 130 percent in the last 10 years.

DS: But the OTC market is up 500 percent.

BB: That's because it's gone from nothing to become a very substantial market. The CBOT has just had its best year and is the largest futures exchange in the world. Its profits were up 26 percent last year over 1995. It is true that the U.S. futures exchanges are experiencing competition and have been experiencing it in the last 10 years-probably for the first time in any significant way-from the OTC market and from exchanges being established abroad. On the other hand, I think they are doing quite well competitively. These other markets have grown up because they provide additional services-not because our futures exchanges are too heavily regulated.

DS: In certain cases-the listed currency markets are most obvious example-the OTC market clearly has advantages that have allowed it to take over much of the volume from the currency pits.

BB: The OTC cash market in foreign currency has always been much larger than futures exchange trading in foreign currency. There was an enormous interbank market in OTC foreign currency transactions in 1974 when the statute was first extended to foreign currency futures exchange trading. So I'm not sure that's really a significant change in circumstances.

DS: You said you were surprised by the positions of the FIA and the exchanges on this legislation. They've always complained about undue regulation. What was so unexpected?

BB: I didn't say I was surprised by the exchanges' position. It seems to me the exchanges see a self-interest in having federal regulation eliminated the way most industries would see some self-interest in that. I was surprised by the Futures Industry Association because it's essentially an association of commodities professionals-futures commission merchants and others who make their profits representing customers on the futures exchanges. It surprised me that they took the position that they would support pro markets in their Senate testimony.

I was surprised because these people rely on customers who have confidence in the fairness and safety of these markets in terms of being willing to commit funds to them. I imagine that there could be a significant diminution of that confidence if our markets became the least-regulated in the world. All other countries with established futures markets would have significantly higher levels of regulation than our pro markets.

DS: A final question about the OTC market: What anti-fraud and anti-manipulation powers do you think the CFTC should have over the OTC market, and is there any new role you foresee in this area?

BB: We have traditionally maintained fraud and manipulation prohibitions and enforcement capabilities over those markets to the extent those markets involve futures and options operations, and we think those powers should continue.