The Warning

October 20, 2009 3:32 PM

Tonight on PBS, Frontline airs a new investigative report entitled The Warning (sneak peaks 1 & 2), which profiles Brooksley Born, who (as head of the CFTC from '96-'99) was almost alone among regulators in warning of the potential dangers of derivatives.
posted by HP LaserJet P10006 (34 comments total)

The site will feature:

A video timeline

Interviews with Born, Arthur Levitt, Joseph Stiglitz, Gary Gensler and Michael Greenberger

Analysis including more about Brooksley Born, the Alan Greenspan era, why derivitives were created and what went wrong, what ought to be done now, what if they had listened to Born?, and the forewarning in 1998

Naturally the whole show will be available online and you can join the discussion.

And don't miss the readings, site map, press reaction and especially the credits!
posted by Mayor Curley at 3:48 PM on October 20

I first heard of derivatives in a wildly unflattering 60-Minutes piece in the '90s, and was shocked that they were still around. Prescient, and well worth watching.
posted by coolguymichael at 3:57 PM on October 20 [3 favorites]

If you are the chairperson of the regulatory commission, can't you do more than warn?
posted by smackfu at 4:35 PM on October 20

If you are the chairperson of the regulatory commission, can't you do more than warn?

As I understand it, in 1998 Born began a process to do just that, but wa ganged up on by Greenspan, Rubin, Summers, et al., and her early efforts to regulate this totally unregulated market were shot down by the most powerful people advising Clinton at the time. The wiki link in the FPP has more details.
posted by HP LaserJet P10006 at 4:41 PM on October 20

If you are the chairperson of the regulatory commission, can't you do more than warn?

This is discussed in chapter 4 of the online version of the show.
posted by Mayor Curley at 4:45 PM on October 20

My cousin works for a Fortune 500 investment firm, and warned me about the sub-prime collapse 6 months before it happened. In fact, he didn't even have to warn me. He just told me how the system was structured, and smiled as I drew my horrified conclusion.

It was pretty obvious to everyone involved in the mortgage market. Most of them simply kept their mouths shut.

On a side note, every time you read "conspiracy theory" just replace it with "class loyalty" and suddenly the thing won't sound so crazy.
posted by clarknova at 5:13 PM on October 20 [8 favorites]

"It was pretty obvious to everyone involved in the mortgage market."

It was pretty obvious to anyone paying any attention at all. I'm not even in the states and it was obvious at least a year out that a meltdown was coming and it was going to be oh so bad. I so wished at the time that I had both the know how to cash in on the crash and the nerve to ride out the expanding bubble until it collapsed.
posted by Mitheral at 6:24 PM on October 20 [1 favorite]

--Top banks cut small business lending by $8 billion
--FDIC chief: Small banks can't compete with bailed-out giants
--Niall Ferguson on why we're not out of the hole yet
posted by HP LaserJet P10006 at 6:38 PM on October 20 [1 favorite]

Bit meh, really. A Blowjob for Brooksley Born would be a handy alternate title. She seems like a perfectly nice lady, and was indeed trying to do the right thing. But this didn't cover much new ground that hasn't been laid out in many and varied other venues in the coverage of the crisis. If you've been following this, you probably know this stuff. If you haven't it might make a handy intro to some of the issues.
posted by Diablevert at 6:59 PM on October 20

How can someone with a name like Brooksley Born expect to be taken seriously?

It's like getting your political advice from Berkeley Breathed!
posted by markkraft at 7:31 PM on October 20 [1 favorite]

Please extra regulation will do little to stop this from happening in the future. As long as private contracts can be made between corporations you'll find someway of selling liabilities to other parties, they just won't call it whatever it is that is being regulated. As businesses become increasingly linked through liabilities, revenues or parts of their supply chain, you're going to see small problems ripple through. The only way to secure such systemic risk is to reduce the huge players like AIG that can take down everyone or at least regulate them so there are no surprises.

Really Clinton and the Republicans of the late 90s stripped the SEC of any actual power they had. They were mainly going after fly by night brokers, even as the Enron scandal came to light. Bush further took out any teeth the SEC might have had and while we should have been focusing on this post-Enron crash, 9/11 happened and everyone else that was playing with the numbers began to rationalize how they weren't Enron. I've mentioned it before but David Einhorn's "Fooling Some of the People All of the Time" really illustrates how the SEC really gave two shits about anyone with expensive lawyers who could swing the "no government in business" stick at them.

Really you can keep on regulating but you'll always run into people who'll come up with clever things to skirt regulations. They'll make good, rational cases how what they're doing is not technically breaking Basel IV or whatever and regulators will smile, say you know you're right, and walk over to the guy pushing penny stocks on grandmas. What you really need is an oversight that lawyers or doctors face. Setup an ethics committee and give those people real, independent power. You can make the case that anyone facing an ethics board would possibly be facing their ex-peers or that it is full of Goldman boys, but the same sort of thing happens in law all the time, the difference being that judges hold their office in higher regard than their professional connections. Start treating Jeff Skilling like a medical malpractice case and you'll suddenly see a huge drop in those smart kids trying to turn housing markets into ATMs. Sure people will still try to do it, but only the crazy ones and those are a lot easier to catch.
posted by geoff. at 7:53 PM on October 20 [1 favorite]

Dupe?
posted by humanfont at 7:59 PM on October 20

geoff, if you think the medical or legal professions are somehow more ethical because of some "board", I've got a bridge to sell you.

Self-regulation is the biggest farce in the world - MetaFilter included. Once the system becomes large enough, and the profits become interesting enough, corruption and gaming are inevitable, which is precisely why a regulator that ISN'T a revolving door for the industry it regulates is necessary. When the SEC and Treasury were purchased by vested financial interests, it went downhill, fast.

Good post, I wouldn't have seen it otherwise.
posted by SeizeTheDay at 8:04 PM on October 20 [1 favorite]

Oh, and fuck Obama and his policies. He let the greatest financial catastrophe slip through his fingers so he could pass some shitty, watered-down, bullshit healthcare plan. He wasted his political capital on a bloated, pork-laden stimulus that's created no jobs, propped up financial institutions with no recourse (letting Goldman and JPMorgan pay off those warrants was particularly egregious), and if I'm right and Dems lose in the interim election, he'll be out in 1 term, going down as the President who forgot that "it's the economy, stupid."
posted by SeizeTheDay at 8:11 PM on October 20

geoff, I agree that runaway speculation and unregulted trading are difficult to curb, and I think we should try a variety of approaches, perhaps including what you suggest, but also coupled with robust regulation. After all, if there had been any regulation of derivatives in the 1990s (after P&G sued BT or the fall of LTCM), we might have at least partially prevented the kind systemic risk these markets came to pose. As it is we now have megabanks and parasitic practices that are undermining our ability to move forward without threat of further crisis.
posted by HP LaserJet P10006 at 8:19 PM on October 20

Where are the perp walks? Where are the people who are in jail who caused this mess? I still don't see anything in new legislation that will enable us to better defend against a run on the bank of the US Taxpayer 15-20 years from now when this collapse is just a memory.
posted by gen at 9:15 PM on October 20

My father just pointed me to this frontline doc, and then told me that one of his friends from Arthur D. Little named Fischer Black told him way back when, before he died of brain cancer, that "we need to regulate the hell out of these things." Fischer Black knew because he helped design them.

From wikipedia: "Black has also received recognition as the co-author of the Black-Derman-Toy interest-rate derivatives model, which was developed for in-house use by Goldman Sachs in the 1980s but eventually published."

This just makes me so upset with grown ups, the damage these bankers and ayn rand apologists have done to me personally and the world at large is criminal, and I really wish they would be treated as such.
posted by pwally at 9:37 PM on October 20

And why in the WORLD does Obama have Larry Summers and Geithner at the helm? I mean What. The. Flying. F-word. It's like hiring they guy who assaulted you to be your lawyer.
posted by pwally at 9:41 PM on October 20 [2 favorites]

And why in the WORLD does Obama have Larry Summers and Geithner at the helm? I mean What. The. Flying. F-word. It's like hiring they guy who assaulted you to be your lawyer.

Class loyalty. Same as it ever was.
posted by peppito at 10:12 PM on October 20 [1 favorite]

It's like hiring they guy who assaulted you to be your lawyer.

The same people who created the leverage that fcuked the US banks are the same people who are being paid to clean up the mess at the banks they wrecked and the US Taxpayer bailed out.
posted by gen at 10:21 PM on October 20

The otherwise very wealthy Orange County in California went broke, losing $1.6 billion because of derivatives in 1994. We never learn. This will happen again in 15 years, if not sooner.
posted by eye of newt at 10:45 PM on October 20

Echoing Mitheral, I grow increasingly weary of the 'only the prescient and plugged-in could have seen it coming'. Fuck that noise. Anybody with two goddamned brain cells to rub together saw it coming. Myself included, and I've been down to my last brain cell for years.

That kind of bullshit just abdicates personal responsibility in favour of granting it to authority figures and technocrats and manipulative media figures, and ramps up the feedback spiral of willful stupidity and victim self-identification that's got us all circling the toilet bowl.
posted by stavrosthewonderchicken at 11:04 PM on October 20 [2 favorites]

She wasn't the only one that sounded the alarm many years beforehand.

You'll learn more that's worth knowing (and maybe get sick to your stomach) by reading this: Wall Street's Naked Swindle. It all started back in 1968 with the Central Certificate Service ...

posted by Twang at 2:49 AM on October 21 [1 favorite]

--Niall Ferguson on why we're not out of the hole yet

Ha Ha, Niall Ferguson calls the remaining firms "survivors."

NPR Fresh Air: Andrew Sorkin's 'Inside Story' On Financial Collapse

Mr. SORKIN: A lot of the people who are still in business today think of themselves now as survivors, and they use the word survivors as if they're cancer survivors. And I'm not sure there's an appreciation that they were saved by the taxpayer and that they owe something back not only to the taxpayer, but to the community as a whole. And that's something that has been completely lost on these people. And, you know, there are not many heroes in this book.

You know, you could argue that some of them may, in fact, be villains. But it is something that bothers me to this day about how little self-awareness there still is about what they did to bring us to the brink and how they were saved and the responsibility they should have now.

GROSS: Let's give an example. I mean, Goldman just reported its earnings for the third quarter were $3.19 billion. And they…

Mr. SORKIN: Unbelievable, right?

GROSS: Yeah, and they're giving out huge bonuses.

Mr. SORKIN: Unbelievable.

GROSS: And so, you know, for we the taxpayers, it's like when you think of all the people who lost their jobs, who lost their retirement funds, and as a result of losing their jobs, lost their health insurance…

Mr. SORKIN: Right.

GROSS: …and their homes, to think, you know, that they're getting these huge bonuses at places like Goldman Sachs just seems outrageous. How does Goldman Sachs even try to justify that?

Mr. SORKIN: Well, let me just go back for one second, which is to say to me, the most gulling part about the bonuses is where the profits are coming from. The profits are not coming from lending. I think Americans would feel a lot better if banks were lending money to small business owners, to people who needed an auto loan, to people who needed a mortgage. If the banks were profiting doing that, I think we might actually all say maybe this is okay. The problem is that these profits are coming from trading, and that's what's got us in trouble the first time. That's what these banks were doing.

GROSS: Risky trading, you're talking about.

Mr. SORKIN: Risky trading.

posted by peppito at 2:52 AM on October 21 [1 favorite]

They can't lend. If they lend, they lose all the money propping up the failed mortgage notes they're still holding on to and not allowing to come to market. The bailout money is being used as a hedge against mark-to-market. Because the banks know full-well the numbers on their books are written in bullshit.
posted by Civil_Disobedient at 5:43 AM on October 21

At a certain point, if a bank's not lending but only trading, then it's not a bank.. it's a trading firm, and all of their federal protection should be dropped.
posted by pwally at 6:51 AM on October 21 [1 favorite]

When are we allowed to get REALLY REALLY FUCKING ANGRY about this?

I'm ready to go, I just need the word. Some inclination that somewhere, somehow is going to step in, point at these motherfuckers and say "Enough!"

I know it's delusional, but I can hope.
posted by Lord_Pall at 7:49 AM on October 21

Previously. Previously. Previously. Previously. Previously. Previously.
posted by albrecht at 8:58 AM on October 21

Oh, and fuck Obama and his policies ... He wasted his political capital on a bloated, pork-laden stimulus that's created no jobs...

While I agree that Obama has entirely dropped the ball on both the financial crisis AND healthcare, it's utterly untrue that the stimulus created "no jobs." In my state (Nevada) a number of the "shovel-ready jobs" have already begun -- those jobs don't do themselves. And there's lots of stimulus $$ still unawarded or undistributed.

It would be totally correct, on the other hand, to say that the stimulus resulted in a seriously disappointing number of new jobs. Or that the distribution of those funds is comically (or not so comically, depending on your state) haphazard. But when you parrot the opposition's false talking points, you negate the value of the rest of your message.
posted by coolguymichael at 12:02 PM on October 21 [1 favorite]

Parrot opposition's talking points? I don't need Republican crib notes to tell me that the stimulus is/was ineffective. And if you take my statement about zero jobs literally, I'm not sure that you're my target audience.

Note, I also said that we propped up financial institutions with no recourse. That's not entirely true either, and yet you didn't point that out. My comment wasn't meant to be taken literally, and the fact that you'd point to the stimulus being marginally effective, yet don't defend the banks, AND accuse me of parroting talking points is a greater indication of your politics than mine.
posted by SeizeTheDay at 12:31 PM on October 21

Um - what part of "I agree with you" is difficult to understand? You made an incorrect statement. I corrected it.
posted by coolguymichael at 12:57 PM on October 21

Goldman Adviser Says Inequality Helps All
posted by HP LaserJet P10006 at 1:07 PM on October 21

The part where you accused me of parroting talking points. I will weight that insult far more heavily than any "I agree with you, BUT..."
posted by SeizeTheDay at 1:17 PM on October 21

Goldman Adviser Says Inequality Helps All

Ha, Trickle Down Goldmanomics. Lovely.
posted by peppito at 1:19 PM on October 21