A Warning We Should Have Heeded

Nice article in the Telegraph about Brooksley Born who tried and failed to get former President Clinton to regulate derivatives.

Admirably independent, Born issued warnings about the systemic dangers posed by America’s vast and entirely unregulated “over-the-counter” derivatives market. Worth some $600,000bn (£375,000bn) today, having grown 20-fold since Born first raised the alarm, there is now near-universal agreement this massive expansion, and the counter-party risks involved, did a lot to cause the current crisis.

When she issued her warnings, though, Born was treated disgracefully. As a first step, she asked financial institutions for data about OTC derivative trading. But Clinton’s Treasury and Alan Greenspan’s Federal Reserve issued a joint statement expressing “grave concern about this action and its possible consequences”. Larry Summers, then Deputy Treasury Secretary, said Born’s request “cast the shadow of regulatory uncertainty over an otherwise thriving market, raising risks for the stability and competitiveness of American derivative trading”.

As Born recently observed: “Recognising the dangers wasn’t rocket science … but it was contrary to the conventional wisdom and the economic interests of Wall Street”.

If only that last sentence could somehow be implanted in the brains of those that will have a say in the financial regime that emerges from this chaos. Forget the conventional wisdom and go against not just the economic interests of Wall Street but against vested interests period.

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