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Brooksley Born, the Cassandra of the Derivatives Crisis

Consolation Prize

Born got her clerkship, but at the 9th U.S. Circuit Court instead of the Supreme Court, then signed on at the prestigious Arnold & Porter law firm. Marriage -- to Jack C. Landau, an attorney and journalist who was one of the founders of the influential Reporters Committee for Freedom of the Press -- followed, and a son, Nicholas, was born during a year leave for her husband's Nieman Fellowship at Harvard. Sarah Hughes, the pioneering federal judge who swore in Lyndon B. Johnson as president on Air Force One after the Kennedy assassination, had once told her that if she wanted to be a success, she "needed to give up everything in terms of a family life and dedicate myself exclusively to the law."

But, back in Washington, she had other plans. Ahead of her time, she found a solution to the work/family conundrum: She went part time at the law firm and still managed to make partner. She also became the first female head of the ABA's federal judiciary committee, which at that time played a make-or-break role in the confirmation of Supreme Court justices. In 1981, she conducted a review of President Reagan's nominee, Sandra Day O'Connor. The lawyer who couldn't get a Supreme Court clerkship because she was a woman was about to help usher in the country's first female justice and she "was thrilled."

Born was seriously considered for attorney general in 1992, but eventually lost out. Four years later, she got her consolation prize: the chairmanship of the Commodity Futures Trading Commission, an afterthought in the Washington power game that Waldman, Born's eventual general counsel there, called "a sleepy little agency."

The CFTC had been created in the 1970s, primarily to regulate futures contracts purchased by farmers to hedge against price fluctuations. But by the time Born took office in 1996, futures were a much more sophisticated game.

Four years earlier, the CFTC had created a giant opening for sharp market players, exempting most privately negotiated over-the-counter derivatives contracts from regulation. Waldman calls the decision "the seed" of the current financial crisis because bad bets on unregulated derivatives crippled large firms such as Bear Stearns and AIG last fall.

In the late 1990s, the seed had sprouted into a $25 trillion derivatives market and Born saw trouble coming. The mostly unregulated "dark markets" had shown signs of danger in the preceding years, such as the bankruptcy of Orange County, Calif., which lost heavily investing in derivatives. Born's agency set its sights on a highly caffeinated market.

"I was very concerned about the dark nature of these markets," Born said. "I didn't think we knew enough about them. I was concerned about the lack of transparency and the lack of any tools for enforcement and the lack of prohibitions against fraud and manipulation."

Based on her lunch with Greenspan, Born knew she would run into heavy resistance.

"Brooksley's view was that he didn't believe in regulation," Waldman recounted.

But Born did, and she was about to demonstrate it.

Deaf Ears

In early 1998, Born's plan to release her concept paper was turning into a showdown. Financial industry executives howled, streaming into her office to try to talk her out of it. Summers, then the deputy Treasury secretary, mounted a campaign against it, CFTC officials recalled.

"Larry Summers expressed himself several times, very strongly, that this was something we should back down from," Waldman recalled.

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