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Brooksley Born, the Cassandra of the Derivatives Crisis

In one call, Summers said, "I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II," recounted Greenberger, a University of Maryland law school professor who was Born's director of the Division of Trading and Markets. Summers declined to comment for this article.

The discordant notes crescendoed in April 1998 during a tension-filled meeting of the President's Working Group, a gathering of top financial regulators that periodically met behind closed doors at the Treasury Department. At that meeting, Greenspan and Rubin forcefully opposed Born's plans, Waldman said.

"Greenspan was saying we shouldn't do it," Waldman recalled. "Rubin was saying we couldn't do it."

The next month, Born released her concept paper anyway.

Within weeks, she was under attack. Lauch Faircloth, then a Republican senator from North Carolina, took to the Senate floor to call her "a rogue regulator." A Boston Herald column accused her of a "power grab. . . . She reached for that brass ring and in doing so cast a pall of legal uncertainty." Greenspan, Rubin and Levitt jointly urged Congress to pass a moratorium on the CFTC regulating over-the-counter derivatives.

With emotions running high, Born was summoned to the office of House Banking Chairman Jim Leach, a Republican from Iowa, to meet with top officials from the Fed and the Treasury. Born raced to Capitol Hill from the bedside of her daughter, Ariel Landau, then 27, who was about to undergo knee surgery.

"The feelings in the room were very tense," recalled Leach, who said he felt the CFTC was too small to govern over-the-counter derivatives and wanted derivatives moved to clearinghouses regulated by the Fed or the Treasury. "In my time in public life, I have never seen the executive branch so bifurcated. You had a feeling that the Fed and the Treasury didn't have a great deal of respect for what the CFTC was made of."

Also, "There were some very profound personality clashes between Rubin and [Born], and Greenspan and her," Leach said. "They felt, I think, that they understood finance better than she did."

Barbara Holum, who was a CFTC commissioner at time, said Born irreparably damaged the agency's reputation by releasing the concept paper without achieving a consensus.

"They didn't trust her anymore; it was a matter of style, not the regulatory approach," Holum, now retired, said recently. "When she left the CFTC, the agency was back in good graces."

Born's supporters, though, said she was only exercising her agency's independence and that the other regulators simply dismissed her.

"She was not a charming, motherlike figure, which may have been what they were looking for," Greenberger said. "Her professionalism, and maybe, her lack of bonhomie had been interpreted as stridency."

"If you could fault her for anything, it's not recognizing the politics," Waldman said. "She assumed the force of her ideas were going to be sufficient."

But then, in September 1998, a huge hedge fund that had bet heavily on derivatives -- Long-Term Capital Management -- nearly failed and had to be bailed out by a group of banks. Here was a living example of Born's prophecy. Even Leach, who supported the moratorium on CFTC regulatory action, introduced Born at a hearing by saying, "You're welcome to claim some vindication, if you want."

Born responded: "I certainly will not do so." But she went on to tell the committee that the Long-Term Capital debacle "should serve as a wake-up call about the unknown risks in the over-the-counter derivatives market."

No one woke up. That same month, Congress passed the moratorium. Born says they were "muzzling an independent agency." Two months later, Born announced that she would not seek reappointment to a second term. She left office in April 1999.

She has never said she resigned because her regulatory efforts were thwarted; she says even today that she merely wanted to return to practicing law. Either way, she was finished as a government regulator and so was any hope that light would come to the Dark Markets.

Belated Respect

Born, who retired in 2003, is now more likely to fixate on the weather report -- ever looking for good sailing conditions -- as the financial world. She and her second husband -- a retired Arnold & Porter partner named Alexander Bennett -- split time between Washington and a summer home on Squirrel Island, Maine, and keep a 32-foot Morris sailboat and a 28-foot powerboat in Galesville, Md.

She maintains a little office at Arnold & Porter, where she tinkers with ABA projects, such as a sprawling oral history of women in the law. Almost every week, it seems, someone is giving her props on Capitol Hill.

At a recent hearing, Democratic Sen. Maria Cantwell, of Washington state, pointed out that Summers had opposed Born's effort to regulate over-the-counter derivatives.

"There's a few people in the administration who still can't say that it was a mistake, and those are the same people, I think, who ar e slow-walking, thinking we're all going to forget about this regulatory reform that is needed," Cantwell said recently. "I can assure you that we're not going to forget . . . my patience is running out with the administration."

Born keeps informed, but she has other concerns, bird-watching jaunts and trips to Antarctica to plan, mystery novels to read, four grandchildren to dote on. "I'm very happily retired," she says. "I've really enjoyed getting older. You don't have ambition. You know who you are."

Sometimes this woman -- whose mother always made her wear white gloves when they went downtown -- doesn't bother dyeing her hair, letting it go gray.

"I go through phases," she said one afternoon, smiling and drawing a thin, small finger across her head. "I was just looking in the mirror this morning and thinking, 'Maybe it's time.' "

Last week, with her hair colored and the gray gone, she traveled to Boston to receive the John F. Kennedy Profiles in Courage award. Finally, though perhaps too late, everyone wanted to listen to Brooksley Born. She once again warned about the danger of Dark Markets, now grown to $680 trillion of notional value, according to the Bank for International Settlements -- "more than 10 times the amount of the gross national product of all the countries in the world.

"If we fail now to take the remedial steps needed to close the regulatory gap," Born said, "we will be haunted by our failure for years to come."

All during her spotlight turn at the John F. Kennedy Library, of course, she clutched a handbag.

Staff researcher Alice Crites contributed this report.

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