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Credit Crisis Cassandra
Brooksley Born's Unheeded Warning Is a Rueful Echo 10 Years On

By Manuel Roig-Franzia
Washington Post Staff Writer
Tuesday, May 26, 2009

Friends nudge the woman who saw the catastrophe coming.

They want Brooksley Born to say four words, four simple words: "I told you so."

Ah, but she won't -- not at legal conferences or dinner parties. Not even in a quiet moment in her living room, giving her first interview with a major news organization since last fall's economic collapse.

She just smiles, perched ever so properly in an upholstered armchair at her Kalorama home.

"More coffee?" she asks daintily, changing the subject.

A little more than a decade ago, Born foresaw a financial cataclysm, accurately predicting that exotic investments known as over-the-counter derivatives could play a crucial role in a crisis much like the one now convulsing America. Her efforts to stop that from happening ran afoul of some of the most influential men in Washington, men with names like Greenspan and Levitt and Rubin and Summers -- the same Larry Summers who is now a key economic adviser to President Obama.

She was the head of a tiny government agency who wanted to regulate the derivatives. They were the men who stopped her.

The same class of derivatives that preoccupied Born -- including the now-infamous "credit-default swaps" -- have been blamed for accelerating last fall's financial implosion. But from 1996 to 1999, when Born was the chairman of the Commodity Futures Trading Commission, the U.S. economy was roaring and she was getting nowhere with predictions of doom.

So, upstairs in the big house in Kalorama, Born tossed and turned. She woke repeatedly "in a cold sweat," agonizing that a financial calamity was coming, she recalled one recent afternoon.

"I was really terribly worried," she said.

Before taking office, Born had been a high-octane attorney, an American Bar Association power player, a noted advocate of feminist causes and co-founder of the National Women's Law Center. But none of that carried much weight when she crossed over into government; for all her legal experience, she was a woman who wasn't adept at playing the game. She could be unyielding and coldly analytical, with a litigator's absolute assertions of right and wrong. And she was taking on Beltway pros, masters of nuance and palace politics. She marched into congressional hearing after congressional hearing -- pin neat, always with a handbag -- but no one really wanted to listen.

The Wall Street Journal declared that "the nation's top financial regulators wish Brooksley Born would just shut up." The Bond Buyer newspaper compared her to a salmon "swimming against raging currents."

That last one cracks her up.

"Maybe not an inappropriate analogy!" she says.

Now that she is retired and far from a position of influence, Born, 68, may be closer than ever to vindication. No longer an outlier, she attended a small, private dinner at the Treasury Department last week with current and former regulators at the invitation of Secretary Tim Geithner, according to two sources. And the Obama administration has unveiled a plan to regulate some of the derivatives she warned about, though the proposal must still get through Congress and falls short of regulating the entire over-the-counter market that kept her awake all those years ago.

Still, maybe -- just maybe -- her old friends say, the people in charge are beginning to realize what they thought all along: "the lady with the handbag was right."

The Maestro Balks

Born's baptism as a new agency head in 1996 came in the form of an invitation. Federal Reserve Chairman Alan Greenspan -- routinely hailed as a "genius," the "maestro," the "Oracle" -- wanted her to come over for lunch.

Greenspan had an unusual take on market fraud, Born recounted: "He explained there wasn't a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him."

This made no sense to her. She'd spent much of the 1980s defending clients caught up in a vast conspiracy by two wealthy brothers, Nelson and William Hunt, who duped investors while trying to corner the world silver market.

"After all," Born said, looking back, "I'm a lawyer, and I think the existence of fraud prohibitions is critically important."

But Greenspan was insistent, she said.

Finally, he said, "Well, Brooksley, I guess you and I will never agree about fraud." (Greenspan did not respond to requests for comment. Daniel Waldman and Michael Greenberger, both top aides of Born's, were briefed on the lunch at the time and independently confirmed Born's recollection of the conversation.)

That was just the beginning. By early 1998, Born had also tangled with Treasury Secretary Robert Rubin, his deputy, Summers, and Securities and Exchange Commission head Arthur Levitt, not to mention members of Congress, financial industry heavyweights and business columnists. She wanted to release a "concept paper" -- essentially a set of questions -- that explored whether there should be regulation of over-the-counter derivatives. (Derivatives are so-named because they derive their value from something else, such as currency or bond rates.)

They warned that if she did so, the market would implode and predicted tidal waves of lawsuits. On top of that, Rubin told her, she didn't have legal authority to regulate the derivatives anyway.

She wasn't buying any of it, and she wasn't backing down.

Arguing with the Big Boys, as it turns out, is exactly what she'd been doing her whole life.

'The Little Girl Has It!'

Born's father, a San Francisco welfare agency director, wanted a son. The boy would be named after his best friend, Brooks. He got a girl instead, and came up with Brooksley in "a last-minute attempt to feminize" the name, Born said.

Born was "awful" at junior high school home-economics class, she said, and "a bit of a nerd." As an undergraduate at Stanford University (1957-1961), she scored high as a doctor on an aptitude test and low as a nurse. The guidance counselor chided her, she said, accusing her of only wanting to be a doctor because it paid well.

"It certainly was a reflection of the society we were living in," Born recalled. "To aspire to be a doctor or a lawyer was thought to be arrogant and somewhat inappropriate."

The summer after she graduated, Born was a bridesmaid in two weddings. Some of Born's girlfriends in her Stanford graduating class were going off to be stewardesses, dental hygienists, nurses, teachers. She headed for Stanford Law School.

Not long after she started law school, a male classmate confronted her.

"He told me I was taking up space in the class for a man who undoubtedly was being drafted to go to Vietnam," she recalled.

One law professor tried to trip her up by making her answer questions for an hour; another refused to call on her or any other women in the class. After watching the professor skip over female students on a question that had stumped all the men, she shouted out an answer.

"The little girl has it!" Born remembers the professor saying.

She became the first female president of the Stanford Law Review and the first to finish at the top of a Stanford Law School class. Still, a dean told her that "the faculty stood ready to take over the law review if I ever faltered," she said. "I told him I didn't intend to falter."

Traditionally, Stanford's top law student was essentially guaranteed a U.S. Supreme Court clerkship. But the law school's selection committee recommended two male students instead. She flew to Washington anyway, and had tea with Justice Potter Stewart, who told her he "wasn't ready" to have a female law clerk, Born said. Justice Arthur Goldberg, whom she'd met previously at a reception, didn't extend an offer either, but gave her a note to help her get a federal court clerkship. "It said something like, 'Of course, I can't have a woman law clerk, but she seems well qualified,' " Born recalled.

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.

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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