The Crash: Risk and Regulation

The Washington Post examines how Wall Street innovation outpaced Washington regulation.

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Key Players In the Battle Over Regulating Derivatives

"The size and nature of this market create a potential for systemic risk to the nation's financial markets that requires vigilance by federal regulatory authorities."
- Brooksley E. Born, chair, Commodity Futures Trading Commission, 1996-1999
Arrived at the CFTC determined to get her arms around the risk posed by the burgeoning growth of derivatives, so called because they are financial instruments that derive their value from other investments.
"Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary. Regulation that serves no useful purpose hinders the efficiency of markets to enlarge standards of living."
- Alan Greenspan, chairman, Federal Reserve, 1987-2006
Opposed regulation of derivatives on free market grounds. Thought the CFTC had no legal authority to do so, and any CFTC proposal would threaten the legality of existing contracts.
"Derivatives, with leverage limits that vary from little to none at all, should be subject to comprehensive and higher margin requirements... but that will almost surely not happen, absent a crisis."
- Robert E. Rubin, Secretary of the Treasury, 1995-1999
Agreed with Greenspan that the CFTC had no legal authority to regulate derivatives. Voiced qualms about their risk and rapid growth, but saw no political will to take action.
"I guess if I had to do it over again, I certainly would have pushed for some way to give greater transparency to products which turned out to be injurious to our markets."
- Arthur Levitt Jr., chairman, Securities and Exchange Commission, 1993-2001
Like Greenspan and Rubin, questioned CFTC jurisdiction over derivatives and feared a CFTC regulatory effort would cast doubt over the legality of existing derivatives contracts.
Decried Born's efforts as "casting a shadow of regulatory uncertainty over an otherwise thriving market."
- Lawrence Summers, Secretary of the Treaasury, 1999-2001; previously undersecretary and deputy, 1993-1999
Opposed regulation when he took over from Rubin.
"I think we would do well to remember the Lincoln adage that to ask a society to live under old and outmoded laws--and I think you could say the same about regulation--is like asking a man to wear the same clothes he wore when he was a boy."
- Phil Gramm, Republican senator from Texas, 1985-2002; chairman, Senate Banking Committee, 1999-2001
Pushed through several major bills to deregulate the banking and investment industries, including the 1999 Gramm-Leach-Bliley act that brought down the walls separating the commercial banking, investment and insurance industries.
"I have never in my life been in a setting where three senior members of the U.S. government reflected more tension. Secretary Rubin and Chairman Greenspan were in concert in expressing frustration with the CFTC leadership... [Born] felt, I'm confident, outnumbered with the two against one."
- Jim Leach, Republican representative from Iowa, 1977-2006; chairman, House Banking Committee, 1993-2001
Tried to mediate in the regulatory rift, bringing Born, Greenspan and Rubin to his committee for a meeting.
"It is unusual for three agencies of the executive branch to propose legislation that would restrict the activities of a fourth."
- Richard G. Lugar, Republican senator from Indiana, 1976-present; chairman, Senate Agriculture committee, 1995-2001
Held a hearing in July 1998 to encourage Born to back away from trying to regulate derivatives. Pointed out the adamant opposition of other regulators at the Fed, the Treasury and the SEC.
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