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One woman saw the Great Recession coming. Wall Street's boys club ignored her.
The Great Recession's unsung hero
Brooksley Born saw the financial crisis coming. Wall Street's boys club ignored her.
As chair of the Commodity Futures Trading Commission, Brooksley Born saw the financial crisis coming. But no one listened.
Andrius Banelis for BIMark 9:24
This is an excerpt adapted from "WOMEN MONEY POWER: The Rise and Fall of Economic Equality."
When Lehman Brothers filed for bankruptcy in the fall of 2008, jolting an already ailing global economy into near-freefall, the whole world was in shock. But one woman could legitimately have claimed she saw it coming.
The story of Brooksley Born is not only the tale of a remarkable regulator whose Cassandra-like warnings — if heeded — could've prevented the great financial crisis from exploding into raging, ruinous enormity. It's also, more broadly, an account of how systemic bias and prejudice created the conditions for a dangerous breed of groupthink to thrive with ultimately disastrous consequences. Understanding what went wrong back then can teach us an important lesson about managing risks in the future: Every voice in the room is worth hearing, even if — and perhaps especially if — the message is inconvenient.
Born grew up in California in the 1940s and 1950s and graduated from Stanford University in 1961. She attended Stanford Law School as one of only seven women in her class and was also the first female student ever to be named president of the Stanford Law Review. During her first year, she recalled in an interview years later, one man in the class told her that she was "doing a terrible thing" by taking the place of a man who would have to go to Vietnam and might get killed. At the time, men could be drafted if they weren't able to get a deferment. In 1964, Born graduated first in her class, but the school refused to recommend her for a Supreme Court clerkship. When she managed to convince Associate Justice of the Supreme Court Potter Stewart to meet with her, he told her outright that he simply wasn't ready for a female law clerk.
Eventually, Born was offered the opportunity to clerk for Judge Henry Edgerton of the US Court of Appeals for the District of Columbia Circuit, paving the way for an associate position at Arnold & Porter, a law firm that today ranks among the largest and most prestigious in the world. Born recalls that she was drawn to the firm in part because it was one of only a handful at the time that had a female partner.
Born specialized in institutional and corporate law; complex litigation, mostly in the federal courts; and the regulation of the burgeoning futures market, in which contracts to buy or sell a particular financial asset for delivery at a predetermined time were exchanged. But beyond the global financial system, she also started to foster an interest in the inherent structural inequalities that permeated American society and business and what she, as a lawyer, could do to change that.
She could see that the data points were heading the country into a serious set of calamities, each calamity worse than the one before.
Born thrived in private practice, but as the daughter of civil servants, she had always dreamed of a government appointment. As she gained prominence in legal circles and academia, she'd become acquainted with the Clintons, so when Bill Clinton won the 1992 presidential election, rumors swirled that Born might be his attorney general pick. It was never a hope she voiced publicly, but it certainly would have been a great honor. But in 1993, Clinton appointed veteran Miami prosecutor Janet Reno for that post, and in 1996 he awarded Born with what many considered to be a consolation prize: chairmanship of the Commodity Futures Trading Commission, a little-known government agency with a few hundred employees that had been created in 1974 to regulate the market for financial derivatives. Born had admittedly hoped for something a little flashier, but she accepted with gratitude and grace.
Indisputably, she was qualified. She was deeply analytical, staunchly impartial, and blindly devoted to using her position, knowledge, and skill to ensure that the financial system worked to protect American savers. Crucially, she believed in the power of regulation, and she had an unshakable faith in her ability to recognize when regulation was inadequate.
"Brooksley had the advantage of knowing the law and understanding the fragility of the system if it weren't regulated," Michael Greenberger, who would later serve as her deputy at the CFTC, said in a magazine interview in 2009. "She could see that the data points, by lack of regulation, were heading the country into a serious set of calamities, each calamity worse than the one before."
Not long after she assumed chairmanship of the CFTC, Born started to feel a lingering unease with the rapidly expanding derivatives market. Derivatives allow investors to bet on the trading direction of underlying assets that they "derive" their value from — equities, mortgages, or interest rates, for example — without trading the asset itself. By the mid-1990s, this market was growing at a breakneck pace.
Specifically, Born was worried about an explosion in the size of the over-the-counter, or OTC, derivatives market — "the hippopotamus under the rug," as she later came to call it. OTC trades were happening away from public exchanges, quietly and behind closed doors. There was no way of knowing the nature, scope, and true scale of the multi-trillion-dollar market. What had allowed the OTC market to flourish in such an uncontrolled manner was the aggressive deregulation that had occurred in the preceding decades.
In 1994, Bankers Trust had come within a whisker of blowing up two of its most important clients — Procter & Gamble and Gibson Greeting Cards — after selling them complex derivatives products that, as it later turned out, were falsely valued. A few years before that, it had emerged that a trader at Japanese bank Sumitomo had spent a decade using derivatives to try to corner the copper market, leading to billions in losses. The memory of that now haunted Born, and she was also starting to hear rumors that companies were using derivatives to manipulate their quarterly financial statements.
Unfortunately, her fears weren't shared at the highest echelons of government and the Federal Reserve. In March 1998, Born paid a visit to Robert Rubin, who had served as Treasury secretary since 1995, a period during which the United States had enjoyed remarkable economic growth, near full-employment, and a buoyant stock market, coupled with only moderate inflation. A veteran of Goldman Sachs, Rubin had personally overseen the loosening of regulatory guidelines that had been in place for more than half a century, and he was confident that continued deregulation was the key to national economic prosperity.
If Wall Street got too spooked, it would go into meltdown, and it would all be her fault.
So to Rubin, Born was more of an inconvenience than anything, and she certainly wasn't in his club. "She had no sense of the smooth collegiality that characterized the top policymakers of the Clinton administration," journalist Michael Hirsh wrote in his 2010 book, "Capital Offense: How Washington's Wise Men Turned America's Future Over to Wall Street." "So what if she was running a nominally independent agency? She had no sense of place, no respect for who they were."
Similarly, when Alan Greenspan sat atop the Federal Reserve, Born's opinions were just as unpopular. Greenspan, an eccentric and often enigmatic, mostly self-taught economist who ended up presiding over the Fed for more than 18 years, had begun his career as a worshiper of philosopher and novelist Ayn Rand. He was as devoted to free-market capitalism as Rubin, and Born was an unwelcome voice in his ear.
According to Hirsh's book, Greenspan invited Born to lunch when she first took over at the CFTC in 1996, during which she voiced her concerns about the lax regulation in some of the most opaque but sprawling corners of the financial market. "Well, Brooksley, I guess you and I will never agree about fraud," Greenspan reportedly told her, to which Born wondered out loud what, exactly, there was to not agree upon.
"Well, you probably will always believe there should be laws against fraud, and I don't think there is any need for it," Greenspan replied, as reported by Hirsh. Born was gobsmacked.
Quoting an unnamed Fed official, Hirsh wrote that staffers under Greenspan privately thought of Born as "a lightweight wacko." Born, for her part, knew that she wasn't, and would never be, one of "them." She was a lawyer, not an economist, and, most obviously, she was a woman. But that didn't dent her resolve to do her job properly, and at that moment she considered that to mean pulling out all the stops to prevent the derivatives market from blowing up in a cataclysmic fashion.
But whatever she said or did, Rubin and Greenspan didn't want to hear about her sleepless nights or her predictions about an impending crisis. They had grown up on Wall Street during an era when braggadocian machismo was a character trait that led to success, and when women never dreamed of expressing an opinion on something as complex as the financial markets. Born headed up an agency that was so obscure, it was housed in a rented space in the commercial district of downtown Washington. As far as they were concerned, she held no real sway in the hallowed halls of government and financial policymaking. They were not about to let her waste their time. With the Asian financial crisis well underway, and contagion a real risk, they had more important matters to deal with, and at least for the time being, it certainly looked like they had America on their side. Greenspan was regularly referred to as the "wizard of monetary policy." In early 1999, Time magazine would run a cover story lauding Rubin, Greenspan, and Lawrence Summers, who was deputy Treasury secretary, as the "Committee to Save the World," heroes of the free market: the "three marketeers."
Finally, in the late spring of 1998, Born started to act. Under her guidance, the CFTC started preparing what's known as a concept release, an invitation for members of the public to submit comments on the relevance and appropriateness of existing regulation of the OTC derivatives market, which by that time was estimated to have a value of about 29 trillion dollars. A concept release is often a precursor to a formal regulatory proposal, and news that Born was drafting this one shook some of the most influential institutions in Washington to the core. Lawrence Summers reportedly called her in a panicked rage to warn her what would happen if she kept pushing: If Wall Street got too spooked, it would go into meltdown, and it would all be her fault.
The following month Rubin, Greenspan, and Arthur Levitt, the chairman of the Securities and Exchange Commission, came face-to-face with Born on the matter during a meeting of the president's Working Group on Financial Markets, of which they were all members. Rubin cut to the chase. Born was playing a dangerous game, he suggested. If the concept release were to be published, markets might be sent into a tailspin, fueled by uncertainty over what might be about to happen. But aside from that, Rubin argued, Born and the CFTC didn't even have jurisdiction to make decisions about this kind of regulation in this particular market. That, Born countered, was ridiculous.
Shortly after the meeting, Greenspan, Rubin, and Levitt published a rare joint statement underscoring their "grave concerns" about the CFTC proposal. Summers, for his part, argued that Born even so much as drawing attention to the possibility that something needed to change in that particular corner of the market would cast "a shadow of regulatory uncertainty over an otherwise thriving market." They might have thought that grilling her at the Working Group on Financial Markets had served to silence her, but they were wrong. In May, Born circulated the concept release. Rubin was incensed, and Born recalls it triggering a "firestorm of opposition." By some accounts, Rubin never spoke to her again.
The war entered its next battle. One morning and without warning, Born was summoned by staffers for Jim Leach, who chaired the House banking committee, and the chair of the agriculture committee, Richard Lugar, to appear on the Hill, where she was berated yet again for stepping out of line. It was the first of several hearings during which Born tried desperately yet as calmly as possible to explain why she, the chair of a small and relatively toothless agency, was terrified of what might be going on in the derivatives market.
Even in the autumn of that year, as a massive hedge fund, Long-Term Capital Management, which had two Nobel laureates on its board of directors, almost collapsed under the weight of trillions of dollars of derivative bets gone wrong, no one — it seemed — was prepared to take Born seriously. As Bethany McLean and Joe Nocera write in their 2011 book about the financial crisis, "If there was a moment when Bob Rubin could have used his immense stature to do something about the derivatives problem ... this was it."
It was clear, by this point, that Born had fired all the shots in her arsenal. One last time she pleaded with the House banking committee to do something about "the unknown risks that the over-the-counter derivatives market may pose to the US economy," including credit default swaps. She referenced an "immediate and pressing need to address whether there are unacceptable regulatory gaps." But she was a lone wolf. Not long after, Treasury officials lobbied Congress to pass legislation preventing the CFTC from being able to regulate the OTC derivatives market. Congress responded by barring the commission from enacting any regulation along these lines for six months. In January 1999 Born wrote to President Clinton informing him that she would not be seeking reappointment for a second term atop the CFTC and would be returning to Arnold & Porter instead.
Born's Cassandra-like warnings, it seemed, were quickly forgotten. Even in 2001, as Enron — which had helped create the global market for energy-based derivatives — was forced to file the largest corporate bankruptcy in American history, regulators didn't change their tune. In fact, as President George W. Bush assumed office, a fresh enthusiasm for Reaganomics and deregulation swept across Washington. Leverage was king.
Born retired from private practice in 2003. Five years later, she watched from a distance as the unregulated derivatives market that had caused her so many sleepless nights sent the value of financial assets around the world into free fall, bringing economies to their knees and crushing global banks. In the months and years that followed, it became increasingly hard to deny that the multi-trillion-dollar OTC derivatives market was the root cause of the great financial crisis.
"It helped foment a mortgage crisis, then a credit crisis, and finally a once-in-a-century systemic financial crisis that, but for huge US taxpayer interventions, would have in the fall of 2008 led the world economy into a devastating depression," Michael Greenberger stated as he testified at a Financial Crisis Inquiry Commission hearing in June 2010.
As the US economy soared, the powerful trio of men wasn't inclined to entertain the idea that they might be doing something wrong.
Even Alan Greenspan, testifying before a congressional committee in late 2008, admitted that the crisis had exposed a "flaw" in the economic philosophy and ideology that had guided him for years. "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms," Greenspan said.
It's impossible not to wonder why no one with the ability and power to make a difference truly took Born's warnings to heart. It's certainly reasonable to conclude that sexism played a part. In a 2009 "Frontline" episode, Arthur Levitt, the former chairman of the SEC and an erstwhile vehement opponent of Born, admitted that the crisis had, for him, catalyzed a change of heart. He felt different now than back when he was pitted against Born during those bitter battles in Washington. "I've come to know her as one of the most capable, dedicated, intelligent, and committed public servants," he said. "I wish I knew her better in Washington," he added. "I could have done much better. I could have made a difference."
In 2012, Lauren Rivera, a professor at Northwestern's Kellogg School of Management, published research on hiring processes at 120 major employers, a third of which were banks. Rivera's research concluded that hiring is "one of those critical gatekeeping moments whereby the judgments we make about people have enduring effects." On the back of her findings, she coined the term "Looking Glass Merit" to describe the unconscious tendency that we as humans have to define merit in a way that is self-validating.
It's not hard to understand how this phenomenon might have been at play here. Born was distinct. In a sea of economists and politicians in Washington, she was a lawyer. In the President's Working Group on Financial Markets meeting, she was the odd one out, because she sat atop a relatively obscure agency. She didn't grow up on Wall Street, like so many others in government did, and, perhaps most important, she was a woman.
When Alan Greenspan, Robert Rubin, and Lawrence Summers batted her concerns aside, they were likely demonstrating confirmation bias — a human instinct or heuristic impulse to seek out and attribute value to evidence that supports our underlying belief about something and to disregard information that might discredit it. As the US economy soared, the powerful trio of men wasn't inclined to entertain the idea that they might be doing something wrong and that the deregulation they had championed for so many years was setting the market up for disaster.
In a blog post published a decade after the crisis, in September 2018, Christine Lagarde, who at the time was managing director of the International Monetary Fund, described the great financial crisis as "a sobering lesson in groupthink." She wrote that in the years since the collapse of Lehman Brothers and other major financial institutions, policy has addressed the flaws in the system that ultimately led to the crisis. But there's one thing that's not changed much, she contended, and that's culture.
She added that "the true legacy" of that crisis cannot yet be adequately assessed because it's "still being written." More than 15 years on, and with far more women in positions of power across business, politics, and elsewhere, it may be too early to tell whether the lessons from that crisis have all been internalized. Would a Brooksley Born today be able to avert a financial meltdown? One hopes so, but it may take another crisis to know for sure.
Josie Cox is a journalist who has written for Reuters, The Wall Street Journal, The Washington Post, and The Guardian. She is the author of "WOMEN MONEY POWER: The Rise and Fall of Economic Equality."
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