Hedge Fund Fiasco Could Have Been Avoided

Tuesday, 23 Feb 2010 10:28 AM

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"Frontline," a PBS investigative journalism series, epitomizes the very best of television reporting. Recently, "Frontline" featured an absolutely riveting account of our disastrous failure to regulate hedge funds and other high flying investments.

Brooksley Born was the chairwoman of the Commodity Futures Trading Commission from 1996-99. While chairwoman, she announced that she intended to regulate hedge funds, perceiving the danger that such unregulated funds posed to the economy. Only an expert in “derivatives” can adequately understand and explain hedge funds, so I won’t try.

Suffice it to say that one of the leading hedge funds, Long-Term Capital Management, run by those thought to be mathematical wizards and masters of the universe, failed in the late 1990s in what was a harbinger of the recent near collapse of the country’s banking system that has had a devastating effect on the nation’s economy.

Before Long-Term Capital Management collapsed, Ms. Born told four key members of the Clinton administration — Robert Rubin, then-secretary of the treasury; Alan Greenspan, then-head of the Federal Reserve; Larry Summers, then-deputy treasury secretary and Arthur Levitt, then-head of the Securities and Exchange Commission, that she planned to use her regulatory powers to regulate hedge funds.

They unanimously condemned her, stating she had no power to do so and when she refused to concede the point, they asked Congress to hold hearings for the purpose of stopping her.

"Frontline" showed scenes of the congressional hearings where she was pilloried by Sen. Phil Gramm of Texas who lectured her, stating she had not made her case, and with his congressional colleagues, enacted legislation that eliminated her power to regulate the hedge fund industry. She subsequently resigned.

The debacle Brooksley Born feared years ago took place beginning in 2006.

Like dominos, the Wall Street firms and banks throughout the country, particularly the high flyers, became insolvent, with the consequent bailouts of Wall Street and the auto industry at the expense of American taxpayers in amounts which will run ultimately into the trillions, and unemployment rising to over 10 percent. Stock market investors lost a substantial part of their portfolio value, and many retirees lost their ability to support themselves.

Of the four whose foreheads should be marked with the word "shame," only one has publicly sought forgiveness: that is Arthur Levitt, who has said, “I’ve come to know her as one of the most capable, dedicated, intelligent and committed public servants that I have ever come to know. I wish I knew her better in Washington. I could have done much better. I could have made a difference.”

Alan Greenspan has admitted error — having opposed regulation believing the market would self-regulate — telling Congress, “No, that’s precisely the reason I was shocked because I’ve been going for 40 years or more with very considerable evidence that it was working exceptionally well.” But he has not accepted responsibility for the debacle, nor has he apologized to the American people.

Today, Born is a retired partner in the distinguished law firm, Arnold & Porter. Has she been lauded by the Obama administration for her clairvoyance and willingness to stand up to the four horsemen of the apocalypse and Congress which rightfully is held by the public in such low esteem?

"Frontline" pointed out that “Rubin’s other top deputy, Gary Gensler, now holds Brooksley Born’s former post at the CFTC. It still lacks authority to regulate OTC derivatives.” I urge everyone who has not seen the "Frontline" episode on hedge funds to do so. It is available online.


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