News & Views from 465 California Street

Beware the “Geniuses”

Clint Reilly
Feb
23
2010

I recently attended a small party with President Obama’s deputy chief of staff, Jim Messina. Messina – a Huck Finn type originally from the office of Montana Senator Max Baucus – treated us to a Pollyannaish assessment of Obama’s first year.

According to Messina, White House Chief of Staff Rahm Emanuel is the smartest political brain in America and Obama is the greatest political communicator of his generation.

That’s where I started to tune out. My BS periscope surfaces whenever I hear these superlatives used to describe politicians. After a lifetime in the game, I’ve learned that genius labels should be reserved for Nobel Prize winning scientists and mathematicians.

Why am I so skeptical? Maybe it’s because our “genius” political class so often drums out rational, intelligent voices of dissent.

Take the case of Brooksley Born.

You could be forgiven for not knowing the former Commodity Futures Trading Commission Chair. But last week’s powerful PBS Frontline story about Born should be must-see TV for all Americans.

Let’s put it this way: If former Fed Chairman Alan Greenspan, former Treasury Secretary Robert Rubin and Assistant Treasury Secretary Lawrence Summers had heeded Born’s warnings, we might have averted the worst financial crisis since the Great Depression, saved taxpayers $12 trillion in bailouts and averted the loss of millions of jobs.

Instead, all three Washington “geniuses” came together to undermine, trivialize and ultimately to bury Brooksley Born.

Born is a San Francisco native whose father once headed the Welfare Department. She graduated from Stanford Law School at the top of her class in 1964 and was the first woman to be elected president of the Law Review.

Born’s distinguished legal career led to a partnership at the prestigious Washington law firm of Arnold and Porter. In 1993, she was on President Bill Clinton’s short list for Attorney General but lost out to Janet Reno. Instead, she was appointed to head the Commodity Futures Trading Commission (CFTC) because of her extensive expertise in securities law and regulation.

As chair of the CFTC, Born became deeply concerned about a class of financial products involving trillions of dollars in liabilities that the government knew almost nothing about. Derivatives were being exchanged between huge financial institutions without regulation. Born deduced that no one really understood the risks or even knew the massive amounts of money involved.

At the center of the derivatives market was a new piece of paper called the “credit default swap,” which insured lenders against losses from creditors.

Born began to propose regulations that would require transparency in the derivatives markets. But she was opposed head-on by Greenspan who marshaled Rubin and Summers to testify against her views in Congress.

They were strongly opposed to regulating financial products, preaching that markets can always be trusted to police themselves. Congress even passed a law prohibiting Born and the CFTC from regulating derivatives. She resigned and returned to private practice.

History is clear about what happened next.

For years, Greenspan was hailed as “The Maestro.” His easy money policies fueled years of expansion. Rubin gained hero status as an economic guru, left the Treasury and became a highly paid Citibank executive. Summers became President of Harvard University.

But in 2008, a mountain of credit default swaps came due when the mortgage market collapsed and home values plummeted. Fear swept the financial markets. Financial companies’ inability to honor their policies plunged the financial system into chaos.

Brooksley Born had predicted Armageddon and she had been right.

Washington loves to plant the genius label on the reigning A-list power brokers but only history decides the truly deserving. Fifteen years after leaving the CFTC – Brooksley Born has been vindicated. Greenspan, Rubin and Summers were dead wrong.

Greenspan has shrunk from public view. Rubin’s Citibank required a $100 billion federal bailout to remain solvent.

Larry Summers is now President Obama’s economic guru.

Comments (17)

  • Because I give in to my ADD and I am maintaining my optimism at a high level, there is a lot in the San Jose Mercury News that I do not read. I use it to get ideas for blogs, to teach to my ESL students and keep my mind sharper with Sudoku and the crossword.

    However when I see your column I read carefully from start to finish, knowing that I will learn something of value each day, even if it attacks my cheerful, sunny attitude as did today’s on Brooksley Born, Esq. There are always going to be times when the prophet is killed for carrying a message of “Watch out!” but this takes the cake. Does it have anything to do with W.’s administration? Don’t bet your sweet bippy, because you’ll lose.

    I KNOW that you have other readers who do not take the time to join your blog discussion, but who take the time to read, absorb and agree with or argue with your column. I just want to say, finally (since I have been reading you since I first noticed you quite a while ago), thank you for writing the best thing in the paper.

    Salle H

    Posted by: Salle | February 23rd, 2010 at 9:14 am

  • I’m not much into politics, but found your article this morning and
    read it with great interest. I do not mean the following in any sort
    of negative way toward your writing or thoughts…but…

    Where were Brooksley’s supporters when needed? I seems unlikely that in such an elevated position as CFTC Chair she would not have had a whole bunch of people rallying behind her when she made waves about the economy. Or, were they all just too insecure and just plain old chicken to speak up? That seems to be de rigour in Washington these days (and everywhere else, for that matter). And when anyone—whether that be the President or any elected official—expresses ANY opinion on ANY subject, there are legions of detractors who have nothing at all to offer in the debate except to say “no”. That old Biblical business of “a voice crying in the wilderness” seems to have withered and died in our current world, most folks willing to just turn away and not face realities that will not disappear unless or until confronted, dealt with, and vanquished.

    Posted by: Paul P. | February 23rd, 2010 at 9:15 am

  • Appreciated your article. Thanks for honest exposure on cause of housing bubble and a “non-genius” attempting to expose problems with financial world. It took a long time to implode and started during the Clinton administration!!

    In your first sentence you stated you attended small party with Obama’s deputy chief of staff and my reaction was to read no further. Article would be another “anti-Bush” / love Obama article. Glad I read further.

    I understand Obama administration does not include ONE business person!! None have any business experience and are attempting to run the world’s largest organization!

    John A

    Posted by: John A. | February 23rd, 2010 at 10:33 am

  • A wonderful article you wrote for today’s IJ. I traded commodities for 30 years and was her (Born’s) backer. Please keep writing, although I can’t figure why. Time will tell me.

    J.G.H.

    Posted by: J.G.H. | February 23rd, 2010 at 10:35 am

  • Glass-Stegall (1933) regulated banking – a lesson learned after the depression. Voting to repeal in 1999: Eshoo, Lofgren, Pelosi, Lantos, Biden… Voting AGAINST repleal: Tom Campbell and Barbara Boxer! This makes voting a little harder… In any case, shame on Bill Clinton for firing Brooksley Born.

    Posted by: Hersh Brown | February 23rd, 2010 at 11:10 am

  • What needs to happen is to get rid of the Fed Reserve entirely and go back to the gold standard. If you understood finance at all then you’d be able to see how the Fed ruins this country.

    As for bailouts – we should have let every one of those banks fail. Then people who know how to run an HONEST business could start new banks.

    But see, what’s happening isn’t about economy and prosperity. What’s happening is all about control of everyone and everything.

    You either see it or you don’t. And once you’ve caught a glimpse you can’t not see it anymore.

    Posted by: M | February 23rd, 2010 at 11:42 am

  • If she was the first female president of Harvard Law Review, she came hard on the heels of the first black president, Barack Obama. She was quoted somewhere as saying that Obama, who strangely enough never got around to writing an article for that journal, was seldom seen on the premises. The guy has floated through life, never doing much but looking good doing it. Except for now. As for that Montana bumpkin, he probably thinks hiring him is evidence of a first class mind. I see Rahm Emanuel these days is busy leaking to the press to defend himself from the onslaught on Clintonistas who say the Chicago mob is keeping Obama from realizing his true greatness. The fiddling goes on as Rome burns.

    Posted by: Banjo | February 23rd, 2010 at 11:57 am

  • Just wanted to say how much I enjoy reading your column – always
    a unique and interesting point of view. I especially agreed with your assessment of
    the antiquated political system which allows Wyoming
    as many Senate votes as California – Please keep this issue in front of
    the public. I am a retired teacher who has followed your career for
    years and while I don’t always agree 100%, you always provide fresh
    food for thought.
    Thank you,
    Alicia J

    Posted by: Alicia J. | February 23rd, 2010 at 4:34 pm

  • What I don’t understand is why Brooksley Born wasn’t appointed Treasurer? I guess it’s the same old story over and over again, the tendency to dismiss the Cassandra’s amongst us.

    Posted by: Alan A. | February 23rd, 2010 at 4:35 pm

  • I enjoyed your article ion the Marin Ij this morning. The behavior
    of the “geniuses” as you say has been less than helpful and the
    wreckage is substantial.

    As an anthropologist I have put the Wall Street derivative concept in
    the context of primitive economics. I’m sending a recent article I wrote that describes how really destructive and, as my old professor
    Carlo Cipolla would put it, stupid, but controlling. I hope you find
    the article amusing.

    Posted by: N.C. Ph.D. | February 23rd, 2010 at 4:36 pm

  • I have read many of your columns and thought I’d reply. I am a registered
    Democrat but I think that really liberal Dems are as repugnant as Republicans. I do
    share some things in common with Reps, but ideologically they don’t make sense. I
    don’t want to bore you, just give you some idea of where I stand so that my conveyed
    thoughts make some sense.

    The Dems seem like they are very incompetent to the point that, as President
    Obama once quipped in one of his observances….”let’s not snatch defeat from the
    jaws of victory”…Well, it seems that they have done just that with the health care
    reform. I hope this is the type of feedback you are looking for.

    Posted by: Mike R. | February 23rd, 2010 at 7:07 pm

  • Thank you so very much for your article in the IJ. I watched that Frontline
    program. We all make mistakes, but railroading Brooksley Born was egregious and, I
    believe, should not go unpunished. When I heard Greenspan admit his errors at the
    Congressional hearing, I found it incredulous that he was allowed to walk out
    without any repercussions. It seemed clear that Greenspan, Rubin and Summers knew
    they were wrong but had ulterior motives and wanted to shut Brooksley Born down to
    keep themselves safe.

    I am completely enthralled with President Obama and trust that he really is trying
    to do the right thing for this country. However, I am not happy that he keeps
    Summers around. I wish I could understand his reasoning.

    I do go on. Besides thanking you for bringing this to more people via the IJ, I
    wonder if there is anything you might suggest we do to get the message across to the
    President and Congress that someone should pay for bringing our economy to its
    knees. After seeing Frontline, I truly believe those three men should be held
    responsible.

    Posted by: Denise K. | February 24th, 2010 at 12:08 pm

  • You have interesting comments. I look for them.

    & I read your comment in the San Jose Mercury News 2/23/2010.
    I agree… It is new news and old news.

    See Stanford Uiniversity Alumni Magazine,

    http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html

    But then you must read Chris O’Brien’s comment in SJMN today 2/24/2010 about the lack of any meaningful reform in the financial world over the past year. Yep….

    FYI My parents were wounded badly by the Great Depression of the 30s. No dinner table discussion in that Pennsylvania farmhouse about buying anything over $100 was complete until I heard….
    “….but what if there is another Depression? ……

    Keep it up… It needs to be heard.

    Howard P.

    Posted by: Howard P. | February 24th, 2010 at 12:10 pm

  • Please keep writing your column. Last “Beware the Geniuses” was very informative. There is no else out there telling it as it really is, please don’t stop.

    Sad to see there are no ethics left, either in the business world and still none in politics, maybe just worse then ever.

    Posted by: Tom P. | February 25th, 2010 at 1:32 pm

  • Keep up the good work!

    Posted by: Howard | February 26th, 2010 at 9:29 am

  • Enjoy your column. Thanks, very informative and impartial, which I
    like.

    roger t

    Posted by: Roger T | February 26th, 2010 at 9:29 am

  • I have to take exception with the thesis that more regulation would have prevented the meltdown. The problem was too much government interference in the market, not too little. Greenspan, Rubin and Summers were all government interveners setting up a massive moral hazard. The market can self regulate if that function is not crowded out by government geniuses, but instead the wunderkinds set up implicit guarantees to shield the players from any risk.

    Born did the right thing in warning about a ballooning systemic risk. But patching up risk with ever more layers of arcane regulations would have only delayed the bust. The real solution would have been to gradually remove the web of safety nets masking off the risk.

    Posted by: David Johnson | March 2nd, 2010 at 6:13 pm

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