Brooksley Born Excoriates Alan Greenspan: “You Failed”

"At today’s Financial Crisis Inquiry Commission hearing, Brooksley Born, the former head of the Commodity Futures Trading Commission, declared Alan Greenspan’s tenure at the Federal Reserve an unmitigated failure – to his face. Greenspan accords a certain degree of respect on Capitol Hill, despite Born’s accurate take on his many failures, and so this outburst was highly unusual – and gratifying.

Born, who pushed to strictly regulate derivatives under the Clinton Administration, but lost the battle to, among other people, Alan Greenspan, told the former Federal Reserve chair that his agency “failed to prevent housing bubble, failed to prevent the predatory lending scandal, failed to prevent the activities that would bring the financial system to the verge of collapse.”

“You failed to prevent many of our banks from consolidating and growing to a size that are now too big or too interconnected to fail,” Born added. She added that Greenspan’s views on deregulation, which he took as an article of faith, contributed to the Federal Reserve’s failure in delivering on its mandate."

"And only a moron believes that outlawing CDS would have somehow prevented the bubble."

I have never said that outlawing OTC derivatives or the CDS's was necessary, recommended, or required. If the regulation recommended by Brooksley Born had been implemented then they would have discovered that not only the Bonds held by the GSEs but the private sector OTCs and CDSs too were all at risk because of the risky sub prime loans and the ARMs.

So go back a couple of decades and we have the Junk Bonds and the Savings and Loan scandals. After that all the elected officials came out and said that this will never happen again. It only took them 20 years to go from Junk Bonds to bonds made of junk.

You must know that the SEC monitors for inside trading? All Brooksley Born requested was that there was someone to investigate and prosecute shady dealings in the hidden OTC market. Last time I checked, you can't go public secretly and with a Ponzi scheme as a prospectus. Although that never stopped Bernie Madoff.

It looks like staying away from Wikipedea has not prevented you from being in error. Brooksley Born did not want to kill the OTC market.

"The swaps on this paper failed because the insurers hadn’t taken into account what would happen if failure was systemic."

With all genuflection implied, That's what I've been saying. If Freddie & Fannie were so squeaky clean then why did they fail? Why did they need bailing out? This is kind of funny. Brooksley Born took that into account and warned that something needed to be done more than 10 years earlier. In fact, it was her job. She was the person appointed by President Clinton. The OTC market was her responsibility. I don't get this. Some of you people have all the answers yet you have no intention of watching the Frontline exposé. Wiki_Wonky_Wacky media.

"These private label CDOs were made out of option ARMS, stated income loans, and other high risk paper. This is where the meltdown originated."

No. I'm a builder and have worked in my field through three housing corrections. The meltdown originated because the tipping point was reached in the speculation reaching its saturation point. The law of diminishing returns came to the point of flat lining. In the past you would get teachers and firemen, watching ten episodes of This Old House, then they would go out a build a spec house. In the past you would get too many new homes on the market and the market would tip past a growing bubble and crash the market rapidly. In this latest market you could just purchase an existing house, hold it for two years, and sell it for a decent profit.

This time is different in several ways. Not only were new homes being speculated but existing homes were added to that spec market based on government's desire to add more people to that growing market. And last but not least, the bail out and the foreclosure intervention has attempted to cause a soft landing in the housing market. All it has accomplished is extending the time it takes to reach the bottom. So they have taken an existing market, manipulated it so that it would crash like the Hindenburg, and purchased a trillion feather beds so as to soften the blow.

More dweebs be in, how nice.

I have never said that outlawing OTC derivatives or the CDS's was necessary, recommended, or required.

Well that's a relief.

If the regulation recommended by Brooksley Born had been implemented

Which regulation did she recommend? Be as precise as you can.

then they would have discovered that not only the Bonds held by the GSEs but the private sector OTCs and CDSs too were all at risk because of the risky sub prime loans and the ARMs.

Imagine two banks. One buys $500 million in mortgage bonds and uses a CDS. The other buys $500 million in mortgage bonds and does not use a CDS.

How does the existence of the CDS prevent the non-CDS bank from discovering the risk of the bonds?

Pretend CDS did not exist, how does that make the risk of the mortgage bonds more easily discovered?

Last time I checked, you can't go public secretly

Last time I checked, CDS are not traded on an exchange (which is kinda what it means to "go public").

It looks like staying away from Wikipedea has not prevented you from being in error.

Where do you imagine I was in error? Be as specific as you can.

"Born spotted the rising problem in derivatives and attempted to do something about it."

Two words, moron: "Fannie Mae". And two more in case you're dumber than I thought: "Freddie Mac".

Screw Born and anyone else who fails to blame BIG LEFTIST GOVERNMENT for the mess we're in. The Bush Administration tried to stop the homosexual pervert BARNEY FRANK's banking/loan fiasco but met with nothing but opposition from the Left. Warned about the impending disaster by the Bush Administration in 2004, Barney the Banking Queen declared from a Senate panel: "We see no crisis in the making". When those bums that Barney Frank gave government-backed loan entitlements to could not pay back their loans the banks inevitably failed and the housing industry imploded. The banks had no choice in the matter either, because if refused to give risky loans to the bums they were sued and raked over the coals for massive settlements. This fiasco was government's making.

Hey cricket boy, it’s OK to discover anger when you’re in your first stages of learning how issues have side effects in politics. You can use an issue as a whipping item. You can use it to get at the opposition by taking it out of context. You can even fabricate it factually. Everything is fair if you know you can lie to the potential voter.

Conservatives, Republicans, Tea Partiests, and Reagan Democrats all agree here. The truth, in the hands of practical political activists, helps those that have the the liberals on the run. Brooksley Born’s warning is to protect the little children too. That includes you. Keep up your interest in politics. It’s wonderful to grow past the stage when realization that politicians lie at times.

“No. I’m a builder and have worked in my field through three housing corrections. The meltdown originated because the tipping point was reached in the speculation reaching its saturation point.”

I think your perception is accurate and you were well positioned to see what was going on. This time was different. But the reason that this cycle didn’t top out from its own excesses as early as 2003 is because of the credit made available via the private label CDO market. This is the market that continued making credit available to buyers long past the point where traditional lending didn’t make sense. This is where the stated income/stated asset “liar loans” came from, the payment option ARMS, and other similar loans that began blowing up in 2006.

“That’s what I’ve been saying. If Freddie & Fannie were so squeaky clean then why did they fail? Why did they need bailing out? “

They failed for the same reason that Downey S&L in Socal did. Downey was a conservatively run firm that made conforming loans. They insisted on down payments. They didn’t engage in the high risk loans that mortgage brokers were engaged in. They operated with the same sort of rules that Fannie and Freddie followed.

What they didn’t realize is that the entire mortgage market had become unstable due to an asset bubble in housing. All real estate had become too high relative to incomes and at some point there was going to be a generalized collapse in prices. Downey and Fannie and Freddie were hardly alone in failing to recognize the bubble. They had Greenspan and most of the financial community for company. The mainstream consensus was that housing prices might correct as much as 5-15%. And when the collapsing bubble crashed through 15% on its way down to 50% it took down Downey despite their conservative lending practices. They didn’t have a way to protect themselves from a system wide collapse. The S&L failed and was taken over US Bank.

What Downey and Fannie and Freddie would have needed to do is to stop lending sometime before 2005. Kind of a hard thing to do when lending is your business. But that is about the only thing that would have prevented them from being caught by the eventual collapse of the bubble, an asset bubble that most of the financial world didn’t even recognize.

“Some of you people have all the answers yet you have no intention of watching the Frontline exposé.”

I watched the Frontline piece on Brooksley Born and there is nothing in the program that I disagree with. Born was one of the few people who spotted the potential danger in the OTC derivatives market and she tried to do something about it. But that has nothing to do with Fannie and Freddie, who weren’t in the OTC derivatives market in any fashion. Outside firms were free to take out swaps on Fannie and Freddie paper, either to protect their own position or to simply gamble. The swaps market was totally unregulated, it was opaque to regulators, and it was being run like a casino.

My perspective is as a builder. I have always hated outside players ballooning speculation to the breaking point. There is always a time when speculators jump into the market. It’s human nature. Freddie & Fannie were exposed with their bonds. They in fact got hit by the bubble bursting. The recession is because of credit drying up. Because of so many layoffs to construction and manufacturing. Had Born been successful the foreclosures would have been much less in number. I would have hoped that someone would have done something about ARMs. So this is what we got.

We have to restore a traditional mortgage lending market or we are going to have more boom and bust cycles that are driven by derivatives trading of mortgage paper in the financial markets. The financial markets are turning the real economy into a casino instead of supporting it. At this point nothing has been done to remove the “innovations” that generated the bubble. The only thing preventing its return is that the damage done is too fresh in everyone’s mind. We need something like the Glass Steagall act that was scrapped in 1997. It’s not a coincidence that the bubble followed the repeal of GS.

I agree, we need some kind of limited regulation that allows the market to continue but places a requirement on risk takers to be responsible. They put Martha Stewart in jail for insider trading. They might consider some kind of retribution for making sub prime loans that are written upside down from the start. Perhaps fines could be based on lifetime results. Individual equity in your own home is carried over a lifetime for tax purposes. Perhaps the risk to home ownership should be placed on the buyer. Walking away from a mortgage, just because it’s upside down, could be a crime. If the foundation is strong then the market won’t crumble. If the lender takes a huge risk then that lender should become part of the solution to right the wrong. If you must speculate you should be responsible for everything that happens.

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