The American Meltdown, Derivatives, & Brooksley Born
“We didn’t truly know the dangers of the market, because it was a dark market,” says Brooksley Born, the head of an obscure federal regulatory agency — the Commodity Futures Trading Commission [CFTC] — who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country’s key economic powerbrokers to take actions that could have helped avert the crisis. “They were totally opposed to it,” Born says. “That puzzled me. What was it that was in this market that had to be hidden?”
At the time Brooksley Born was trying to propose regulation it is estimated that 594 Trillion in OTC derivatives were being sold in “black box” markets. “Black box” means no regulation, and actually no recording of who is selling what to whom. There were derivatives, derivatives of derivatives, and derivatives of derivatives of derivatives being sold. And neither the individuals selling, or the buyers, understood what a derivative really was.
A derivative is, as best we can understand, a form of “insurance” that is in essence a form of betting. A simple example is that one could take out insurance on an neighbor’s house, without the owner’s knowledge. And then one could bet against it – sell it short (because of hidden knowledge of its real worth) – in essence, set fire to your neighbor’s house, and then collect the insurance.
Also, derivatives were (are) sold in such secret, that the buyers didn’t (don’t) know how many people have bought the same derivative. So there might be several buyers wanting to collect on a single derivative, while there is only enough to pay one. The complex mathematics of determining a derivative creates a kind of imaginary financial product, with no real money to pay anything.
Derivatives have payed up to 40% profit to the black box buyers. Since the time of Ronald Regan, who elevated Alan Greenspan to Chairman of the Federal Reserve, this market has been growing. Those that got in, sold, and then got out, got the money. The rest of it is a large vacuum with no real money to cover the crisis. Sound like the crash of 1929, with no real money and runs on the bank? We think, yes.
But Brooksley Born knew, warned, tried to stop it, but was defeated by the powers in Washington. Even after this meltdown, the financial lobbyists in Washington are still winning. Regulatory proposals have been written up, but are stalled. The time to move on shutting down further money drain is passing.
US citizens could be asked to poney up yet more money for the unregulated securities and derivative black box deals that go bad, since all this stuff is “too big to fail.” And they will get the apology of having to live in hard times, but not much else. We used to write about and believed that our biggest problem was the players in oil. At least that was one issue that we could see. But the financial games now being played, on a national and worldwide scale that boggles the mind – and brings down whole countries – is what worries us most at this time.
Without transparency and regulation, money that should go to the people who earned it, will continue down the black box hole. How much more financial blood can the average American donate. We are very, very worried to think.
This is a 55 minute program by Frontline of PBS see “The Warning.” After seeing this, we may not understand the mathematics of derivatives, but we do understand the problem. Obama, can you overcome the financial lobbyists and lift up your country?
Frontline: The Warning
The Queen of Amerindia