The Warning - Brooksley Born and the Unregulated Derivatives Market

I watched an outstanding episode of Frontline last night. It really did open my eyes and I recommend that everyone watch this.

The episode is about Brooksley Born, a lone Washington outsider back in the late 1990's warning everyone about the unregulated and secret derivatives market. She warned that without regulation and transparancy of derivatives trading the entire financial system could be at risk. This was during a time when the markets were flying high and nobody wanted to hear it. She was attacked and silenced by the big three financial wizards of the time. Greenspan, Rubin and Summers.
You can watch it from this link:
www.pbs.org...

In early 1998, Larry Summers, called Born to "chastise her for taking steps he said would lead to a financial crisis. But Born kept at it, unwilling to let arrogant men undermine her good judgment. But it got tougher out there. In June 1998, Greenspan, Rubin and the then head of the SEC, Arthur Levitt, Jr., called on Congress "to prevent Ms. Born from acting until more senior regulators developed their own recommendations." (Levitt now says he regrets that decision.) Months later, the huge hedge fund Long Term Capital Management nearly collapsed--confirming some of Born's warnings. (Bets on derivatives were a key reason.)

www.thenation.com...

The Federal Reserve Bank of New York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets. This saved LTCM and prevented a financial meltdown. Even after this happened Brooksley Born was still ignored. 10 years later in 2008 her prediction came true and the financial system nearly collapsed and had to be saved by the tax payers. She was right and nobody cared because people were making tons of money. If they would have listened to her back in 1998 the 2008 collapse could have been avoided.

"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?"

By the way the derivatives market is still unregulated to this day even after the financial crisis. Two of the big three people that prevented Brooksley Born from regulating derivatives are now major players in the Obama administraion, Larry Summers and Robert Rubin.

Well this is probably one of the biggest "toads" under the American lily pad... chek that, global lily pad.

Me thinks that there is much more pain to come from this story. It has been apparent for years that the lack of regulation of these products was very dangerous. Inspite of this, greed, once again has overridden common sense...

This derivative debacle could be the catalyst for what many on ATS are expecting, economic collapse. JMHO

reply to post by wakinup13


I agree. The numbers are shocking and the scary thing is nobody really knows what is going on with these derivatives.

There's a $700 trillion elephant in the room and it's time we found out how much it really weighs on the economy.

Derivative contracts total about three-quarters of a quadrillion dollars in "notional" amounts, according to the Bank for International Settlements. These contracts are tallied in notional values because no one really can say how much they are worth.

The total value of all the stock markets in the world amounts to less than $50 trillion, according to the World Federation of Exchanges.

www.marketwatch.com...

you did not actually mention that the derivatives creation is still mushrooming....the trash out there is near 600 Trillion$


if one takes the view that the continued NON-regulation and NON-interferrence of the Derivatives NON-markets...
is just a way of 'arming' the 'too-big-to-lose' WallStreet financial firms with financial Swords, to lop off the heads of the smaller banker/financiers/...

all the FED-Treas. Beast want left are a very few Primary Dealers & Market Movers to survive.... among them GS, JPM et al

Citi is still to be gobbled up, & perhaps BoA, BBT, Wachovia/WellFargo and a generous number of regional banks..

the elites are allowing Derivatives to modify/ terraform the USA financial landscape... under their covert supervision the rest of the Global Central Bank system is the next stage

And its not the housing market that need stabilizing it is trying to figure out how much these mysterious derivatives are really worth.

Stabilizing the housing market will do little to take the sting out of the snapback we are going through on Wall Street. Once people's mortgages were sold off to secondary buyers, and then all sorts of crazy types of derivative securities were devised based on those, and those securities were in turn traded on down the line, there is now little if any relevance to the real estate values on which they were pegged.

We need to identify and determine the real value of derivatives before we give banks and institutions a pass-go with more tax dollars. Otherwise, homeowners will suffer as banks patch up the holes left in their balance sheets by the derivatives gone poof; new credit won't be extended until the raff of the old credit is put behind.

It isn't the housing market devaluation, or the sub-prime mortgage market defaults that have us in real trouble. Those are nice fakes to sway attention away from the place where greed truly flourished -- trading phony instruments to the tune of $700 trillion.

www.marketwatch.com...

I don't buy into this whole "derivative collapse" talk. Perhaps because I am too ignorant on the subject -- but I challenge anyone on ATS to actually come up with some definitive research (not youtube videos) on the consequences of this.

I don't know, maybe I'm wrong. What are the derivatives in question, anyways? The chicken littles on this board should at least be able to cite some of these derivatives which are threatening to bring down the system.

One thing that is increasingly apparent to me is this, there are several people who saw this coming, tried to change things, warn people and prevent it and they were ignored. The people who ignored them and continued to make bad decisions are still in senior positions (some in VERY senior positions), and they are the oes suggesting that everything is going to be fine, there is a recovery, nothing to be too worried about...

Now, those same people who tried to give warnings before are (on the whole) repeating their warnings and saying that this is nowhere near over. Many of them are stating that the $ will collapse completely. They seem to be suggesting in concert that the stimulus is a temporary fix, that the basics have not been repaired and that the entire system will be destroyed.

Anyone else seeing a pattern here?

I know who I am going to trust, and it's the ones not in the pockets of some very powerful people who seem to be telling the truth.

Lesson: trust those who have nothing to gain from lying. Do not trust those who are towing the party line or acting as foot soldiers for the bankster elite.

Originally posted by Kaytagg
I don't buy into this whole "derivative collapse" talk. Perhaps because I am too ignorant on the subject -- but I challenge anyone on ATS to actually come up with some definitive research (not youtube videos) on the consequences of this.

I don't know, maybe I'm wrong. What are the derivatives in question, anyways? The chicken littles on this board should at least be able to cite some of these derivatives which are threatening to bring down the system.

I am not an economist but I will give it a shot.
Derivatives are also known as credit swaps. Basically it is these large financial institutions trading some of their risk to other institutions to offset potential losses.

As I posted earlier:
Derivative contracts total about three-quarters of a quadrillion dollars.
The total value of all the stock markets in the world amounts to less than $50 trillion.

Can you see how this could cause financial collapse not just in the US but globally. There is not enough money in the world to cover these derivative contracts. So what happens if everyone wants to cash in all at once. I am no financial genius but it does not sound like everything is ok.

[edit on 10/21/2009 by Erasurehead]

I caught parts of that show last night when my wife wasn't hogging the tv. I'm glad someone posted a link where we can watch it.
Excellent episode, riveting to watch and listen to what was in play back then.

Particularly interesting to me was how Ms. Born first stumbled onto the whole derivatives "non" market. Procter and Gamble was suing a company (I forget which one) over losses due to the derivatives, and they ended up obtaining actual taped conversations between people at that company.

These guys were essentially "yukking it up" (on tape no less) over how they're totally going to clean up on the deal because (in their words) the derivatives were so overly complex that P&G and everyone else buying into them had really no idea what was going on, and no way to anticipate the real risks involved with those particular investments.

Basically, they KNEW they were in the process of ripping off loads of money, and they LOVED it!

I'm sure I wasn't the only person feeling more and more pissed off as that show went forward.

Not only were they warned, but she attempted, to bring regulation to that market, and the "boys-club", for lack of a better phrase, crapped all over her, her integrity and eventually her career.

Then, 10 years later, when the house of cards collapsed, Greenspan sat there all contrite, saying that he had "no idea" that this could happen and that his confidence in his belief system was shaken.

To that I call B.S.

Now the very people who crapped on this woman and fed the system of garbage piled on top of garbage, are the very people entrusted with our economy, and we're supposed to trust them.

absolutely laughable, if it weren't so devastating to everyone's financial wellbeing.

They should all be charged with Conspiracy, because that's what they are, UN-indicted co-conspirators.

Just makes me want to

Originally posted by Erasurehead
I am not an economist but I will give it a shot.
Derivatives are also known as credit swaps. Basically it is these large financial institutions trading some of their risk to other institutions to offset potential losses.

That's not how investopedia defines derivative:

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

As I posted earlier:
Derivative contracts total about three-quarters of a quadrillion dollars.
The total value of all the stock markets in the world amounts to less than $50 trillion.

Can you see how this could cause financial collapse not just in the US but globally. There is not enough money in the world to cover these derivative contracts. So what happens if everyone wants to cash in all at once. I am no financial genius but it does not sound like everything is ok.

[edit on 10/21/2009 by Erasurehead]

Derivatives aren't just for stocks, so if the market is really valued at 750 trillion dollars (how the hell did they come up with that figure?), it could be explained by commodities, currency, real estate, etc. If this is the case, then the 750 trillion may not be as much as it sounds (I'm still wondering how they got that figure).

As long as there is an underlying asset to the derivative contract, what is the danger?

The reality is, nobody has any idea whatsoever how big the derivatives market is.

edit: And if that unnerves you, it should.

[edit on 21-10-2009 by leo123]