00:00In 2005, economic cheerleaders dominated the airwaves.
00:20I'm betting on Microsoft in 2006.
00:22Boom, boom.
00:23Let's get another one.
00:24That stock is not done.
00:25Times were good.
00:26Alan Greenspan ruled the economy.
00:28When you can get a 3.7% yield with upside, that's a lot better than getting a 3.7% yield.
00:35Washington's hands-off attitude toward Wall Street seemed to be paying off.
00:38So now it's all systems go between now and then.
00:40Better than that, I'd recommend a buy on it.
00:43Remember one of the few bull markets we got in.
00:47Ladies and gentlemen, it was time for a celebration.
00:50The Presidential Medal of Freedom.
00:55Alan Greenspan is one of the most admired and influential economists in our nation's history.
01:00The nation's highest civilian honor was bestowed on the man many called the wizard.
01:08More than one story was written about Alan Greenspan as the wizard, the man behind the curtain, the wizard of Oz.
01:16Alan was a great wizard.
01:18No one understood what he said, but he said it in such a way that everybody bought it.
01:24What's going to happen when all of this stimulation starts to decline?
01:29Everybody hung on every word.
01:32Congressman, it depends on what is going on in the world generally.
01:38The wizard, the man behind the curtain who mumbled in ways that ordinary people couldn't understand,
01:44but who appeared to be controlling absolutely everything.
01:47Then we're going to get an exceptionally large amount of fiscal stimulus which we're not going to want.
01:52Very few people wanted to take him on or challenge him because he knew so much more than they did.
01:59And if he didn't, he certainly appeared to.
02:02In his 18 years as Fed chairman, he applied those...
02:04Five presidents had watched Alan Greenspan work his magic.
02:10It started back in the Ford administration.
02:13Alan Greenspan was a financial consultant who was hired by Jerry Ford,
02:19first to be head of his Council of Economic Advisors in the 70s.
02:23But Alan Greenspan was not your stereotypical economist.
02:28He was also very charming and a man about Washington.
02:34He played jazz clarinet, had made himself rich on Wall Street,
02:39and he had embraced an unusual political guru.
02:42I'm challenging the moral code of altruism.
02:44The libertarian philosopher, Ayn Rand.
02:47Everybody is enslaved to everybody.
02:50Greenspan is a disciple.
02:52She is the great champion of government as a destructive force that just gets in the way.
02:59Mike Wallace, Ayn Rand, 225-1-32.
03:04Can I ask you to capsulize your philosophy?
03:08I'm opposed to all forms of control.
03:11I am for an absolute, laissez-faire, free, unregulated economy.
03:17Let me put it briefly.
03:19I'm for the separation of state and economics.
03:24Greenspan talked about Rand in his autobiography.
03:29Ayn Rand became a stabilizing force in my life.
03:32It hadn't taken long for us to have a meeting of the minds,
03:35mostly my mind meeting hers.
03:39Rand stood in the Oval Office as her star pupil was sworn in.
03:44Greenspan had a very clear ideology about regulation.
03:48His philosophy was in the form of libertarianism.
03:53And that meant those who do well prosper, those who do poorly fail,
03:59and the market clears the transactions.
04:02But I will faithfully execute the office of President of the United States.
04:09It was a philosophy made to order for Ronald Reagan.
04:13Government is not the solution to our problem.
04:16Government is the problem.
04:18In 1987, Reagan made Greenspan the most powerful banker in the world,
04:24the chairman of the Federal Reserve.
04:26Greenspan was a believer in Ayn Rand, a believer in free market.
04:31A little bit curious for a central banker, because wood is central banking.
04:35It's a massive intervention in the market, setting interest rates.
04:40Greenspan worried about this contradiction in his autobiography.
04:44I knew I would have to pledge to uphold not only the Constitution,
04:48but also the laws of the land, many of which I thought were wrong.
04:53Now the vice president will swear Alan Greenspan in...
04:57He swore the oath and took the job.
05:00I had long since decided to engage in efforts
05:04to advance free market capitalism as an insider,
05:07rather than as a critical pamphleteer.
05:10He understood that there were laws he had to enforce
05:12that he personally would not have passed,
05:15but he intended to do as little as he could on regulation,
05:18and he proceeded to do just that.
05:20And by the time Bill Clinton took the White House,
05:25the anti-government rhetoric had become so fashionable
05:29that even some Democrats embraced it.
05:31Ronald Reagan had won.
05:32Government was seen as the problem,
05:34and even though Bill Clinton was someone who believed in government
05:38and wanted to use it,
05:39he was kind of forced into that Reagan-esque ideology,
05:42because that was what people wanted to hear.
05:44From the beginning, Clinton aimed to reassure powerful forces on Wall Street,
05:53and he did so with a key appointment.
05:55I asked Robert Rubin to serve as assistant
05:58to the president for economic policy.
06:02Rubin is the best-known financier in the country at that point,
06:06because he had run the legendary Goldman Sachs.
06:10Bob Rubin was Bill Clinton's emissary to Wall Street.
06:14Clinton placed great trust in Bob Rubin
06:17and Bob Rubin's view of financial markets
06:20and financial regulation.
06:22He had an enormous amount of credibility
06:24because he was a business success,
06:26and Democratic administrations
06:28always seem to worship people who can excel at business.
06:32At the White House and as Treasury Secretary,
06:36Rubin found an unlikely ally.
06:39Clinton had asked Alan Greenspan to stay on.
06:43Bob Rubin and Alan Greenspan were very much in lockstep.
06:48They had very similar views on Wall Street.
06:53It boiled down to the less regulation, the better.
06:57And Rubin populated the Clinton administration
06:59with a network of free-market true believers.
07:03It wasn't just Rubin and Greenspan
07:05who were these free-market acolytes.
07:08That thinking pervaded the Treasury and the White House.
07:13Among Rubin's acolytes,
07:1535-year-old Timothy Geithner
07:17and Rubin's top deputy,
07:19the outspoken Harvard economist Larry Summers.
07:23Summers is tough.
07:24Summers is very blunt-spoken,
07:27doesn't suffer fools lightly or anyone else,
07:29as the saying goes.
07:32Bob Rubin is not a guy who likes confrontation.
07:35He's confrontation-averse.
07:37But he understands you need someone in there
07:40who can swing a heavy axe.
07:43And that person was Larry Summers.
07:45He was the enforcer.
07:47Together, Greenspan, Rubin, and Summers
07:50formed their own pro-business, anti-regulation support group.
07:53They're the committee to save the world,
07:56according to the Time magazine cover.
07:59These are the people we turn to at that moment,
08:02who together, all three, in a way, say, trust us.
08:06They seem to have things under control.
08:09You know, the world trusted Rubin and Greenspan,
08:11so why wouldn't Clinton?
08:13You know?
08:14And the market was doing great,
08:16and the country seemed to be doing great.
08:20Big day on Wall Street
08:21as stock prices return to territory
08:23not soon since the summer.
08:24He's joining the party on Wall Street today,
08:25posting a triple-digit gain along with today.
08:26It's not trading at five times its offering price.
08:28Nine for a total of $41,000.
08:30Extremely active volume,
08:3155 million shares changing hands,
08:33and market-friendly...
08:34$2,500 dot, $2,500 dot.
08:36These were the euphoric go-go 90s.
08:40Well, you know, the mid to the late 1990s
08:42were a very ripe boom period.
08:44The most robust portion of the tech boom.
08:49Internet fever has not subsided at all.
08:51On the money tonight, Internet fever again.
08:53eBay, up 700 percent.
08:56The financial markets were zooming.
08:59Priceline.com is the latest beneficiary
09:01of the Internet stock craze.
09:03The market was rocking and rolling.
09:05Shares of the web technology company
09:07soared more than 450 percent.
09:09The Dow Jones Industrial Average gained 91 points today.
09:18$300 a share.
09:20Santa Claus arrives early on Wall Street.
09:22But in Washington, there was one agency
09:27that looked at the bull market with some skepticism.
09:31Buried deep in the bureaucracy,
09:34the Commodities Futures Trading Commission, CFTC.
09:39It was a small fish in otherwise a pretty big pond.
09:43It was always viewed as kind of a sleeping, small,
09:48not terribly significant agency.
09:51The agency was authorized to regulate agriculture futures
09:56and to oversee arcane complex financial instruments
10:00known as derivatives.
10:01You know, they're one of these little afterthought agencies
10:04that kind of get in the way of the big guys.
10:07The CFTC started getting in the way in 1996
10:12when a new chairperson, Brooksley Bourne, took over.
10:16My law practice was in the derivatives area.
10:19I'd practiced derivatives law for more than 20 years.
10:24Brooksley Bourne is a longtime securities lawyer.
10:30She has a stellar reputation.
10:32She's been around the block.
10:34She knows her stuff.
10:36Bourne was 55, a veteran of the gender wars
10:40that had influenced many women of her age group.
10:44In Bourne's case, the struggle had started early.
10:49Bourne went to Stanford in the early 1960s.
10:52Most women in her class got married.
10:55Brooksley went to law school.
10:58There were very few women in law school at the time.
11:02This was during the Vietnam War,
11:05and a lot of men in the class saying,
11:07what are you doing here?
11:08You're taking the place of somebody,
11:11a man who could be here and not have to go to the war.
11:15The way she approached this was,
11:17well, I got to show them I can do it.
11:19She did, top of her class.
11:22The first female president of the Stanford Law Review.
11:27You would think this would be a great moment of triumph
11:29for Brooksley Bourne.
11:31Instead, she gets a phone call from one of the deans,
11:34and he says,
11:35Brooksley, I just want to let you know
11:39that the faculty stands ready to step in
11:43if you're not able to pull this off.
11:49It goes on like that, on and on and on,
11:52at each step of Brooksley Bourne's life and career.
11:58In Washington, she became a partner
12:00in a prestigious law firm,
12:02built an international reputation,
12:05formed alliances with other powerful female attorneys,
12:09including one who happened to be the wife of Arkansas's governor.
12:13She had developed a very close relationship
12:16with Hillary Clinton
12:17when Hillary Clinton was a very prominent lawyer
12:22in Little Rock, Arkansas.
12:25And then, Bill Clinton won the presidency.
12:28Brooksley Bourne found herself being invited down to Arkansas
12:32during the transition for a meeting with him
12:35to discuss possibly being the Attorney General
12:38of the United States.
12:39She's very self-effacing.
12:42You know, she's flattered,
12:43but she's going to see if it happens.
12:46Week 7 of the Clinton transition.
12:49NBC's Andrea Mitchell tonight.
12:51For Attorney General,
12:52Clinton is considering Washington lawyer Brooksley Bourne.
12:55Brooksley went in for an interview with Clinton.
12:58The story that comes back
13:00was that Clinton found her boring
13:02and that she was...
13:05It never went anywhere.
13:07It didn't happen.
13:10Janet Reno was chosen.
13:13And that's how Brooksley Bourne
13:15ended up running the obscure CFTC.
13:19I think, to some extent,
13:20you could view this as a consolation prize.
13:23To the general world,
13:24people who knew Brooksley,
13:25the circles she traveled,
13:26the American Bar Association,
13:28the D.C. Bar,
13:29all the prestigious boards she served on,
13:32people were probably scratching their heads.
13:36An experienced financial litigator
13:38who'd seen the worst of the markets,
13:40Bourne was a believer in government regulation.
13:45Given the political climate in Washington at the time,
13:48clashes with Greenspan,
13:49Reuben and Summers were inevitable.
13:53Almost right away, she had one.
13:55It began after she received an invitation to lunch
13:59at the Federal Reserve with the chairman himself.
14:03How could you not have a little bit of butterflies in your stomach
14:09when you're going to go see Alan Greenspan
14:12at that moment in time?
14:15It didn't take long for Bourne to learn
14:17that she and the chairman were not going to see eye to eye.
14:20He said something to the effect of,
14:22well, Brooksley, we're never going to agree on fraud.
14:26And she said,
14:27well, what do you mean?
14:28And he said,
14:29you probably think there should be rules against it.
14:32She said, well, yes, I do.
14:34He said, you know,
14:35I think the market will figure it out
14:38and take care of the fraudsters.
14:41The Alan Greenspan lunch, did it actually happen?
14:44Where he says...
14:45I'm not going to talk about it.
14:47I'm not going to talk about it on camera.
14:51Bourne is reluctant to speak about her meetings with Greenspan
14:55or others in the Clinton administration.
14:59Greenspan refused to speak to Frontline at all,
15:02but Bourne's advisers did.
15:05Greenspan didn't believe that fraud
15:07was something that needed to be enforced,
15:10and he assumed she probably did.
15:12And of course she did.
15:15I've never met a financial regulator
15:18who didn't feel that fraud
15:20was part of their mission.
15:22And this is an absolute stunner
15:27for the new head of this tiny agency
15:31who is charged with making sure people don't commit fraud.
15:37Well, I think she was taken aback
15:38about how far he would go towards deregulation,
15:42that even the notion that we should police fraudulent activity,
15:45he didn't think was something that was a given.
15:51That was her introduction to Alan Greenspan.
15:54The clash with Greenspan didn't intimidate Bourne.
15:58She was determined that her agency would investigate fraud
16:01at the first opportunity.
16:03One area that caught her attention
16:05was a new and highly lucrative market,
16:08over-the-counter derivatives.
16:10She starts to realize
16:11that there's this whole world out there
16:14of what are called over-the-counter derivatives
16:17that are essentially unregulated.
16:20They're not...
16:21It's not even that they're unregulated.
16:23It's that the government doesn't even know
16:25what's going on.
16:27My staff began to say
16:29how big this was
16:31and how little information they had about it.
16:36On Wall Street,
16:37they described it as a black box.
16:40Only the parties involved in a deal
16:42knew what was happening.
16:44The derivatives market
16:45was a market that was not well understood,
16:48was growing rapidly,
16:50that had a few really smart, aggressive,
16:53innovative players.
16:56Derivatives, swaps, basically bets
17:00between companies and banks,
17:02laying off risk.
17:05Derivatives, in essence,
17:06are insurance policies
17:08that various players on Wall Street
17:11enter into to protect themselves
17:13from unforeseen calamities.
17:15It was a $27 trillion market
17:18happening out of sight,
17:20inside a black box.
17:22We didn't truly know the dangers
17:25in the market
17:26because it was a dark market.
17:28There was no transparency.
17:31The conditions were very favorable
17:34for things to go wrong.
17:36As Born's investigators learned,
17:38there was also plenty of room
17:40for old-fashioned fraud.
17:42There's this major scandal
17:43at Bankers Trust
17:44where they have taken
17:47two of their customers,
17:49Procter & Gamble
17:50and Gibson greeting cards,
17:51to the cleaners
17:53with these complex,
17:55over-the-counter derivative products.
17:57Dealing in derivatives
17:58sold by Bankers Trust.
17:59Procter & Gamble
18:00claim they've lost millions
18:01of dollars
18:02from derivative deals
18:03arranged by Bankers Trust.
18:05In 1993, Bankers Trust,
18:07one of the largest banks
18:08in the country at the time,
18:10had sold derivatives
18:11to Procter & Gamble.
18:13Procter & Gamble
18:14sued Bankers Trust,
18:15claiming that they had been sold products
18:19that they didn't really understand
18:20and that blew up in their face.
18:22The lawsuit set the stage
18:24for a stunning revelation.
18:26Bankers Trust employees
18:28took advantage of the fact
18:30that derivatives
18:31were too complicated
18:32to understand.
18:33It opened a window
18:35onto what was really going on
18:36in the derivatives market.
18:37As part of the case,
18:42Procter & Gamble discovered
18:44secret audio tape recordings
18:46of telephone calls
18:48among Bankers Trust brokers.
18:50There was one employee
18:52who described the business
18:53as a wet dream.
18:55A Bankers Trust employee
18:57said,
18:57we set them up.
18:59They had taped phone calls
19:01from people inside Bankers Trust
19:04who were sort of chuckling,
19:05saying, ha-ha,
19:06these idiots really think
19:08that this isn't their best interest,
19:09but ha-ha, it's not.
19:11We're probably going to end up
19:12cleaning their clocks
19:12on these contracts.
19:15It had all happened
19:16in secret.
19:18Even this blatant scam
19:20might never have been discovered
19:21by the government.
19:23The only way the CFTC
19:25found out about
19:26the Bankers Trust fraud
19:28was because Procter & Gamble
19:31and others filed suit.
19:33Looking inside
19:34Wall Street's black box
19:36was impossible for Bourne,
19:38or indeed any other
19:39government regulator.
19:41They're unregulated.
19:42The contracts aren't traded
19:44on exchanges.
19:45They're entered into
19:46between private parties.
19:49There was no record-keeping
19:50requirement imposed
19:52on participants in the market.
19:54There was no reporting.
19:57We had no information.
20:00There's no way, really,
20:01for the government or anyone else
20:02to know how many of these
20:03are out there,
20:04know how big a market it is,
20:06and know who owns them
20:07and who owes who money,
20:09because it's just a bunch of contracts
20:10and file cabinets
20:11and the lawyers' offices
20:12of banks and hedge funds
20:14all over the world.
20:17And that's what frightened Bourne
20:18more than anything.
20:21Trillions of dollars
20:22and the biggest banks in the country
20:24operating in secret.
20:27If something went terribly wrong,
20:29the high-stakes derivatives market
20:30could take down the entire financial system.
20:34And that's what everybody's worried about.
20:36You have one big institution that fails.
20:38It can't pay its obligations.
20:40It forces somebody else
20:41into a dangerous territory
20:43who can't pay their obligations.
20:45Pretty soon,
20:46it's a falling domino effect
20:47through the economy.
20:50As the market grew and morphed,
20:53Bourne felt her agency
20:54would have to get involved.
20:57But that would mean confronting Greenspan,
21:00Rubin, and Summers.
21:02She used to say she would lay awake at night
21:05turning in her bed
21:07because she could see,
21:09coming down the road,
21:11the crises kept building and building.
21:23Federal Reserve Chairman Alan Greenspan
21:25told Congress today
21:27the U.S. economy is the best he's ever seen.
21:30By spring of 1998,
21:32the idea of tougher regulation
21:34seemed out of step with all the good news.
21:38Current economic performance
21:40is as impressive as any I have witnessed
21:44in my near half-century.
21:46Those Internet stocks
21:47continue their meteoric rise.
21:49Investors are hoping Alan Greenspan
21:51will give them another boost
21:53by lowering interest rates yet again.
21:54You have to remember the context.
21:56Companies are going public
21:57and doubling and doubling
22:00every week of the year.
22:01If you thought the Internet bubble
22:03was about to burst, think again.
22:06Some weeks, it was happening every day.
22:07And, you know, the idea of worrying about derivatives
22:10was just, you know, so 20th century.
22:13We were on a path towards,
22:16wow, markets can do great things.
22:18Communism was dead.
22:20Markets capitalism was invincible.
22:26But at Treasury, things were about to change.
22:30The carefully calibrated inner tranquility
22:33was being disturbed by a small tremor.
22:36It quickly made its way up to Robert Rubin.
22:39Brooksley Bourne was contemplating
22:41the regulation of OTC derivatives.
22:45The pushback is visceral and immediate.
22:48And that's one of the striking things about this.
22:51This was a job for Larry Summers.
22:54I walk into Brooksley's office one day.
22:57The blood is drained from her face.
23:00She's hanging up the telephone.
23:03She says to me, that was Larry Summers.
23:05Larry basically reads her the riot act.
23:09He more or less tells her,
23:12my understanding is that you don't get it.
23:15He says you're going to cause
23:18the worst financial crisis
23:20since the end of World War II.
23:22That he has, my memory is,
23:2413 bankers in his office
23:28who have informed him of this.
23:31Stop right away.
23:34No more.
23:36In Washington, they say the financial sector
23:39has five lobbyists for every congressman.
23:42Brooksley Bourne is stepping into the maw
23:45of the most well-oiled and highly financed
23:48lobby in the history of Washington, D.C.
23:51It's the financial lobby.
23:53The bankers just fall over themselves,
23:55calling Summers and Rubin and Greenspan
23:57and everybody, saying,
23:58get this lady off our backs.
24:01But the harder they pushed,
24:03the more interested Bourne became.
24:05They were totally opposed to it.
24:08That puzzled me.
24:11You know, what was it that was
24:14in this market that had to be hidden?
24:17Why did it have to be a completely dark market?
24:22So it made me very suspicious and troubled.
24:27Bourne's agency was legally independent.
24:30She reported to the president.
24:33Rubin had no authority over her.
24:36To stop her, he would call upon his allies
24:39who sat with him on a secretive council
24:41known as the President's Working Group.
24:44The President's Working Group
24:45was the most influential White House body
24:49on financial policy.
24:51It was called at the discretion
24:53of the secretary of the treasury.
24:55It was a committee hand-picked by Bob Rubin,
24:58and it was a committee that he steered.
25:00Larry Summers attended.
25:02So did Alan Greenspan.
25:04And the chairman of the SEC, Arthur Levitt.
25:07Alan and Bob and I had known one another
25:11and away from government.
25:14I think we all liked one another
25:16and respected one another.
25:18By executive order,
25:20the head of the CFTC also attended the meetings.
25:23I didn't know Brooks Lee Bourne.
25:25I was told that she was irascible,
25:30difficult, stubborn, unreasonable.
25:37Rubin Summers and Greenspan
25:39had a great deal of faith in their own intellects.
25:43And I think that they were not welcoming
25:46of somebody who looked at the world different.
25:49It was kind of abrasive.
25:50You know, they were used to dealing mainly with men
25:53and with people they knew.
25:55And here was someone they didn't really know.
25:57They didn't know that much about her.
25:58And to boot, she was a woman.
25:59So, you know, put it all together
26:01and you got somebody that you can kind of flick off
26:04in the back of your hand.
26:05At least they thought.
26:07As Rubin was quietly preparing the working group,
26:10Bourne was taking the first steps
26:12toward regulating OTC derivatives,
26:15designing a document known as a concept release.
26:18In response, Rubin acted,
26:21calling an emergency meeting of the working group.
26:24We're driven there,
26:27and we get out at the entrance to the Treasury,
26:29go up to the room.
26:30Everybody assembles.
26:31The secretary walks in.
26:33The meeting is called to order.
26:34And the subject of the meeting was to discuss
26:38the concept release.
26:40And the clear mission of it was
26:42to convince Brooksley
26:46that it shouldn't be issued.
26:48What's amazing is that Rubin and Greenspan said,
26:53no, no, no, you can't do that.
26:55We just can't have this.
26:56And it got pretty nasty pretty quickly.
26:58Those on the other side were saying,
27:01look, this deregulated market
27:03is part of what's brought us the boom times.
27:05And so we don't, we can't,
27:07we don't want to change that.
27:08You know, the market will take care of everything.
27:11And we really don't need regulation of these.
27:14And, in fact, it would be counterproductive.
27:16Each of the principles, in turn,
27:18that is to say,
27:20Rubin, Greenspan, and Levitt
27:23take their shot at telling Brooksley
27:26that she shouldn't do what she's doing.
27:28Rubin says to her,
27:30you don't have the legal authority to do this.
27:33And Brooksley said,
27:35oh, that's interesting.
27:36That's the first time I've ever heard that.
27:38All my lawyers at the CFTC
27:41have assured me
27:43that we have the exclusive jurisdiction to do this.
27:47Rubin was condescending toward her.
27:49He said he would get his lawyer in the department
27:51to help her understand the laws better,
27:53something like that.
27:55SEC Chairman Arthur Levitt
27:57had been personally lobbied
27:58to join the effort to shut Bourne down.
28:01This tight-knit group persuaded me
28:04that we really would face
28:07a situation of financial turmoil
28:11if we tried to undo these existing contracts.
28:16And then it was Alan Greenspan's turn.
28:19I happen to be sitting behind Brooksley
28:22and behind Greenspan.
28:24They're sitting next to each other.
28:26Greenspan turns to her.
28:28She turns to him.
28:30His face is red,
28:34and he's clearly quite upset.
28:37He was very adamant
28:39that this was a serious, serious mistake,
28:42that it caused untold damages
28:44to the financial services market
28:46and that she should stop and not do this,
28:48that it was unwise
28:50and would cause tremendous damage.
28:55In a group of this kind,
28:57there will be a disparity in power.
29:00And it would take an extraordinarily outspoken,
29:03knowledgeable, pugnacious person
29:06to fight the losing battle
29:09against the titans who led that group.
29:14It's the education of Brooksley Bourne.
29:18They decided that,
29:20hey, she's not playing ball.
29:22We're going to teach her a lesson.
29:24And we're going to get this thing killed
29:26because we don't want it to happen.
29:31But two weeks later,
29:32Bourne told her staff to publish the concept release.
29:35That creates an earthquake.
29:39You're talking foundation of the building.
29:43And she is literally in the crossfire
29:47of an amazing number of bullets.
29:51The response of the working group
29:53was immediate and unprecedented.
29:55By the afternoon,
29:57Rubin, Greenspan, Levitt put out a statement
30:02saying this is a very bad thing
30:07and Congress should act
30:09with all deliberate speed to block it.
30:12We have grave concerns about this action
30:14and its possible consequences.
30:17We are prepared to pursue, as appropriate,
30:20legislation that would provide greater certainty
30:23concerning the legal status of OTC derivatives.
30:27The powers that be in Washington
30:29put out the word to the media
30:31and they put out the word to Capitol Hill
30:34that her views were not to be trusted,
30:36they were not to be taken seriously,
30:38that she was running a podunk agency.
30:40This was a power grab
30:42and she didn't have a clear understanding
30:44of the products that she was going to regulate
30:46and shouldn't be entrusted with that kind of power.
30:48And it would be a great mistake if she were.
30:53This hearing of the Senate Agriculture Committee
30:55is now called to order.
30:57Only Congress had the legal authority to stop Bourne.
31:01Rubin, Greenspan, Summers, and Levitt lobbied hard.
31:05Today we will receive testimony
31:07on over-the-counter derivatives.
31:09Hearings were held almost immediately
31:11in both the House and the Senate.
31:13Brooksley is a lady.
31:16And the men were gentlemen.
31:19But the feelings were quite intense.
31:21This was an enormous embarrassment
31:26to the executive branch
31:27because they couldn't coordinate with each other.
31:30There are a ridiculous number of congressional hearings.
31:35The government not creates uncertainty.
31:38CFTC wants to come into somebody else's yard here.
31:42She just gets pummeled on Capitol Hill.
31:45I see no evidence whatsoever to suggest
31:49that this is a troubled market,
31:51that fraud is rampant.
31:53The release has cast the shadow
31:55of regulatory uncertainty over a thriving market.
31:59The CFTC's action has and will bring,
32:03I believe, significant disruption
32:05to this important global market.
32:07It serves no useful purpose,
32:10hinders the efficiency of markets
32:12to enlarge...
32:13All the regulators there testifying
32:15and, you know,
32:16all of them say,
32:17this is a bad idea, this is a bad idea,
32:18this is a bad idea, this is a bad idea.
32:19And then she says, this is a good idea.
32:20And the senators and congressmen
32:23just, you know, beat her over the head.
32:26I feel very strongly that we should not have
32:29one agency innovate in this area
32:32and, in doing so,
32:34create very substantial financial problems.
32:37Ninety percent of the members of Congress
32:39couldn't have told you what a derivative was.
32:41So all they knew was that these guys on Wall Street,
32:44some of them make big campaign contributions,
32:46many of them seem very smart,
32:48say, if we do this, it'll screw up the economy.
32:51My question, again, is what are you trying to protect?
32:54We're trying to protect the money
32:57of the American public,
32:59which is at risk in these markets.
33:03That summer of 1998,
33:05Bourne testified four times
33:07before hostile congressional committees.
33:10They were hearing from very respectable sources
33:14that there was no problem
33:17and they chose to rely on those people.
33:20And I think that was understandable.
33:24I think it was unfortunate,
33:26but I think it was very understandable.
33:28I thank each one of you for coming
33:30and for your testimony.
33:32Thank you, Mr. Chairman.
33:35The system wasn't set up to allow somebody
33:37like Brooksley Bourne to have a real impact.
33:41She was running against the tide
33:43of very powerful forces
33:45and powerful forces that were doing exceptionally well.
33:49As Congress headed for the summer recess,
33:53it seemed likely they would not heed Bourne's warning.
33:57She had no support anywhere.
34:00She wasn't a member.
34:02She had no political capital.
34:05She had no chance.
34:11Then Bourne's warning became a prophecy.
34:14I was at home and I got a call
34:18and as I would often get a call
34:20from the Treasury operator.
34:22And it was Secretary Rubin on a Saturday
34:25and the Secretary of the Treasury
34:26wants to have a conversation with me
34:28about this hedge fund
34:29that apparently was about to go under.
34:32The hedge fund,
34:36long-term capital management,
34:38was melting down.
34:39A quiet panic had begun.
34:42It looked exactly like
34:45what Brooksley Bourne had been warning about.
34:47Known on the street as LTCM,
34:51it was the trillion-dollar favorite
34:53of in-the-know investors.
34:55LTCM's a hedge fund.
34:58It's run by John Merriweather,
35:00ex-Solomon Brothers.
35:03He's considered one of the great geniuses
35:05of the bond market.
35:06Tons of money flows his way
35:08from private investors
35:09who would like to make a killing
35:10via his smarts.
35:11The firm also had the former vice chairman
35:15of the Fed,
35:16Alan Greenspan's number two.
35:18David Mullins and John Merriweather
35:20operated LTCM outside government regulations.
35:25They were the personification
35:27or the embodiment
35:28of Alan Greenspan's credo.
35:30Credo was,
35:31markets get it right.
35:35LTCM invented complex mathematical formulas
35:39and used derivatives to place their bets.
35:42These guys are the rock stars,
35:44the long-term capital management team.
35:46They're sort of rock stars
35:47for the math clubs of America.
35:50LTCM is a case study in arrogance.
35:53Lot of really, really smart people
35:55who thought they had
35:56a foolproof money machine,
35:58a number of them Nobel Prize winners.
36:01Neither the government nor investors
36:03knew anything about how LTCM worked.
36:06It was a completely secret process.
36:10If you want to invest
36:11in long-term capital management,
36:13you've got to walk into a conference room,
36:15abandon computers,
36:17abandon pencils,
36:18abandon yellow pads,
36:20no notes,
36:22and you're told there's a black box.
36:24Look at these returns,
36:2546%, 40%, 20%.
36:27People are fighting
36:29to get in to invest.
36:31People are fighting to lend money.
36:33LTCM did business
36:35with 15 of Wall Street's biggest banks,
36:38leveraging $5 billion
36:40into more than $1 trillion in derivatives.
36:43All these big banks
36:45hadn't done their homework.
36:47They didn't even know
36:48the extent of LTCM's exposures
36:52in the market
36:53or the fact that all of the other
36:55OTC derivatives dealers
36:58had been lending to them as well.
37:01Then, trouble.
37:03LTCM's complicated computer models
37:06were failing.
37:07In Russia,
37:08the financial markets were hit hard today.
37:11Rocked by a financial crisis in Russia.
37:13The firm had all sorts of models
37:15that said no matter what happened,
37:16based on history,
37:17they couldn't lose
37:18more than $35 million a day.
37:20In Russia today,
37:21a grave financial situation
37:23grew decidedly worse.
37:24The effects of the Russia crisis
37:26were evident everywhere.
37:28They started dropping
37:29$300, $400, $500 million every day.
37:33Word of a pending collapse spread.
37:36Many banks had invested
37:38in LTCM's derivatives,
37:40believing they alone were in a deal.
37:43They weren't.
37:44When LTCM started to get stressed
37:47and these guys said,
37:48I want to collect my collateral,
37:49they all discovered
37:50that a lot of other parties
37:51had the same claims on it.
37:54With Wall Street's banks in a panic,
37:56LTCM was perilously close to collapse.
38:02And that's when Washington
38:03first heard about the problem.
38:06Secretary of the Treasury began
38:07to contact members
38:08of the President's working group.
38:10I got a call
38:11from the Treasury Department.
38:13I thought that LTCM was exactly
38:16what I had been worried about.
38:18None of the regulators had known
38:20they were on the verge of collapse.
38:22Why?
38:23Because we didn't have
38:24any information about the market.
38:26That weekend,
38:27the members of the working group
38:29were told the entire American economy
38:31was hanging in the balance.
38:33Long-term capital management
38:35had very large positions
38:37in the over-the-counter
38:38derivatives marketplace.
38:40And if it came down,
38:43the question is,
38:44how would that affect
38:45the American public?
38:46How would that reverberate
38:47through the system
38:48and affect everybody's livelihood
38:50in the country?
38:52The fear is that if it goes down,
38:54it would present
38:55what they call a systemic risk,
38:57something that could unwind
38:58the entire financial system.
39:00At Treasury,
39:02all they could do
39:03was watch and wait.
39:05It was very scary.
39:06Credit markets around the world
39:07just shut down.
39:09There was a period of real panic.
39:11People were very, very frightened.
39:13These firms were worried about
39:15in some cases their future,
39:17in some cases their survival.
39:19It was a real bloodletting.
39:21After four days,
39:23the Fed acted,
39:24but not directly.
39:26The Wall Street banks
39:28were pressured
39:29to bail out LTCM themselves.
39:32The government said,
39:33it is our belief
39:34that your financial stability
39:36is in jeopardy.
39:37And the way to solve this problem
39:40is for you each
39:41to pony up $400 million
39:43and buy the fund,
39:44prevent it from collapsing,
39:46and try and work the thing out.
39:48Fourteen banks agreed
39:49to put up a few hundred million each,
39:52about $3.5 billion total.
39:55It worked.
39:56The crisis passed.
39:58In Washington,
39:59a collective sigh of relief.
40:04And then,
40:06a call to action.
40:08The video will come to order.
40:09Some in Congress
40:10began to clamor for regulation.
40:12The United States government
40:13is obligated
40:14to be on top of the issues.
40:16When and how did the concept
40:18of market self-regulation fail us?
40:20Americans should be worried
40:22about the gambling
40:23of Wall Street elites.
40:26That puts at risk
40:28every American.
40:29It puts at risk democracy.
40:31How many more failures
40:32do you think we'd have to have
40:33before some regulation
40:34in this area
40:35might be appropriate?
40:38There was a strong sense
40:39that we ought to do something
40:41about these derivatives.
40:42That they really were
40:45posing a risk to our
40:47national economy,
40:49to the global economy.
40:50But Alan Greenspan
40:52had no intention
40:53of yielding.
40:55I know of no set
40:56of supervisory actions
40:58we can take
40:59that will prevent people
41:00from making dumb mistakes.
41:03I know of no piece
41:04of legislation
41:05that can be passed
41:06by the Congress
41:07which would require us
41:08to prevent them
41:09from making dumb mistakes.
41:10Congress was told
41:12that this was an anomaly.
41:14This was not
41:16indicative of dangers
41:18in the market.
41:20I think it's
41:21very important
41:22for us
41:23not to introduce
41:24regulation
41:25for regulation's sake.
41:27In the end,
41:28Congress agreed
41:29with Alan Greenspan
41:30there would be
41:31no new regulations
41:33of over-the-counter
41:34derivatives.
41:35So now,
41:36this is an unregulated
41:37market.
41:38No transparency.
41:39No capital
41:41reserve requirements.
41:43No prohibition
41:44on fraud.
41:45No prohibition
41:46on manipulation.
41:47No regulation
41:48of intermediaries.
41:49All the fundamental
41:50templates
41:51that we learned
41:53from the Great Depression
41:54are needed
41:55to have markets
41:56function smoothly
41:57are gone.
41:58But within the next
41:59few weeks,
42:00Congress did decide
42:01to do something
42:02about Brooksley-Borne.
42:03They stopped her
42:05entirely.
42:06Essentially,
42:07what you have
42:08is a very bald
42:09and brutal power play.
42:11They defenestrate
42:12her entire agency.
42:14They say,
42:15because you haven't
42:16played ball,
42:17we are now declaring
42:18a regulatory freeze
42:20on anything you folks
42:21can do in this market.
42:22Forget it.
42:23You're done.
42:24And she was.
42:26Born resigned.
42:28There was not
42:29anything effective
42:30that was going to happen
42:31in the over-the-counter
42:32derivatives area.
42:34And I felt as though
42:36because of that,
42:38I had done
42:39what I could
42:40to help protect
42:42the public.
42:43And there wasn't
42:45much left
42:46for me to do.
42:49With Born
42:50out of the way,
42:51the last two years
42:52of the Clinton administration
42:53were a heyday
42:54of deregulation.
42:57OTC derivatives
42:58were off-limits.
42:59Banks were freed
43:01to make riskier investments.
43:05Wall Street was largely
43:06left to regulate itself.
43:08Again and again
43:09during the Clinton
43:10administration,
43:11you see these examples
43:13of the top regulators
43:15basically saying
43:16the market knows
43:17better than us
43:18and we're going to
43:19let the market do it.
43:23By 2007,
43:25the OTC derivatives
43:26market had grown
43:27to $595 trillion.
43:30That's $595 trillion.
43:32Stocks shot higher
43:33giving the Dow
43:34its best day
43:35in...
43:36The hands-off approach
43:37seemed to be working.
43:39Wall Street had bet heavily
43:40on the real estate boom.
43:41The economy expanded
43:42at a robust
43:434.3% annual rate.
43:45Those derivatives
43:46were at the heart
43:47of that strategy.
43:49You have derivatives
43:50insuring derivatives
43:51which are based
43:52on derivatives.
43:53It's an almost
43:54an Alice in Wonderland.
43:56kind of profitability.
43:59What, in fact,
44:00you essentially had
44:02was a big,
44:04creaking time bomb
44:06that needed
44:07some sort of event
44:08to disrupt
44:10all of the assumptions
44:11everyone had.
44:14The stock market
44:15dropped by hundreds
44:16of points
44:17right from the open.
44:18The banking industry
44:19are plunging.
44:20The office rate
44:21in America
44:22has now soared.
44:23The Dow...
44:24The time bomb exploded
44:25almost exactly 10 years
44:26of LTCM.
44:27Investors were shaken
44:28by Lehman's bankruptcy
44:29filing and what was
44:30essentially...
44:31You had the most
44:32raw panic
44:33the economy
44:34and the financial markets
44:35had seen
44:35since the 1930s.
44:37It was ugly.
44:38It was broad-based.
44:39It was bringing
44:40huge institutions
44:41to their knees
44:42and a lot of that
44:43was tied into derivatives.
44:45They are hidden
44:46like landmines
44:47in a battlefield
44:48and nobody wants
44:49to give money
44:50to anybody else
44:51because they don't know.
44:52AIG plunging.
44:54At one point
44:55they were down
44:5670%
44:57If AIG can't raise
44:5820 billion dollars
44:59they'll have to announce
45:00bankruptcy tonight.
45:01It was my worst nightmare
45:03coming true.
45:05Nobody really knew
45:06what was going on
45:08in the market.
45:10The toxic assets
45:12of many of our biggest banks
45:15are over-the-counter
45:16derivatives
45:17and caused
45:18the economic downturn
45:20that made us
45:21lose our savings
45:22lose our jobs
45:24lose our homes.
45:26It was very frightening.
45:30I think to understand
45:31the crisis
45:32you have to understand
45:33that it had
45:34many, many factors
45:36that contributed to it.
45:37But it's absolutely clear
45:39to me that
45:40if we had restricted
45:41the derivatives
45:42some of the major problems
45:45would have been avoided.
45:46Had Brooksley Bourne
45:48been enfranchised?
45:50Had Brooksley Bourne
45:51been listened to?
45:52Had Brooksley Bourne
45:53been made part
45:54of the process?
45:55Would that have had
45:56a different ending
45:58for what subsequently
46:00happened in the
46:00derivatives market?
46:01Certainly.
46:04In the aftermath
46:05one former member
46:06of the working group
46:07has had a change of heart
46:09about Brooksley Bourne.
46:10I've come to know her
46:13as one of the most capable
46:15dedicated, intelligent,
46:20and committed public
46:21servants
46:22that I have ever
46:25come to know.
46:26I wish I knew her
46:29better in Washington.
46:30I could have done
46:32much better.
46:33I could have made
46:34a difference.
46:35And the others?
46:39Robert Rubin left government
46:42to join top management
46:43at Citibank.
46:44The taxpayers
46:46have pledged
46:47more than $100 billion
46:48to keep City afloat.
46:50Rubin's former deputies
46:53Larry Summers
46:54and Timothy Geithner
46:55have become
46:56President Barack Obama's
46:58chief financial advisors.
46:59Neither Rubin nor his
47:02former deputy
47:04Larry Summers
47:05would speak with Frontline
47:06about what happened
47:07to Brooksley Bourne.
47:08And Rubin's other
47:10top deputy,
47:11Gary Gensler,
47:12now holds Brooksley Bourne's
47:14former post at the CFTC.
47:15It still lacks authority
47:18to regulate OTC derivatives.
47:20Alan Greenspan retired
47:24from the Federal Reserve
47:25just before the crisis
47:27hit in 2006.
47:32The committee will
47:33please come to order.
47:34Last year,
47:35he once again appeared
47:37before the Congress.
47:38You see Greenspan
47:39at the hearing table
47:40after the collapse
47:42and you see
47:42a crushed man, really.
47:44He said that the premise
47:46that you could trust
47:46markets to regulate
47:47themselves was misplaced.
47:49You have been a staunch advocate
47:52for letting markets
47:53regulate themselves.
47:55And my question for you
47:57is simple.
47:58Were you wrong?
47:59Yes.
48:00I found a flaw
48:02but I've been very
48:03distressed by that fact.
48:04You found a flaw
48:05in the reality?
48:07A flaw in the model
48:09that I perceived
48:10is the critical
48:11functioning structure
48:12that defines
48:13how the world works,
48:14so to speak.
48:15In other words,
48:16you found that
48:17your view of the world
48:19your ideology was not right.
48:21Precisely.
48:22No, that's precisely
48:23the reason
48:24I was shocked
48:25because I've been going
48:26for 40 years or more
48:28with very considerable evidence
48:30that it was working
48:31exceptionally well.
48:34After almost two decades
48:36of public service
48:37he realizes
48:38that the economic philosophy
48:40that he had pushed
48:41so hard,
48:42resisting regulation
48:44of derivatives,
48:45he realized
48:46that there were some
48:47fundamental flaws
48:48in that whole philosophy.
48:52It was a pretty
48:52incredible moment
48:54that after a lifetime
48:56of faith
48:57and a certain way
48:58the world worked
49:00that Greenspan would say
49:02I was wrong.
49:04It struck me
49:05as someone admitting
49:06that the core belief
49:08that it animated
49:09basically a 20-year,
49:1018-year career
49:11as Fed chief
49:12was wrong.
49:13It's stunning,
49:14but it doesn't
49:15undo the damage.
49:19And President Obama
49:20visits New York today
49:21to deliver a major
49:22address to Wall Street.
49:23Last month
49:24the President spoke
49:25on Wall Street.
49:26We will not go back
49:28to the days of reckless
49:29behavior
49:30and unchecked excess
49:31that was at the heart
49:32of this crisis.
49:35Right now he is
49:36deciding how hard to push
49:38to regulate the OTC
49:40derivative market.
49:42We've got to close
49:43the loopholes
49:44that were at the heart
49:45of the crisis.
49:46Where there were gaps
49:47in the rules,
49:48regulators lacked
49:49the authority
49:49to take action.
49:51The President's
49:52point man,
49:52Larry Summers,
49:53now says he supports
49:55strong regulation
49:56of over-the-counter
49:57derivatives.
49:59And Treasury
50:00has released
50:01a proposal outlining
50:02some of the same
50:03ideas Bourne had
50:0411 years ago.
50:07But the financial lobby
50:08is still against
50:09those ideas
50:10and is lobbying hard
50:11at the White House
50:12and in Congress.
50:14The new regulations
50:15are stalled.
50:16I was very hopeful
50:18that in the aftermath
50:19of the crisis
50:20we could see
50:21what had gone wrong
50:22and said,
50:23let's fix it.
50:25But it may be
50:26that we are passing
50:28that critical moment
50:29and in that case
50:31the necessary reforms
50:33will be just much more
50:34difficult to come by.
50:35as for Brooksley Bourne,
50:42without new regulations
50:44she's offering
50:45another warning.
50:46I think we will have
50:49continuing danger
50:51from these markets
50:53and that we will have
50:55repeats of the financial
50:57crisis.
50:58may differ in details
51:00but there will be
51:01significant financial
51:03downturns
51:04and disasters
51:06attributed to this
51:08regulatory gap
51:10over and over
51:11until we learn
51:13from experience.
51:15you
51:27you
51:29you
Comments