Heroes of the meltdown

Not many heroes emerged from the rubble of the global financial meltdown. Two are Sheila Bair, the chair of the FDIC, and Brooksley Born, the former head of the CFTC.

Both warned of the crisis. Both were ignored.

In a June 2008 column—written before things got really bad—Steven Pearlstein of the Washington Post described Bair as

one regulator who refused to be muscled by an industry that appeared to be generating lots of new jobs and new wealth, who never bought into the notion that bureaucrats should not substitute their judgments for those of the marketplace, who understood the magnitude of the mortgage crisis.

Born, meanwhile, called for the regulation of derivatives that magnified the mortgage market collapse. Again, here’s The Post, from last May:

A little more than a decade ago, Born foresaw a financial cataclysm, accurately predicting that exotic investments known as over-the-counter derivatives could play a crucial role in a crisis much like the one now convulsing America. Her efforts to stop that from happening ran afoul of some of the most influential men in Washington, men with names like Greenspan and Levitt and Rubin and Summers — the same Larry Summers who is now a key economic adviser to President Obama.

She was the head of a tiny government agency who wanted to regulate the derivatives. They were the men who stopped her.

Sheila Bair

Last night, Bair and Born made a joint appearance as they were honored at the annual dinner of the National Women’s Law Center. (My wife Karen Schneider is v.p. of communications at the center, which explains my presence.) They were interviewed by Judy Woodruff of PBS, and it was revealing to hear them talk about what went wrong and what, if anything, we’ve learned.

Brooksley Born
Brooksley Born

Agencies like the FDIC and CFTC are part of the alphabet soup of Washington regulatory agencies  that ordinarily get no attention from anyone other than the industries that they regulate. That’s one reason that virtually no one, other than industry insiders, their family or friends, paid much attention Bair or Born until it was too late.  With the downturn in Washington journalism, which continues unabated, you can be sure almost no one will be watching those agencies or others like them in the future.

Bair had worked as an aide to Sen. Bob Dole, and then at the treasury department before becoming head of the FDIC  in 2006. “I was just horrified by what I saw,” she said. Banks and individuals were wildly overleveraged.

The trouble is, it’s hard to see a bubble from within. “Everybody was making money,” Bair said. “No one wants to be the one to take away the punch bowl.”

While Bair has a reputation as consumer-friendly, she placed some blame for the crisis on people who borrowed too much money, by engaging in “serial re-fi’s” of their homes, without considering the consequences. “They didn’t understand that this was ultimately stripping them of wealth,” she said.

Born, meanwhile, said that as CFTC chief in the late 1990s, she grew concerned that a derivatives market then worth about $30 trillion was not only unregulated but invisible because the complex securities were traded over the counter and not on exchanges.

“I had no idea of its size or how little any financial regulator knew about it until I got to the CFTC,” Born said, even though, as a partner at Arnold & Porter, she had been exposed to the derivatives market. “None of the financial regulators had much information about it because it was not a transparent market.”

“I saw an enormous growing regulatory gap that I thought really threatened our financial stability,” she said. But she was overpowered by Greenspan and his allies in the Clinton administration.

Woodruff did a nice job conducting the interviews but I wish she had asked what I thought were two obvious questions, especially at a women’s event: First, did the fact that Bair and Born were both pioneering women in a field (financial regulation) dominated by men help them to see things differently? And second, do they think their warnings were ignored in part because of sexism?

Woodruff did ask the women where they found the courage to buck conventional wisdom. Both, essentially, said it never occurred to them not to sound alarms. Women are socialized to be dutiful.

“It was my job,” Born said. “My job as government servant was to make sure that Congress and the other financial regulators and the American public knew about the risks that came from not regulating over-the-counter derivatives.”

So have we learned from our collective mistakes? I’m skeptical. Even now, over-the counter derivatives remain unregulated.

And this morning’s Times brought two ominous headlines, one on the front of Business Day:

Mortgage Delinquencies Soar

One in 10 Borrowers is at Least a Month Behind on Payments

The other made Page One:

In Expansion, Easy Loans in Wealth Areas

FHA Props Up Prices With Risk to Taxpayers

The front-page story went on to say that FHA insurance, which was created to help working class and minority homeowners, is being extended to middle class and upper class home buyers. Meanwhile, tax credits for first-time home buyers have been extended and expanded.

In other words, the government continues to encourage Americans to over-invest in housing.

Bair obviously hadn’t seen those stories when she spoke but she remains worried that, collectively, we can’t resist the temptation to live beyond our means.

“We all need to stop thinking short-term and start thinking long-term,” she said. “I’m not sure everyone in the financial services sector has learned that.”

Rather than close on that worrisome note, let me pass along the advice that Born gave to the young women in the crowd. She urged them to find causes they are passionate about, as she did with women’s rights: “Learn about them. Do your homework. Get allies, and work as hard as you can to further those causes.”

“That’s what makes life worthwhile.”


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