Tuesday, November 24, 2009
Monday, November 9, 2009
Acceptance Speech by Brooksley Born 2009 PICA - Brooksley Born with CBK
Caroline Kennedy presents the Profile in Courage Award to Brooksley Born. In 1998, as chair of the Commodity Futures Trading Commission (CFTC), Brooksley Born unsuccessfully tried to bring over-the-counter financial derivatives under the regulatory control of the CFTC. The government’s failure to regulate such financial deals has been widely criticized as one of the causes of the current financial crisis. In the booming economic climate of the 1990’s, Born battled other regulators in the Clinton Administration, skeptical members of Congress and lobbyists over the regulation of derivatives, warning that unregulated financial contracts such as credit default swaps could pose grave dangers to the economy. Her efforts brought fierce opposition from Wall Street and from Administration officials who believed deregulation was essential to the extraordinary economic growth that was then in full bloom.
I would like to thank the John F. Kennedy Library Foundation for this wonderful and unanticipated honor. John F. Kennedy has been one of my heroes for more than 50 years, and to receive an award for courage in his name is truly thrilling and truly humbling.
I would also like to thank a number of colleagues who served with me at the U.S. Commodity Futures Trading Commission. Their assistance and support at the CFTC was invaluable and indeed essential to my efforts.
I would like to recognize my spouse Alex Bennett and our children, whose love and confidence in me have always sustained me.
When I spoke out a decade ago about the dangers posed by the rapidly growing and unregulated over-the-counter derivatives market, I did not do so in expectation of award or praise. On the contrary, I was aware that powerful interests in the financial community were opposed to any examination of that market. Yet I spoke out because I felt a duty to let the public, the Congress and the other financial regulators know that that market endangered our financial stability and to make every effort I could to address that problem.
My voice was not popular. The financial markets had been expanding, innovation was thriving, and the country was prosperous. The financial services industry argued that markets had proven themselves to be self-regulating and that the role of government in market oversight and regulation should be reduced or eliminated.
All of us have now paid a large price for that fallacious argument. We are in the midst of the most significant financial crisis since the Great Depression, and regulatory gaps including the failure to regulate over-the-counter derivatives have played an important role in the crisis.
It is now critically important to identify and eliminate these regulatory gaps and to strengthen our financial regulatory structure. Without significant regulatory reform, our financial system will be exposed to continuing dangers and repeated crises.
No federal or state regulator has market oversight responsibilities or regulatory powers governing the over-the-counter derivatives market or indeed has even sufficient information to understand the market’s operations. The market is totally opaque and is now popularly referred to as “the dark market.” It is enormous -- the reported size of the market as of last June exceeded $680 trillion dollars of notional value, more than ten times the amount of the gross national product of all the countries in the world.
While over-the-counter derivatives have been justified as vehicles to manage financial risk, they have in practice spread and multiplied risk throughout the economy and caused great financial harm. They include the credit default swaps disastrously sold by AIG and many of the toxic assets held by our biggest banks. Warren Buffett has dubbed them “financial weapons of mass destruction.”
We now have a unique opportunity -- a narrow window of time -- to fashion and implement a comprehensive regulatory scheme for these instruments. Existing U.S. laws governing the futures and options markets provide a model for regulating the closely related instruments traded in the over-the-counter derivatives market. The new regulatory scheme should provide that the instruments must be traded on regulated derivatives exchanges and cleared by regulated derivatives clearing houses to the extent feasible. This would allow government oversight and enforcement efforts, insure price discovery, openness and transparency, reduce leverage and speculation, and limit counterparty risk. If any residual over-the-counter market is to be permitted, it must also be subject to robust federal regulation.
These measures would go far toward bringing this enormous and dangerous market under control. They must be adopted and implemented if we hope to avoid future financial crises caused by this market. Special interests in the financial services industry are beginning to advocate a return to business as usual and to argue against any need for serious reform. We have to muster the political will to overcome these special interests. If we fail now to take the remedial steps needed to close the regulatory gap, we will be haunted by our failure for years to come.
Remarks of Brooksley Born on accepting the 2009 Profile in Courage Award, May 18, 2009.
As Prepared for Delivery
Acceptance Speech by Brooksley Born,Acceptance Speech by Brooksley Born,
Sunday, November 8, 2009
November 5, 2009, 7:00 am
When Will the S.E.C. Ever Admit They Made a Mistake?
By Joe Nocera
That was the headline — in ALL CAPS — of a e-mail message I received recently from a lawyer named Robert W. Pearce. Mr. Pearce’s client, Steven J. Wilson, was one of the two men I wrote about in late June who had been accused by the Securities and Exchange Commission of taking part in a small-time stock-manipulation scheme — and who, after five years of investigation and various legal proceedings, had been found not guilty in trials that lasted literally days.
One point I made in that column is that when people who aren’t rich get sucked into the vortex of a lengthy government investigation, they often wind up broke — and broken, even if they are innocent. Mr. Wilson — and his co-defendant, Richard Kwak — were no exceptions. In the column, I focused mainly on Mr. Kwak, who lost his job as a broker at Morgan Stanley, but Mr. Wilson’s plight was no different.
When the investigation began, Mr. Wilson was working for a small investment boutique called Noble Financial Group. Not surprisingly, he lost that job once the S.E.C. decided to come after him. “The really terrible thing is that clients you’ve had for years, companies you’ve done I.P.O.’s for, they won’t even talk to you when they learn you are being investigated by the S.E.C.,” Mr. Wilson told me when I spoke to him several months after his acquittal. And he was unable to find another job. “Personally, I’m pretty broke,” he said. “They decimated me.” At the time I spoke to him, Mr. Wilson, now 63, was trying to make ends meet as an oil filter salesman.
A month after my column was published, Judge Janet C. Hall of United States District Court ordered the S.E.C. to pay Mr. Wilson $481,844.09 in legal fees. (You can read her order here.) This would hardly end all of Mr. Wilson’s financial woes, but it would at least relieve him of some of the debt he piled up as a result of his ordeal. (Mr. Kwak is currently struggling to get Morgan Stanley to pay some of his legal fees.) Under the law, the government loses its immunity from recovery of lawyers’ fees if the action brought by the prosecution was either frivolous or in bad faith. On that argument, the judge sided with the S.E.C., ruling that bringing the case against the alleged stock manipulators was justified. (After all, she wrote, five of the seven defendants copped pleas. As I note in my column, I don’t think those pleas necessarily show there was a stock-manipulation scheme, only that pressure from the government is more than most people can withstand. But that’s a story for another day.)
But then she went on to say that the evidence against Mr. Wilson was so slim that the S.E.C. had no business making him part of the case — and bringing him into the case was frivolous. (“As thin as the S.E.C.’s evidence against Wilson on the marking the close and aiding and abetting claims was, its evidence on the matched trades claim was even thinner.”) Hence the awarding of $480,000-plus in legal fees.
How did the S.E.C. respond? You guessed it: it recently filed notice that it will appeal Judge Hall’s ruling. In doing so, of course, the S.E.C. is prolonging Mr. Wilson’s ordeal, which the agency itself caused, thus compounding the original injustice. My attempt to get the agency to explain itself went nowhere — all I got was an official “decline to comment.”
The S.E.C. has long since acknowledged its mistakes in missing the Bernard Madoff fraud for so many years. Now it ought to acknowledge that it sometimes — maybe more than sometimes — makes the opposite mistake: it relentlessly pursues people, usually small fry with limited resources, who are not guilty of anything except being in the wrong place at the wrong time. Paying Mr. Wilson’s legal bills would be a good place to start.