Saturday, April 10, 2010

Financial Crisis Inquiry Commission Hearings , OTC Derivatives, Rubin and Born

This week I watched some of the hearing of the Financial Crisis Inquiry Commission.  The commissioners appeared to be working together better than I would have thought given the Commission's composition.  The two Californians in charge, Phil Angelides (D) and Bill Thomas(R) appear to get along.  The two commissioners who I know have strong and different opinions about regulation and OTC derivatives, former CFTC chair Brooksley Born and Peter Wallison of AEI and a former Treasury Department general counsel (in the Reagan Administration), kept any hostility they might have towards each other in check.

 I still wonder where this exercise is going.  With the witnesses, the commissioners seemed more intent on scoring points rather than establishing facts that would lead to an analysis of the underlying causes of the crisis.  There was an element of a show trial, which is not unusual at this venue, a Congressional hearing room.  And some of the witnesses do in fact have quite a bit to answer for.

On one point, I want to come to the defense of former Secretary Rubin.  I have no knowledge other than what I read in the press about his career since he left Treasury, but with respect to his concerns about OTC derivatives during the Clinton Administration, I have personal knowledge that his statements about this to the Commission are correct, even though professional sarcasm dispenser Dana Millbank of the Washington Post and most certainly others have mocked Rubin. 

(From a recent online chat: Q.  How does Robert Rubin have the chutzpah to say he didn't resist the regulation of derivatives to a panel with Brooksly Born on it?
A. I guess the same way Greenspan had the nerve to tell the same commission that he was warning everybody about the subprime mortgage collapse years before it happened.  There is a very strange electromagnetic field or something in that hearing room, which I think explains why the power went out during Wednesday's session.)

At the hearing, Rubin said he was concerned about the risks that OTC derivatives posed to the financial system when he was in the Clinton Administration.  Having been in meetings with him when he was both head of the NEC and when he was Secretary, I can attest that this is true.  He also said that he was concerned about legal issues that might threaten the market if the CFTC were to assert jurisdiction over the market.  I was one of the Treasury staffers making this point at the time.
Brooksley Born was undoubtedly right about the potential for problems with these instruments.  As I have previously written, she could have probably been able to make allies of Rubin and SEC chairman Arthur Levitt, if she had not insisted that the Commodity Exchange Act be used as the applicable statute for regulating this market.

She and her chief aide on this subject, Michael Greenberger (former CFTC Director of the Division of Trading and Markets), effectively wanted to change the name of the Commodity Futures Trading Commission to something like the Derivatives Commission.  In public pronouncements, Greenberger would say that the CFTC was the derivatives regulator.

To some this would appear to be simply a turf fight, and it was partly that.  The bank regulators and, to an extent, the SEC did not want the CFTC imposing rules and examining entities that they viewed as under their jurisdiction.  But there was also a serious legal issue involved that threatened the enforceability of some contracts.  I have likened it to a sword of Damocles.  More about this in my next post.

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