Brooksley Born Named To Financial Crisis Inquiry Commission

I generally don't think much of high-powered congressional commissions, seeing as they typically exist as busy work done after a disaster to offset the balance of inattention that presided when it mattered. But there's good news for those who care about the Financial Crisis Inquiry Commission: Politico is reporting that Nancy Pelosi is appointing Brooksley Born to the Commission. As such, this means there will at least be one person on the Commission who got it right.

Born ran the Commodity Futures Trading Commission during the Clinton years, and is best known for wanting to apply regulation to the derivatives know, something about maybe forestalling a massive systemic disaster or something? Anyway, that idea was kiboshed by Robert Rubin and Alan Greenspan, two members of the ironically named "Committee To Save The World." As Politico's Eamon Javers notes in his lede, Born will now have the chance to say "I told you so" to the third member of said Committee, Larry Summers, should he manage to stay awake long enough.

Goldman used two methods to hide the mess they were selling. First, they bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK, there was no reason to worry so much about the shitty ones: The CDO, as a whole, was sound. Thus, junkrated mortgages were turned into AAArated investments. Second, to hedge its own bets, Goldman got companies like AIG to provide insurance -- known as creditdefault swaps -- on the CDOs. The swaps were essentially a racetrack bet between AIG and Goldman: Goldman is betting the excons will default, AIG is betting they won't.

There was only one problem with the deals: All of the wheeling and dealing represented exactly the kind of dangerous speculation that federal regulators are supposed to rein in. Derivatives like CDOs and credit swaps had already caused a series of serious financial calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange County, California, was forced to default in 1994. A report that year by the Government Accountability Office recommended that such financial instruments be tightly regulated -- and in 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, agreed. That May, she circulated a letter to business leaders and the Clinton administration suggesting that banks be required to provide greater disclosure in derivatives trades, and maintain reserves to cushion against losses.

More regulation wasn't exactly what Goldman had in mind. "The banks go crazy -- they want it stopped," says Michael Greenberger, who worked for Born as director of trading and markets at the CFTC and is now a law professor at the University of Maryland. "Greenspan, Summers, Rubin and [SEC chief Arthur] Levitt want it stopped."

Clinton's reigning economic foursome -- "especially Rubin," according to Greenberger -- called Born in for a meeting and pleaded their case. She refused to back down, however, and continued to push for more regulation of the derivatives. Then, in June 1998, Rubin went public to denounce her move, eventually recommending that Congress strip the CFTC of its regulatory authority. In 2000, on its last day in session, Congress passed the now-notorious Commodity Futures Modernization Act, which had been inserted into an 11,000-page spending bill at the last minute, with almost no debate on the floor of the Senate. Banks were now free to trade default swaps with impunity.

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