October 22, 2009

Frontline Oct. 20, 2009. The Warning:


In the midst of the 1990's bull market, one lone regulator warned about derivatives' dangers--and overnight became the enemy of some of the most powerful people in Washington.

You can watch the entire program on line here as well as additional invertiews with Brooksley Born, Gary Gensler, Michael Greenberger, Arthur Levitt and Joseph Stiglitz.

From Frontline's interview with Brooksley Born:

Q: What's the message that you're trying to spread now in the ashes of what happened in 2008 and '09?

BORN: I think we have to close the regulatory gap. ... We cannot afford as a society to go forward with an enormous unregulated market that poses this kind of danger because it’ll happen again if we don't take the appropriate steps. ... We need to take a lesson from the existing futures markets where exchange trading has been safe. As much as possible of the over-the-counter derivatives market should be traded on a regulated derivatives exchange. The transaction should be cleared on a regulated clearinghouse. There should be robust federal regulation of any remaining OTC derivatives market. And personally, I think that remaining market should be limited as much as possible to no more than the customized contracts that are needed for specific businesses to hedge particular business risks. ...

Q: If this moment passes again, the consequences are what from your perspective?

BORN: I think we will have continuing danger from these markets and that we will have repeats of the financial crisis. It may differ in details, but there will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience.

Frontline also put together a video timeline of the events starting in 1987-today.

I highly recommend watching the entire hour at PBS's site, but here's one more portion I wanted to share here.

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