Frontline: The Warning (how reckless derivatives trading went on unimpeded)

by Ben Hoffman

Warning: Watching this episode of Frontline may (and should) make you sick to your stomach.

“The Warning” is a Frontline episode that aired this evening about derivatives trading and the demise of our economy. The main players were Alan Greenspan, Robert Rubin, and Lawrence Summers — all Ayn Rand disciples who believed that all regulation was bad. They honestly believed that the markets would regulate themselves, even after the Savings and Loan Scandal of the 80s. They even believed that fraud shouldn’t be investigated.

The “warning” was made back in the mid 90s by head of the Commodity Futures Trading Commission, Brooksley Born. The economy appeared to be humming along beautifully. The stock market was soaring. There was a huge surplus of jobs. We even had a balanced budget!

But it turned out, a cancer was growing. It was the completely unregulated derivatives market — a giant, multi-trillion dollar ponzi-scheme. Brooksley Born attempted to alert Congress to the pending disaster but was met with violent opposition by Greenspan, Rubin, Summers, and most of Congress. Not only was she not allowed to regulate the markets, her power to do so was taken away. And the market was further deregulated with the Financial Services Modernization Act of 1999 and the Commodity Futures Modernization Act of 2000 and the

Less than 10 years later, our economy completely collapsed.

But the really sickening thing about this story is, some of the people who caused the collapse of our economy are major players in the Obama administration. Lawrence Summers is now the director of the White House’s National Economic Council for Obama. Timothy Geithner, a disciple of Robert Rubin, is now the head of the Treasury Department.

Robert Rubin became Director and Senior Counselor of Citigroup during which time he earned more than 126 million dollars for his eight years of “service.” Citigroup has received 45 billion dollars from the TARP bailout money.

A lot of people have been ranting about our country becoming socialized. This seems more like corporatism to me. Something needs to be done.

First of all, we need to get rid of Geithner. Geithner and Rubin were both Goldmann Sachs alumni, which should have eliminated them from consideration in the first place. Maybe this Brooksley Born should head the Fed. She was one of the few people bright enough to see the impending disaster. And she actually tried to do something about it.

Watch the Frontline episode here .

22 Responses to “Frontline: The Warning (how reckless derivatives trading went on unimpeded)”

  1. For the most part this was propaganda. Yes the derivatives contributed, and if you watch closely they admit it in the piece that it wasn’t the reason our bubble went bust. I didn’t see one piece about Al “Mr Free Markets” Greenspan, which is how he was presented in the piece, supporting government artificially inflating the housing market. While big hedge funds may have gotten burnt on derivatives, that was because they housed toxic assets, many of which were in the housing market, who everyone and their brother was speculating in, all of the sudden the current price of your house was an asset, we had shows like “flip this house”, and even the people at the bottom of the ladder where getting involved in it and other speculation relating to equity. Also Frontline didn’t see fit to point out how artificially low interest rates, determined by the Fed, helped create this malinvestment, but that didn’t fit the predetermined goal of the documentary, which was cheerleading the upcoming draconian regulations to come and making everything sound like a free market free for wall, when central planning helped create the housing bubble in the first place. Funny how the news are starting to talk about legislation coming down the pike. Was this piece one of the administration/arts coordination efforts? I was excited to see this because I thought it was actually going to be a legit discussion of the people who were getting ridiculed when they said the bubble was BS, but no, Frontline completely dropped the ball, and now the lily white urban echo chambers are going to profess their documentary as some kind of absolute fact.

    And finally, yes deravitives were hard to understand, but it doesn’t take a genius to understand that you shouldn’t invest in something, when you don’t know what it is. Really do we need a regulation to point this out? The government already has rules on the books, they have never been good at preventing jack, yet they are always there to argue for more funding after everyone they miss. That’s a nice little con game they have.

    • [Yes the derivatives contributed, and if you watch closely they admit it in the piece that it wasn’t the reason our bubble went bust.]

      No, it was the very reason the bubble went bust. They were running a giant ponzi-scheme, which always collapse at some point.

      Low interest rates helped inflate the bubble and so did easy credit, but the packaging of these toxic loans and selling them as hugely leveraged commodities resulted in the ponzi-scheme.

      The fact that you don’t like what Frontline reported doesn’t make it propaganda. Although its timing would have been better if it was aired back in January or February when there was a real opportunity for reform. Why did they wait so long? CPB currently has four Republicans and only three Democrats. Did Republicans stall its release?

      • Once again I have to respectfully disagree, and like I said, the documentary admitted in passing that it wasn’t. All it did was pass the buck, leave the bag for someone else, someone was going to face their day of reckoning with those assets. Derivatives by themselves mean nothing, what is in them is what counts and most of the people who bought them didn’t seem to care, they were suckers with no fault but their own, just like the folks who bought Yahoo stock at $300. Really it was not much different than the folks who sold houses at their highest value, though property values are easier to understand, yet folks dealing with such complex financial instruments should educate themselves before blindly putting millions of their firm’s money into it, now if you want to talk about changing corporate limited liabillity laws we might have some agreement depending on the terms. While those suckers might have looked like geniuses at the start, the smart investor will win out in the end, like the tortoise and the hare. People and hedge funds were looking at the returns and blindly following everyone else without thinking much about it. That is how all bubbles work, you could say every bubble is a ponzi scheme. As long as we prop up big banks with bailouts thus no consequences, and as long as people support big banks by keeping their money with them thus the justification for bailouts, we are going to have these issues, once again people need to be smarter. It seems just because a firm is big, the only thing that mitigates its risk is being saved by the government, which perpetuates another kind of bubble and punishes the smart investor. It kind of like arguing about jobs going overseas while they support it with their dollars, very similar to what I said earlier about voters.

        And like I said earlier, how many bubbles has government failed to prevent? How could they prevent them? They never said what kind of regulation would actually do this in the documentary. I don’t think you can regulate greed by investors big and small. Fraud should be prosecuted, and we do have fraud laws, what else do you need besides enforcement of those fraud laws? I don’t just see how government can prevent these things, every new regulation since the beginning of time was going to save us and hasn’t. Government seems to be only good at punishing, and unfortunately they do this in a selective manner since people are connected.

  2. “A lot of people have been ranting about our country becoming socialized. This seems more like corporatism to me. Something needs to be done.”

    Well I don’t see how giving the corporatists more money and power will help. That was one of the things I found telling about Greenspan’s disagreement on fraud enforcement, though I didn’t know that was his responsibility or that he has any powers to prosecute fraud, so it seemed somewhat superfluous in that sense. But, it did point out corporatism, which is when government and corporations are in bed. Of course to actually reverse that you’d need an educated electorate, one who is not swayed by the MSM, who is also in bed with corporations and the government, so to actually tackle corporatism you’d have to address more systematic issues with the electorate, since they ask for corporatism every November.

    • True. That’s a good argument for election reform.

      • Well, I don’t know about election reform. The internet has helped, but breaking up media consolidation would be more vital. Why do you think they started buying everything up after Perot scared the hell out of them? It doesn’t matter how much money one has as long as the media only presents a few as viable. They will just pay them indirectly for favors with revolving door type jobs, and if you end that they will find other ways. Its a neverending game of whack a mole.

      • Nothing of substance improves without election reform. Those elected to office, especially federal office, begin fund raising for the next election the very day after they win their first election. So instead of governing, they are only – and eternally – running for office, all of the time. It serves us poorly. And it will take us down more surely than any other thing that ails us.

  3. Why no mention in this article of Republican involvement as well? The Gramm-Leach-Bliley Act was pushed by Republicans. Phil Gramm would have been John McCain’s Treasury Secretary. He also was behind the Commodities Futures Modernization Act. Yes, Democrats went along with it and Clinton did not veto it, so they also deserve blame, but this article is one sided. Everyone in America needs to watch Enron: The Smartest Guys in the Room, because what happened at Enron is exactly what happened to our financial system. But this notion that only the Democrats are responsible is ludicrous. It’s a shared responsibility, but I will say that 8 years of the Bush Admin giving carte blanche to all of this nonsenses was especially sickening to watch.

    • I didn’t really see the Frontline episode as Republican vs. Democrat but more Greenspan vs. Brooksley Born and free market vs. regulation.

      It’s hard to pass any kind of regulation when the economy is booming. Just look at the problems Democrats are having trying to pass regulation during this deep recession.

      • Good input, and I agree, but I made reference to the article above, not Frontline (which I like). I have followed BB for a long time, and she is excellent. Greenspan made the “genius” move of lowering interest rates during a housing boom. But not to mention Phil Gramm’s influence (along with his wife) is a major oversight of Repub involvement. Agreed on trying to pass regulation during a boom. As to “free market”, I’m all for it. But as I am sure you would agree, what has happened on Wall Street is not a “free market”. It , it is monopolies, insider trading, price fixing, etc. The complete opposite of a free market. It does seem the Obama Admin is starting to pursue some of this stuff. The problem is that a lot of what these people did was actually made legal by the Com Fut Mod Act. As I stated, if you have not seen the Enron Documentary, it is outstanding (better than the book since they have incredible stuff on video and audio tape). I found this report at the time to be great too, even though this TV host can be full of himself. But the report is very accurate.
        http://www.msnbc.msn.com/id/3036677/#25252591

      • Michael, below, references Gramm’s wife – Wendy is it? She was a director of Enron. Gotta love these people.

  4. I watched the show with my husband, we were disgusted with the lack of respect shown to Ms. Born by the “three musketeers”. It was very hard to watch the program knowing what we all know now.Plenty of blame to go around. But that does not solve the problem. Time to kill off the FED,aka: the private banking cartel, and then we need to take back our right to print our own money, a right we have according to our constitution. Ben Franklin,Jackson, Madison, Jefferson and Lincoln were right. Our financial system will never be stable with this “Federal Reserve” running the show.

  5. Besides being angry after watching the show, what I took away from this show is what a huge scum bag Greenspahn is. Talk about an inflated ego. An Ayn Rand devotee no less. UGHHHH

    • Washington is full of huge egos. They’re the ones that get things done. The problem is that the ones with the biggest egos aren’t necessarily the most competent. Greenspan truly believed that the market would regulate itself. That seems extremely naive.

  6. Anyone- and I mean anyone- that believes that Ayn Rand had anything coherent or meaningful to contribute to any dialog about economic or political theory is severely self-deluded- and the proof is in our current economic crisis. That goes for Rubin, Summers, Greenspan and Geithner (yes, you too Timmy).
    A lot of people have half-baked ideas, but her’s never saw the inside of an oven-

  7. What I took away from the program was that Obama had selected the people who are the problem, to run the show. Why did he do this? When will he explain this? Is he a real leader or just a controlled operative?

    • If he lets the people who broke it try to fix it and they fail then he gets a clean break and can fix it his way. If he replaced them and it went down as it will then the people who took on a failed system would get the blame. The man is a thinker.

  8. Start removing corporation charters by bills through Congress. Attach a single bill to a single corporation and so on. Line up a 100 of these bills of the highest offenders. Start with the first and slowly go down the line. Take about 3 months and have recorded up and down votes recorded on every single one of them. Maybe even convene a special session for this purpose. Maybe by then Congress will have demonstrated what Congress needs to demonstrate. That to “Congress”, that is “walk- together” with the People, they will have to stop walking with the corporations and the henchmen of these so-called corporations and start learning real quick what the original walk is all about. One thing the Federalist and the Anti-Federalist never disagreed on was our Liberty and the Republic.

    By the way with no trick of incorporation then there is no treat to Court for standing. The dead corpse no longer that exists.

    This is hardly a mystery much less

  9. oops..

    The dead corpse will no longer exist!

    This is hardly a mystery much less a spooky story.

    Let us now give up the sphecter that somehow a corporation is home to a person. That legal fiction has haunted us for far to long. Let us instead walk all over their graves.

  10. The credit default swap issue is indirectly related to the housing bubble, but it was a problem all by itself. Even without the economic crisis relating to the housing bubble, there would have been a financial crisis just based on complex, speculative, highly levered transactions, just as there was 10 years ago when Long Term Capital Management collapsed.

    Just one example: AIG issued $500 billion of unhedged, unreserved credit default swaps. No one knew, because they didn’t need to be reported on financial statments. They didn’t need to set up reserves against losses (as banks need to do for other investments). If only 10% of the assets protected by the swaps had gone bad, AIG would have been on the hook for $50 billion — and insolvent.

    The economic crisis is worse because of the financial crisis, and the financial crisis is worse because of the economic crisis, but the financial crisis would have happened all by itself. You don’t need to reach the conclusion that the swap industry “caused” the housing situation to conclude that Greenspan, Graham and Summers set the stage for a huge financial collapse.

    • Thanks for that post, Rob.

      Blame can also be placed on commodities deregulation, which led to record high fuel prices, which ate up a good portion of people’s paychecks so they couldn’t put that money back into the economy.

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