Free Markets. Dazzling Derivatives. Omniscient Men. The Science of Metaphysico-Theologo-Cosmologo-Noodleology.
Ah, Derivatives! How dazzling!:
…. It was kind of a nifty business, because you could do a relatively large volume of business with a moderate amount of overhead and secure a very significant profit. And that was very enticing.
It became a big wholesaling operation after a while. So, this took over with credit default swaps, which JPMorgan went into, and so on in the 1990s and drove very hard.
When you saw the evolution take place and it becomes slicing and dicing them, handing them to AIG, what were you thinking? What were you worried about?
…. there never seemed to be a ceiling in the process. There was always another form of derivative that you could create and another way of laying off a little bit of the risk and so on, just like, for example, Goldman Sachs laid off some of the risk with AIG. There was always another way of diminishing the so-called risk taking.
It was very difficult for participants to realize the totality of this risk taking in the system. And the central bank didn't realize it -- either didn't realize it, didn't want to realize it or didn't have the capacity to realize it. That, I think, was part of my concern.
The Omniscient Cabal of Men: Rubin, Summers, Geithner, Jack Lew, various bankers: Blankfein, Dimon, Pandit, et al.
The morphing of financial securities into myriad financial forms such as derivatives, collateralized debt obligations (CDOs), synthetic (CDOs), credit default swaps (CDSs), etc., pure and simple Metaphysico-Theologo-Cosmologo-Noodleology.
And those plaguey difficult women:
Sheilah Bair and Vikram Pandit:
I’m sure Vikram still blames me, and thinks that all these problems would have gone away if he’d been able to buy Wachovia, with a big subsidy from the government.
Iris Mack and Robert Rubin and Larry Summers:
“Whoa, you are Bob Rubin!”
And what do you know, I’d crossed paths with my second former Treasury Secretary! But this one was a whole lot more receptive. I introduced myself and mentioned Phat Math, we made some small talk and how much he loved Miami Beach, where he’d grown up and where he was visiting his ailing father, how relaxed it was around here compared with New York where all anyone talked about was the economy, that sort of thing, shook hands. He told me he chaired a community outreach nonprofit, I told him about my work in derivatives, that sort of thing. Later in the day one of my colleagues suggested I send former Treasury Secretary Rubin a formal letter with my resume, and a bit of information on our work helping kids do math. And lo and behold, a few weeks later Mr. Rubin started calling me back.
Larry Summers:
We were more dealing with guys who understood neither one and sometimes really didn’t seem to care. Guys like that get into derivatives purely and simply for all the fancy creative accounting opportunities they afford, but you’ve got to remember that kind of mentality had just sunk my last employer, and many of Enron’s smartest guys in the room were a lot smarter than the guys I worked with at Harvard Management Company. So long story short, following the example of Enron’s own Sharron Watkins, I tried to blow the whistle on some shenanigans and serious derivatives and risk management issues by detailing them in an email and fax to Larry Summers. Even though he held the lofty perch of president, Summers was well-known to be deeply involved in the financial strategies of the Harvard endowment fund; still, I naively figured he’d be removed enough from the trading floor politics to recognize good intentions for what they were. Instead, those good intentions got me quickly fired, but as a consolation prize they helped win me a modest settlement when I subsequently sued for wrongful termination.
Sherron Watkins and Ken Lay and Jeffrey Skilling of Enron:
The former Enron executive who privately warned company founder Kenneth Lay of impending financial doom in the fall of 2001 had another critical meeting with him Wednesday — as well as with former Chief Executive Jeffrey Skilling, a jury and a phalanx of lawyers in their fraud and conspiracy trial.
Sherron Watkins, the plainspoken former vice president whom Congress anointed as a whistleblower after the company’s collapse, repeated much of what she said then: Enron needed to come clean about potentially disastrous accounting tricks or face implosion.
Cynthia Cooper and Bernard Ebbers, Scott Sullivan, David Myers, and Buford “Buddy” Scott of WorldCom:
Beginning modestly during mid-1999 and continuing at an accelerated pace through May 2002, the company—directed by Ebbers (as CEO), Scott Sullivan (CFO), David Myers (Controller), and Buford "Buddy" Yates (Director of General Accounting)—used fraudulent accounting methods to disguise its decreasing earnings to maintain the price of WorldCom’s stock.
Enter Cynthia Cooper:
Cynthia Cooper is an American accountant who formerly served as the Vice President of Internal Audit at WorldCom. In 2002, Cooper and her team of auditors worked together and often at night and in secret to investigate and unearth $3.8 billion in fraud at WorldCom. At the time, this was the largest incident of accounting fraud in U.S. history.
Brookskley Born and the Commodities Futures Trading Commission (CFTC):
Brooksley E. Born ... is an American attorney and former public official who, from August 26, 1996, to June 1, 1999, was chairperson of the Commodity Futures Trading Commission (CFTC), the federal agency which oversees the futures and commodity options markets. During her tenure on the CFTC, Born lobbied Congress and the President to give the CFTC oversight of off-exchange markets for derivatives in addition to its role with respect to exchange-traded derivatives, but her warnings were ignored or dismissed, and her calls for reform resisted by other regulators. Born resigned as chairperson on June 1, 1999, shortly after Congress passed legislation prohibiting her agency from regulating derivatives.
Poor, dear Robert Rubin and those plaguey difficult women!:
It was the last thing Bob Rubin needed that day, at that moment in history. It was April 21, 1998. Rubin, the Treasury secretary of the United States, was in the middle of a financial crisis that was toppling one Asian economy after another. So it really was not convenient to have this humorless, difficult woman, Brooksley Born, marching into his magnificent Greek Revival palace next to the White House, his Treasury Department, to lecture him about the dangers of derivatives. Born, that busybody from a minor regulatory agency. Born, with her pixie bangs and droning personality. Her ridiculous brown legal folder, from which she neatly extracted her talking points, and her litigator’s demeanor.
March, the month that celebrates women. And I celebrate the largely uncelebrated women of money: Sheilah Bair, Brooksley Born, Cynthia Cooper, Iris Mack, Sherron Watkins … I haven’t even gotten to Carmen Segarra, Alayne Fleishmann, Anat Admati, Meredith Whitney, Sallie Krawcheck ….