Interestingly, there’s some evidence that Alan Greenspan, early in his tenure as Fed Chairman, thought fraud was something that didn’t need government regulation - that the market itself would take care of it. He came to regret this stance when the various derivative disasters came to light.
NARRATOR: And that’s how Brooksley Born ended up running the obscure CFTC[Commodity Futures Trading Commission].
MICHAEL GREENBERGER: I think to some extent, you could view this as a consolation prize. To the general world, people who knew Brooksley, the circle she traveled, the American Bar Association, the DC Bar, all the prestigious boards she served on, people were probably scratching their heads.
NARRATOR: An experienced financial litigator who’d seen the worst of the markets, Born was a believer in government regulation. Given the political climate in Washington at the time, clashes with Greenspan, Rubin and Summers were inevitable. Almost right away, she had one. It began after she received an invitation to lunch at the Federal Reserve with the chairman himself.
MANUEL ROIG-FRANZIA: How could you not have a little bit of butterflies in your stomach when you’re going to see Alan Greenspan at that moment in time?
NARRATOR: It didn’t take long for Born to learn that she and the chairman were not going to see eye to eye.
JOE NOCERA: He said something to the effect that, “Well, Brooksley, we’re never going to agree on fraud.” And she said, “Well, what do you mean?” And he said, “`You probably think there should be rules against it.” And she said, “Well, yes, I do.” He said, you know, “I think the market will figure it out and take care of the fraudsters.”
INTERVIEWER: The Alan Greenspan lunch did it actually happen? Where he says
BROOKSLEY BORN: I’m not going to talk about it. I’m not going to talk about it on camera.
NARRATOR: Born is reluctant to speak about her meetings with Greenspan or others in the Clinton administration. Greenspan refused to speak to FRONTLINE at all. But Born’s advisers did.
MICHAEL GREENBERGER: Greenspan didn’t believe that fraud was something that needed to be enforced, and he assumed she probably did. And of course, she did. I’ve never met a financial regulator who didn’t feel that fraud was part of their mission.
MANUEL ROIG-FRANZIA: And this is an absolute stunner for the new head of this tiny agency who is charged with making sure people don’t commit fraud.
NANCY DUFF CAMPBELL: Well, I think she was taken aback about how far he would go towards deregulation, that even the notion that we should police fraudulent activity he didn’t think was something that was a given.
…later on, near the end of the documentary, after the collapse of AIG…
NARRATOR: …Alan Greenspan retired from the Federal Reserve just before the crisis hit in 2006. Last year, he once again appeared before the Congress.
RON SUSKIND: You see Greenspan at the hearing table after the collapse, and you see a crushed man, really.
ROGER LOWENSTEIN: He said that the premise that you could trust the markets to regulate themselves was misplaced.
Rep. HENRY WAXMAN (D), California: [October 23, 2008] You have been a staunch advocate for letting markets regulate themselves. And my question for you is simple. Were you wrong?
ALAN GREENSPAN: Yes. I found a flaw, but I’ve been very distressed by that fact.
Rep. HENRY WAXMAN: You found a flaw in the reality.
ALAN GREENSPAN: Flaw, flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
Rep. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right.
ALAN GREENSPAN: Precisely. No, that’s precisely the reason I was shocked because I’ve been going for 40 years or more with very considerable evidence that it was working exceptionally well.
JOSEPH STIGLITZ: After almost two decades of public service, he realizes that the economic philosophy that he had pushed so hard, resisting regulation of derivatives he realized that there were some fundamental flaws in that whole philosophy.
JOE NOCERA: It was a pretty incredible moment that after a lifetime of faith in a certain way the world worked, that Greenspan would say, “I was wrong.”
ROGER LOWENSTEIN: It struck me as someone admitting that the core belief that had animated, you know, basically, a 20-year, 18-year career as Fed chief was wrong. It’s stunning, but it doesn’t undo the damage.