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At issue was Born's plan to explore the possibility of
regulating over-the-counter derivatives, a financial
instrument used to spread risk whose popularity had soared
during the '90s. Rubin and Greenspan would have none of it--
they objected even to the notion of thinking about greater
regulation of derivatives, which were not (and still aren't)
subject to the same basic rules that apply to other
securities like stocks and bonds. "If somebody says to me,
'I'm contemplating punching you in the nose,' I don't presume
that is a wholly neutral statement," Greenspan complained.
It's not surprising that an Ayn Rand disciple like Greenspan
considers even modest regulation of financial markets akin to
physical assault. What is surprising is how readily the
Clinton administration concurred. Born lost the debate and
quietly left the administration in 1999. But it wasn't long
before her view was vindicated: The lack of regulation in the
derivatives market helped fuel the panic caused by the 1998
implosion of Long-Term Capital Management, a major hedge
fund.
In recent weeks, liberal-minded wonks have gnashed their
teeth over the various regulatory failures that led to the
current subprime meltdown. And there's no question that the
deregulatory efforts of the last ten-to-twelve years played a
role. The formal repeal of Glass-Steagall--the New Deal-era
restriction on mergers between commercial banks, investment
banks, and insurance companies--in 1999 helped clear the way
for financial giants like Citigroup to buy and sell now-
notorious assets like mortgage-backed securities. But the
truth is that the connection between specific deregulatory
efforts and the current crisis, while real, is murky and
indirect. By the time Congress had wiped Glass-Steagall from
the books, it had spent more than two decades pecking away at
such restrictions. Mergers between commercial and investment
banks had become commonplace.
