While leading the CFTC in 1998, Born declared that the unregulated contracts could ``pose grave dangers to our economy.'' Born, a lawyer who according to futures attorney Dan Roth battled fellow regulators with the ferocity of a courtroom litigator, lost a turf fight with Alan Greenspan and Robert Rubin over policing the deals.
After Congress exempted the contracts from U.S. oversight in 2000, the market swelled from about $100 trillion to $684 trillion by June 30. The growth included credit-default swaps and collateralized debt obligations, custom-made products barely in use under Born's reign. They played a part in almost $1 trillion of global bank losses and are prompting lawmakers to seek controls on the complex deals.
``Brooksley has been vindicated,'' said John Tull, a CFTC commissioner from 1993 to 1999. ``Had they listened to her, I think this catastrophe could have been averted.''
Now retired in Washington, Born, 68, declined to be interviewed for this story.
Investment banks fought regulation for more than a decade because derivatives, whose value is derived from bonds, currencies or other assets, were a cash cow. As much as 40 percent of the profit for dealers, including Goldman Sachs Group Inc. and Morgan Stanley, was from the private transactions, according to fixed-income research firm CreditSights Inc.
Revisiting Born's fight with her fellow regulators a decade ago provides a lesson about bureaucratic boundaries and industry lobbying as officials seek to tame a financial crisis that's crippling banks and shutting off lending.
Acting CFTC Chairman Walt Lukken last month called for more transparency and supervision of large over-the-counter markets such as the one for credit swaps. On Nov. 11, he proposed dispersing oversight functions of his agency, the SEC and banking regulators among three new departments governing systemic risk, market integrity and investor protection.
Securities and Exchange Commission Chairman Christopher Cox said in September that credit swaps should be policed ``immediately.''
The Federal Reserve is pushing to become the lead regulator for a clearinghouse to handle trades in the $33 trillion CDS market, according to people with knowledge of the proposal. Representative Barney Frank, chairman of the House Financial Services Committee, is also seeking federal governance of the market.
`It Will Happen'
``In some form it will happen,'' Rubin, former Goldman chairman and Treasury secretary under Bill Clinton, said in an Oct. 24 interview, of the likelihood of over-the-counter derivatives regulation.
While described as smart, charming and analytical by friends and colleagues, Born was seen by some as stubborn and lacking political savvy.
She roiled colleagues when her agency said on May 7, 1998, that it would consider whether the over-the-counter instruments should remain exempt from oversight. That same day, Greenspan, Rubin and Levitt issued a rebuke of Born's plan, saying in a joint statement, ``We seriously question the scope of the CFTC's jurisdiction in this area.''
Born's position would have extended the commission's reach from exchange-listed futures on oil, soybeans and Treasury bills into over-the-counter derivative contracts sold by banks and brokers. This would have put her agency in territory overseen by the Fed and Treasury, which regulate banks.
``She had a good idea that she pursued in a way that was counterproductive,'' said Susan Ervin, chief counsel to the division of trading and markets at the CFTC from 1988 to 1997.
Her agency didn't have enough personnel to regulate the entire market without the help of the SEC, Treasury and Fed, Ervin said.
``She was sort of the Lone Ranger, that was the problem,'' Ervin said.
Born was among a handful of women who attended Stanford Law School in the early 1960s.
``She was a path-breaking minority at that time, so she dealt with people shaking their heads her whole career, saying `You can't do that,''' said Geoffrey Aronow, who served as director of enforcement under Born. ``That's what she brought to the table.''
The near-collapse of Long-Term Capital Management, a hedge fund that had more than $1 trillion in derivative contracts, in September 1998 should have been a ``wake-up call,'' as Born once put it. The argument failed to sway other regulators.
One issue was whether derivative contracts in the private market should be treated like futures, which by law must trade on an exchange. Wall Street firms feared the agreements would be declared illegal, jeopardizing existing trades. Another concern was that the uncertainty would drive a growing U.S. market overseas.
``On the policy side, she confronted very powerful people,'' said Roth, president of the National Futures Association, a self- regulatory group for the U.S. futures industry in Chicago.
``Born was further weakened in that she approached the issue as a litigator,'' he said. ``Her inclination was to make things more adversarial than they needed to be.''
After leaving the commission in 1999, Born returned to the Washington law firm Arnold & Porter LLP, where she practiced before joining the government. She retired in 2003 and has been active in American Bar Association projects on women in the law.
This year, credit swap-related risk contributed to Lehman Brothers Holdings Inc.'s bankruptcy and the collapse and sale of Bear Stearns Cos. Cox called default swaps ``the fuel for what has become a global credit crisis.''
Greenspan now acknowledges he'd been ``partially'' wrong to oppose regulation of such instruments.
``Credit default swaps, I think, have serious problems associated with them,'' he told a House hearing last month. Greenspan declined to comment for this story.
Levitt, a board member of Bloomberg LP, parent of Bloomberg News, said Greenspan and Rubin were concerned that Born's push to regulate the deals would disrupt existing trades. He now says he wishes he had advocated a clearinghouse to spread the risk of default among all participants.
Such a clearinghouse ``would have helped, but would not have avoided'' the recent turmoil, he said in an interview with Bloomberg TV.
Rubin said while there was ``no turf fight'' with Born over regulating custom-made derivatives, he was concerned that legal questions about the contracts could have led to chaos.
The former Treasury secretary said he favored stricter capital standards and margin requirements on such trades at the time. There was no political will in Washington then to push for new regulation, according to Rubin.
``It would have been dead on arrival,'' he said.
The current drive for regulation will differ from 1998 because the players are different, Damgard said.
``The Fed has a responsibility in this area of systemic risk and would like to see sooner, rather than later, a mechanism for clearing CDS,'' he said. ``Nobody believes it will be possible to maintain the status quo.''
Born should get credit for the change in attitude in Washington, according to Joseph Dial, who served as a CFTC commissioner from 1991 to 1997.
``Brooksley was a voice crying in the wilderness,'' he said. ``There's no question in my mind, the current financial debacle had its genesis some 10 years ago.''