Brookesly Borne

Today, I travelled from New York City back to Tabor; luckily there was Wi-Fi on the bus down so I watch the PBS video on the frontline documentary. The two-hour, part one documentary about the credit crisis taught me the background to the financial meltdown. I learn that a derivate is a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Brookesly Borne believed banks needed regulation. She was the chairperson of the Commodity Futures Trading Commission (CFTC) from August 26, 1996, to June 1, 1999 and the federal agency that oversaw the futures and commodity options markets. Borne believed that regulation was needed in the markets for derivatives but her warnings were opposed by other regulators. She was ignored and later a commissioner to the Financial Crisis Inquiry Commission (FCIC). The Federal Chairman, Alan Greenspan sided with the banks to leave them alone, he believes in having a lazier faire approach to the markets. Florida and Georgia experienced high demands of growth, which caused sub-prime mortgages to be sold in these areas more than others.

Many of these sub-prime mortgages could be sold on wall street, packaged together to create a higher yield and then have Moody’s rating agency give them an AAA. Predatory leading of mortgages started to become increasing common with interest rate as high as 42%. Loans were given out as high as the value of their house and loans given out to non-income families. Homeowners thought they brought protection with credit default swaps but no one assumed that house prices would fall as they did. The bank Goldman Sachs took advantage of credit default swaps by betting against their clients saying they would lose. They were able to make million when the crash occurred through this scrupulous prediction leaving many families homeless and bankrupt. Predication of the house price decline was perhaps at best regional; never did anyone think this would become a national regression. Currently there are thousands of vacant properties where no one really is sure who owns it in many cases many investors own a piece of the property so the property cant be sold on until the true owners are found. As of the financial institutions 4th largest investment bank; Lehman brother has crashed because of the sub-prime mortgages.