by Albrecht Durer 1471 - 1528

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Once upon a time in an alternate universe called Dark Pools there was a guardian angel named Brooksley Born. Her greatest fear was that a Black Swan would emerge from Dark Pools and wreak havoc on the Real World.

One day she was called by the Alchemists to their palace at the Treasury. There was Greenspan, Rubin, Summers, Levitt, the protegé Geithner and the Lobbyists for Irrational Euphoria.

“Brooksley,” said the financial wizard Greenspan. “We hear you plan to regulate OTC derivatives. We cannot let you to this.”

His face was red and he was clearly upset. “This would be catastrophic for the markets.” Greenspan did not believe in regulating against fraud. In his Randian universe Dark Pools would clear the transactions.

But the more the Alchemists pushed her the more curious she became. What was in this market that had to be kept in the dark, she wondered.

Brooksley lead an obscure agency buried deep inside the bureaucracy at the Capitol. “I report to POTUS … the Treasury has no authority over my agency,” she reminded him.  “A minor technicality,” Greenspan assured her.

Two weeks later Brooksley released her plan and the Stars of Dark Pools aligned against her. She was called to four hearings before Congress. In a cautionary omen that went unheeded LTCM vapourized in a deformation in space-time called Black-Scholes from which nothing not even light can escape.

Congress drank deeply from the cup of irrational euphoria and sided with Greenspan. There would be no regulation of OTC derivatives, no transparency, no capital reserve requirements, no prohibition on fraud, no prohibition on manipulation, no regulation of intermediaries. At that time there was an estimated $27 trillion in OTC derivative contracts. Congress defenestrated Brooksley’s agency. Defeated but unchastened Brooksley resigned.

Epilogue: In September 2008, Dark Pools released a Black Swan that brought the Real World to the brink of a Second Great Depression. Brooksley has since been recalled to public life and now serves as a member of the Financial Crisis Inquiry Commission. The OTC derivative market currently exceeds $600 trillion.

The last word goes to Jake Chase: “My guess is that taxing and demanding registration of derivatives contracts would make them simply disappear. Their only real…purpose is manipulation of financial statement results, tax evasion and regulatory arbitrage (evasion). A one percent tax (2 if both parties are US participants) on the estimated 600 trillion notional amount of outstanding contracts would retire the entire US National Debt and eliminate the need for all income taxes.  — Jake Chase

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Acknowledgement:

Brooksley Born and the Trolls is a retelling of the Frontline documentary The Warning


The Alchemists

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The Apprentice

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