Taking a hard look at a Greenspan legacy

[D-Mack]

Taking a hard look at a Greenspan legacy

By Peter S. Goodman
Published: October 9, 2008

"Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient." — Alan Greenspan, former Federal Reserve chairman, 2004

George Soros, the prominent financier, avoids using the financial contracts known as derivatives "because we don't really understand how they work." Felix Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential "hydrogen bombs."

And Warren Buffett presciently observed five years ago that derivatives were "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street.


...


http://www.iht.com/articles/2008/10/...9greenspan.php

At least they talk a bit about derivatives in the press...

[D-Mack]

Re: Taking a hard look at a Greenspan legacy

another one from the WAPO

What Went Wrong

How did the world's markets come to the brink of collapse? Some say regulators failed. Others claim deregulation left them handcuffed. Who's right? Both are. This is the story of how Washington didn't catch up to Wall Street.

By Anthony Faiola, Ellen Nakashima and Jill Drew
Washington Post Staff Writers
Wednesday, October 15, 2008; A01


A decade ago, long before the financial calamity now sweeping the world, the federal government's economic brain trust heard a clarion warning and declared in unison: You're wrong.

The meeting of the President's Working Group on Financial Markets on an April day in 1998 brought together Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin and Securities and Exchange Commission Chairman Arthur Levitt Jr. -- all Wall Street legends, all opponents to varying degrees of tighter regulation of the financial system that had earned them wealth and power.

Their adversary, although also a member of the Working Group, did not belong to their club. Brooksley E. Born, the 57-year-old head of the Commodity Futures Trading Commission, had earned a reputation as a steely, formidable litigator at a high-powered Washington law firm. She had grown used to being the only woman in a room full of men. She didn't like to be pushed around.

Now, in the Treasury Department's stately, wood-paneled conference room, she was being pushed hard.

Greenspan, Rubin and Levitt had reacted with alarm at Born's persistent interest in a fast-growing corner of the financial markets known as derivatives, so called because they derive their value from something else, such as bonds or currency rates. Setting the jargon aside, derivatives are both a cushion and a gamble -- deals that investment companies and banks arrange to manage the risk of their holdings, while trying to turn a profit at the same time.

Unlike the commodity futures regulated by Born's agency, many newer derivatives weren't traded on an exchange, constituting what some traders call the "dark markets." There were now millions of such private contracts, involving many of Wall Street's top firms. But there was no clearinghouse holding collateral to settle a deal gone bad, no transparent records of who was trading what.

Born wanted to shine a light into the dark. She had offered no specific oversight plan, but after months of making noise about the dangers that this enormous market posed to the financial system, she now wanted to open a formal discussion about whether to regulate them -- and if so, how.

Greenspan, Rubin and Levitt were determined to derail her effort. Privately, Rubin had expressed concern about derivatives' unruly growth. But he agreed with Greenspan and Levitt that these newer contracts, often called "swaps," weren't exactly futures. Born's agency did not have legal authority to regulate swaps, the three men believed, and her call for a discussion had real-world consequences: It would cast doubt over the legality of trillions of dollars in existing contracts and create uncertainty over how to operate in the market.

At the April meeting, the trio's message was clear: Back off, Born.

...


http://www.washingtonpost.com/wp-dyn...403343_pf.html

[Rajiv]

Re: Taking a hard look at a Greenspan legacy

This was posted earlier - THE CRASH Risk and Regulation - What Went Wrong

[Mega]

Re: Taking a hard look at a Greenspan legacy

Monday Morning Quterbacking!
Mike

[Rajiv]

Re: Taking a hard look at a Greenspan legacy

Not quite -- if you read the earlier thread -- Brooksley Born was forced to quit for raising the issues of unregulated derivatives in 1998 -- and for wanting to regulate them under the insurance laws -- see also 60 Minutes Shadow Economy - Evil Villain Now Included!

[sadsack]

Re: Taking a hard look at a Greenspan legacy

Brooksley Born speaks out:

The Born Prophecy

More than a decade ago, Brooksley Born warned that unregulated financial markets were getting out of hand. Now many in Washington wish they’d listened.

Shortly after she was named to head the Commodity Futures Trading Commission in 1996, Brooksley E. Born was invited to lunch by Federal Reserve Chairman Alan Greenspan.

The influential Greenspan was an ardent proponent of unfettered markets. Born was a powerful Washington, D.C., lawyer with a track record for activist causes. Over lunch in his private dining room at the stately headquarters of the Fed in Washington, Greenspan probed their differences.

“Well, Brooksley, I guess you and I will never agree about fraud,” Born, in a recent interview, remembers Greenspan saying.

“What is there not to agree on?” Born says she replied.

“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” she recalls him saying. Greenspan, Born says, believed the market would take care of itself.

For the incoming regulator, the meeting was a wake-up call. “That underscored to me how absolutist Alan was in his opposition to any regulation,” Born says.

Over the next three years, Born would learn firsthand the potency of those absolutist views, confronting Greenspan and other powerful figures in the capital over how to regulate Wall Street.

. . .

(emphasis mine)

Continued at:

http://www.abajournal.com/magazine/the_born_prophecy

[Slimprofits]

Re: Taking a hard look at a Greenspan legacy

sadsack, here is the full version of that article:

http://www.stanfordalumni.org/news/m...ures/born.html

[phirang]

Re: Taking a hard look at a Greenspan legacy

aka, "How I learned to stop caring and love the Private Money Cartel"